THE DOT - if this turns orange or red be alert

Tuesday, June 24, 2008

The contra-indicator

The Rydey Nova/Ursa Index is a contra-indicator and has reached red alert level to cover shorts. It can still slip lower and it's a bit to early to act.

Other contra-indicators are Goldman and Merrill, both called close to the last high for a rally and yesterday both turned around their calls - emphasizing that financials are a sell. Those are the new members of my contra-indicator list. We will see a bottom within 1-3 weeks and the downside is limited to 2-3% from yesterdays close. Especially financials will be the place to be on the long side, with airlines and other oil sensitive stocks. The rally will be a strong shortsqueeze, hence a trading position not an investment opportunity. The Congressional hearing yesterday confirmed that 37% of longs are index funds and we will soon see rising pressure to turn around the oil market. Technically, oil is about to have a top within 2 weeks with new highs above 140. The only thing which bugs me is the VIX in my scenario, since it shows too much reluctance and we should see a spike up to the 30 level, which does not fit the timing and magnitude of the bottom. If Vix would rise to 30, markets need to drop more than 2-3%. We will see a capitulation finish and again against the call of Goldman the SOX looks poised for weakness and a test of the gap area at 1850 should be seen within this down move for the NDX. Wednesday's FED announcement could be used to trigger the window dressing for 2-3 days, but its not the start of the overall turnaround.

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