THE DOT - if this turns orange or red be alert

Wednesday, September 10, 2008

technical update - picture is clearer as it unrolls

Yesterday's slump, driven by Financials with LEH being the leader, cleared the picture. The second scenario that was weakness spreading into this week with the breakout of the NDX to the downside has become very obvious. We need at least 3 lower closes on a daily basis for the NDX counting down to a TD combo 13, which will be a test of the 200 week MA and we are heading for the March low of 1670. That's is a crucial level and basically we should not get there, since it would be a deep penetration below 200 week MA. In any case, we produced a lower high and will make a lower low, which confirms as stated before, we are in a bear trend. At some point we will test the 1670 and trade down to 1645, which is the support line. This is the gatekeeper of an ugly sell-off, which we will see within 6 months since we need to come into the ugly wave 3 pattern, which is a brutal selling amplitude. Those are scenarios we discuss soon in a mid-term outlook. For now, we have in the SPX and NDX another 3-4 lower closes ahead, hence it could bring it into next week the current wave before we see a mild recovery of 1-2 weeks at least. We will likely make a new low in the SPX, slightly below 1210 our wedge target and the old low at 1198 (worst case 1170, which is a 50% Fibonacci level as well). Financials will remain a drag until we hit 110/115, from that level we will get a severe correction to the upside but that 20% away and it's not only LEH who is in trouble as the earnings season will also show.

To sum it up, expect 3-4 days of more weakness for US markets before a rebound starts, but that is only a temporary sucker rally again, which has a max time window of 4 weeks. I doubt now that we make it to 1340 SPX - rather to 1300 seems to the cap. Within 6 months, we should trade down to 1070, which is the 61.8% retracement level but at the same time marks a support area from the 2004/5 lows. From that level, we should get in 2009 a multi-week upside move at least 8. I will make a multi-month outlook this WE but basically until Feb. 2009, the theme is still sell rallies. China and EEM may have a different trading pattern for a while yet but they have to drop for at least 2 more weeks (lower closes).

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