SPX broke out of a flag yesterday, confirming our downside bias for this week and the week ahead. As financials are the big drag down, as we assumed. GSE especially lost considerable value, as did Paulson, who seems to have no idea how to deal with the situation.
Let's first deal with the technical picture. The minimum target of 1245/50 SPX should be reached this week before we see a small upwave, followed by another downleg. The flag formation makes a retest of 1200 very likely. Oil, after building a tricky bottom at 112, has now cleared its way to 130 and will deliver, besides financials, the reason for the correction. Even the bulls in Investor Intel have risen back to 40 and bears dropped to 38.7, moderating the overly bearish sentiment.
But it's very tricky going forward and we should soon see some action from Mr. Paulson and his Goldman bankers, who are pushing their long energy and short financials trade, which is a bit of a conflicting situation, since as soon as he acts to bailout the GSE's, we will see short covering in financials and the overall market. The scary part is that the market is reluctant to trade at 20 VIX, with all of these issues hanging over the market. It's a ticking bomb, which will explode at some point in Q4 and push SPX towards 1100 for starters.
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