What's Next? Market Crash? Downward? Upward? More lateral?

September 4th is the next major Time Locus for the indexes.


What will it be: a high or an acceleration point; or the least likely, a continuation of the past week's lateral move?


We believed it would be a market turn at a low. It won't be viewed by us as a low unless the SPX/NDX/Dow close near or below their Monday, August 20th intraday low.


We do view last week's action as the potential end of a lateral (consolidation) phasing. We have stated since the July highs that the swings have been shortened by volatility, weak volume patterns and by extreme moves in our proprietary market sentiment indicator.


The Daily Sentiment Index continues to show much faster movement just as the intraday sentiment has exceeded 80 (bearish) and 20 (bullish) several times last week. Last week reminds us that the normal 3-5 day swings are still under compression to a 2-3 day swing length. The extremes marked intraday highs and lows in index structure and form.


Investors are fully hedged to portfolio neutral from the Friday, August 24th high. Swing traders (3-5 trading days) are in cash.


Bernanke's speech this week clearly shows that the Fed is attending to its mission, and not what the shrill economists are 'demanding'. The Fed is not going to bail you out of your subprime mortgage portfolio. We are already seeing the exact bargain hunting we predicted and believe will continue in the collateralized debt (CDO) market with Citigroup scooping up a bargain this week.


It proves our point in a previous post that the complaint in any market about 'not knowing what something is worth' is a signal that the price is not low enough.


We have seen, traded and lived through several structural corrections in the stock markets and in the economy over the past 4 decades. From that viewpoint, we believe (even more today than 2 weeks ago) that the Bernanke led Federal Reserve Board and FOMC are doing their job just about as close to perfect as a human can be expected to perform. They have one eye on today and a real focus on what tomorrow will be like if they overreact to the hue and cry of a few stuck in the mire of their own making.


Does the Fed lower the Fed Funds rate at its September 18th meeting? We hope it does not. will there be continuing losses, even mega losses for portfolios and holders of some mortgage backed securities and derivatives? Yes, and it will continue for a few more years. Losses can be controlled by cooler heads than those that created and sold these super-leveraged instruments.

Just lower the price, take your loss, sell your portfolio to those that have the capital, and then move onward. Buyers are already waiting for the holders to lower their prices. Who is going to buy Carlyle Capital's assets if its parent, Carlyle Group, cuts it off in the next slide? Carlyle Capital has already received $200 million this week. Even the big and quiet fall hard and loudly.


Give me some direction.


Two scenarios are the easiest - more consolidation with withering heat like the high desert, or just retest the lows of Monday, August 20th. The RUT has already blazed that path through August 20th low for the other indexes to follow, if real buyers don't step back into the market after the long weekend.


Direction could be a difficult call if the indexes set in two extremes in one trading day, Tuesday. An apparent breakout upward or breakout downward that reverses to the opposite extreme by the closing will be easy to daytrade, but will take its measure of our models. That is the principal reason for our cash position in all index Swing positions (remember that we can only enter and exit at openings and closings).


Technicals say -


Momentum indicators, volume and volume patterns still point to a downward move. If divergent indicators were in control, we would give the downward direction a positive balance. The low volume rise from Wednesday through Friday is not unusual before a holiday weekend. Low volume and the patterns show weakness, but these same patterns can be found preceding a blowoff and a breakout of a trading spread.


The objective is to enter trades according to each person's risk management/money management plan. We will decide whether a change to short or long is the call after observing currency trading and tomorrow's track for international indexes. Join our email newsletter.

W. B. Busin