Tuesday, November 25, 2008

Buying panic?

In the last several posts I've gone over my take on human nature. The one constant is that it never changes. The other dependable is that we always go to extremes.

Well we just got the negative extreme. We may now be ready for the positive extreme. I pointed out in last nights update that all the short term indicators I watch are at extreme overbought levels. Usually this is the recipe for a pullback. In bear legs it's the recipe for another move down. On top of that we saw huge selling into strength yesterday (explanation in last nights update). I was expecting this, as selling into any rally has been very profitable the last 3 months.

However the futures are up strong this morning. A market that just rolls right over short term over bought levels is a strong sign of a bottom . Once the market becomes convinced the bottom is in we could see a buying panic on par with the selling panic we just saw, as money managers chase the market trying to improve their year end numbers.

I suggested in the weekend report that market participants would probably come in at the beginning of the week looking to sell the rally. I also thought they could get burned on the short side if this market had in fact bottomed. Yesterday they did get burned and burned bad. Not only that they missed a 400 point rally. All those that sold heavily at yesterday's close looking for the market to fall today are now in the red at the open. If a buying panic does start they will take more losses and miss another chunk of the rally. We have the ingredients in place for a runaway bear market rally. Will it happen? I don't know, we'll have to wait and see. I do know that I'm not willing to lose any of my long positions right now.

I would be very nervous about shorting at this point.