Friday, November 21, 2008

Was breaking the 02 lows significant?

As expected the break of the 02 lows is bringing out all the technical traders now calling for a total collapse of the market. Maybe and then again maybe not.

Major tops and bottoms are often accomplished by the markets breaking major support levels. The dumb money investors jump heavily into a trade that they think is risk free. At the same time the smart money takes the opposite side of their trade.

We saw this exact pattern play out at the 02 bottom and the 07 top. Could we be seeing it in action now? Maybe!

We know the 22 week cycle is due to bottom anytime now. Yesterdays total panic into bonds suggests we saw completely irrational capitulation. Public short interest is at record highs. Cash sitting in money markets is at levels not even seen at the 02 lows and insiders are currently buying stock at levels last seen during the two weeks after the 87 crash.

All that being said, should one jump in right now? I'm going to suggest that a close above the 10 day moving average might be a safer entry and provide a margin of safety that we have in fact seen the weekly cycle bottom.