Saturday, January 30, 2010


The waterfall decline the market is experiencing is now in the second leg down. These second legs tend to burn out fairly quickly, usually lasting from 3-5 days.

Friday was day two. So I don't think I would be looking for a bottom just yet. Probably Tuesday or Wednesday are more likely targets.

We are getting close though. Sentiment is pushing extremes that were last seen at the March bottom on some indicators. The dumb money sentiment is now at levels lower than it was at the July intermediate cycle bottom. Smart money sentiment is now more  bullish than any other time during this cyclical bull.

I have to ask which side of the tracks would you prefer to be on? The side that trades based on emotion, charts and guesswork or the side that controls most of the money in the market and trades based on logic, inside information and statistically data?

Longs need to be prepared to hold on through a few more ugly days  though, as I expect the S&P is going to tag the 1040ish level before this selling climax exhausts itself.

It's not unusual to see an exhaustion move on the last day with a big intraday reversal. And once the bottom is in the snapback rally tends to be violent. Usually recovering all of the second leg down very quickly and if the market is in a cyclical bull like this one is, then it's usually not long before all the losses are erased and new highs are seen.

Actually the odds are very high that we will see new highs within a month. During the last intermediate cycle low in July the market was back at new highs 9 days after the final bottom was in.

We are already seeing signs of institutional buying on down days. Almost always a reliable sign of an impending bottom.

The average gain out of an intermediate cycle low is between 6% and 10% for the initial thrust out of the bottom.

So while I expect the next couple of days to be pretty ugly the rebound after the selling climax exhausts itself tends to be fairly violent.