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Keene Little : 1/22/2008 1:15:18 AM

Monday's pivot tables: Link and Link

I had posted during the day on Monday a reminder about the crash scenario that I had outlined last Thursday (MM post 12:02 AM: Link ) but the price path for that was based on the assumption that we'd soon bottom and get a bigger bounce. The sharp move lower in the futures, if it follows through to more selling on Tuesday, suggests the move could drop further and faster than I had shown on that SPX daily chart.

I've worked through two possibilities for price action based on what I'm seeing happen now. As always, this is a guess based on what I'm seeing now and projecting the wave pattern based on Fib time and price relationships between the waves. I will of course update this as price action progresses but I'll take you through what I'm seeing at the moment, starting with the SPX 120-min chart and working out to the monthly chart to show how the next bear market might look: Link

I had mentioned on Thursday and Friday that the waterfall appearance of the decline suggests something more bearish is playing out and that's shown by the steeper downtrend lines. Based on an expected sharp move down on Tuesday I've updated the wave count that calls for a sharp drop and then stair step lower to about 1120 by the end of the month before getting a slightly larger bounce. Then it should continue stair stepping lower from there into March.

If SPX manages to rally on Tuesday (you never know) and gets back above Friday's close, and especially back above a key level near 1350, then the pink wave count calls for a choppy rally into February. But if price drops below 1260 I think the dark red count will be the one. The daily chart shows how both might look: Link

The pink wave count shows the rally into the first part of March before heading lower again. The bulls (or PPT and short covering) will need to get going quickly on Tuesday for this one to happen. Otherwise the stair-step price action to lower lows through March could be the market's fate. The ultimate low now is lower than what I had shown last Thursday. I think we could see near 1000 by March if the wave count unwinds the way I think it could. Notice that would have price dropping down to the long term uptrend line from 1990. This weekly chart shows how these might look on the longer time frame: Link

Each of the two scenarios would potentially follow their own parallel down-channels. The pink wave count would follow a channel that has a slope similar to the 2000-2002 decline. The dark red channel is steeper and similar to the tech decline in 2000-2002. The monthly chart shows these two down-channels and you can see the relationship to the 2000-2002 decline: Link

The pink wave count could be a developing and large sideways triangle pattern from the 2000 high that will run into 2016 before it finishes. It would be a similar consolidation the market experienced between 1966-1982 ( Link ). The dark red count is for a large A-B-C correction to the 1982-2000 bull market and calls for a final low around 450 by the end of 2009. As noted on the chart, that 450 level is a previous 4th wave correction in 1994 during the bull market run (a common retracement level).

That kind of move down to 450 by the end of 2009 would end the bear market and we'd be off to the races in a new bull market. That kind of decline would surely purge the system of excesses (and obviously be very painful for a lot of people) through a large price reduction in the market whereas the pink count would purge the excesses in time instead of price.

But first things first, let's see what happens on Tuesday. I'm sure the PPT will be doing everything they can to throw in some buy programs and attempt to get the shorts running for cover. Remember, this is the first major decline since they abolished the uptick rule last summer. After this is done that might be one of the first rules they put back in place. The Fed might not be able to try a rate reduction yet--they'll look like they're panicking and it could backfire on them. But anything goes on Tuesday so trade Very carefully. See you in the morning.

Jeff Bailey : 1/21/2008 11:09:41 PM

Mini-Silver Mar (yi08h) down $0.58, or -3.59% at $15.64.

Jeff Bailey : 1/21/2008 11:03:10 PM

Mini-Gold Feb (yg08g) down $19.60, or -2.22% at $861.80.

