Thursday, August 2, 2007

Double top?

I've pointed out several times that the average cycle has normally lasted 21-32 weeks. This decline started early at 19 weeks. However we have some elements in the market at this time that could bring into play my 5th year decline theory. For one when looking at the charts we see some history of this bull making double tops when the first decline has been early. Second before this decline started the NYSE already had historic short interest levels. This would suggest that a lot of people are on the same side of the boat. With the recent decline I seriously doubt that the short interest has declined, as a matter of fact it seems more reasonable that it has increased significantly. Yesterday we got a preliminary look at what could happen if everyone on the same side of the boat all of a sudden find themselves on the side that's sinking. A sharp short covering rally! If we get some strength today or possibly even tomorrow with the jobs report we could get a huge rally. That could possible bring into play the scenario that I outlined in last Sat. update. Where the bears get killed the bulls get giddy and the commercials sneak back over to the short side. That would put into place the ingredients for a top. The weekly money flows and momentum would be diverging and better still nobody but nobody would be willing to short at that point. That's how tops are made when everyone is afraid to go short and everyone can only see clear skies ahead. Obviously I have no idea if this will play out so at the moment I'm just going to stick to my systems. I'll be out again today as I have better things to do than watch the markets gyrate. See ya all tonight.

Just as an after thought. The removal of the uptick rule has been bandied about as part of the reason for the severity of the decline and that may be partially true. However the ease of shorting now may also spell trouble for the bears by enticing way to many people to short. Again we saw yesterday what happens when those shorts get scared.