Linda Piazza : 1/21/2008 11:00:29 PM

I mentioned earlier, before the Market Monitor was archived, that the Bank of Japan makes its policy decision tonight about midnight ET, I believe, if my schedule is correct. I don't expect that decision to turn around the global markets, but it could impact the USDJPY and EURJPY. Today, some market commentary has been directed toward the unwinding of the yen carry trade, with some commentary attributing the declines at least partly to the unwinding and some attributing the unwinding to the decline in the globe's bourses. Anyway, I'm just letting futures traders know that there could be some impact around the time of that release. I have no idea if it will be big or small or which direction but just be aware of the possibility if you're in futures trades.

Jeff Bailey : 1/21/2008 10:50:12 PM

ProShares Products Link

Jeff Bailey : 1/21/2008 10:47:33 PM

Large Block trade alert! ... Just seeing a volume spike in the DIA from Friday of 2.1 million shares that was traded from 11:40-45 AM EST at 5-minute close of $121.02.

Jeff Bailey : 1/21/2008 10:41:20 PM

US Dollar Index (DXY) higher at 77.03.

Jeff Bailey : 1/21/2008 10:39:46 PM

YM currently down 471 points, or 3.89% from Friday's settlement at 11,635.

Jeff Bailey : 1/21/2008 10:38:21 PM

CAC-40 ($CAC) Link ... Fell 348, or -6.83% to finish Monday's trade at 4,744.45.

Jeff Bailey : 1/21/2008 10:37:03 PM

DAX ($DAX) Link ... Fell 524 points, or -7.16% to finish 6,790.19 on Monday.

Jeff Bailey : 1/21/2008 10:35:15 PM

UK's FTSE-100 Suffers Biggest Loss Since 9/11 ... 1/21/08 (Monday's trade) Reuters Story Link

FTSE-100 ($FTSE) Link finished Monday's trade down 323, or -5.48% at 5,578.20.

Jeff Bailey : 1/21/2008 10:31:06 PM

Mainland China's Shanghia ($SSEC) Link ... Down 195, or -3.98% at 4,718.

Jeff Bailey : 1/21/2008 10:28:56 PM

Hong Kong's Hang Seng ($HSI.X) Link ... Down 1,154, or -4.85% at 22,665.

Jeff Bailey : 1/21/2008 10:27:29 PM

Japan's Nikkei-225 ($NIKK) Link ... Down 587 points, or -4.41% at 12,739.

Jeff Bailey : 1/21/2008 10:24:19 PM

Stock Markets Plunge Worldwide ... AP Story Link

OI Technical Staff : 1/21/2008 9:59:59 PM

The Market Monitor has been archived. You may view it and any previous days here: Link

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Linda Piazza : 1/21/2008 5:40:35 PM

I'd like to add one possibility to Keene's "maybe" scenarios listed in his 2:19:23 post. The Bank of Japan's rate decision will be announced about midnight tonight ET if the schedule that I have is right. That's likely to impact the USDJPY and EURJPY, of course, and those can impact the yen carry trade. Further unwinding of the yen carry trade is being mentioned today as a cause/result (different writers, different conclusions) of the global selloff, so this can be important. If you're in futures trades, just be aware of that upcoming development, too.

Keene Little : 1/21/2008 2:19:23 PM

With the large selloff in the world's stock markets our equity futures markets got hit hard Sunday night and Monday morning. The cash markets in the U.S. are of course closed on Monday. It's looking like an ugly ugly start to the trading day on Tuesday. Two things could help our markets: one, the world markets could recover and help our overnight futures; two, the Fed could come in with a "surprise" rate cut pre-market and drive futures up instead of down.

Or maybe the market will open down, drive down further and then the PPT will start some major buy programs while the Fed makes their rate cut. To say we could have a volatile trading day on Tuesday may be the biggest understatement of the year. Need I recommend caution either way?

I had posted late Thursday a crash scenario if we saw continued selling on Friday and of course Friday saw continued selling. Late Friday I then showed the wave pattern calling for more downside on Tuesday but thought we could see the end of the move down from the December high (unless we're in the middle of the crash leg). Either scenario is still up for grabs here.

Notice too that gold is down on the day (silver even more). It dropped another $20 but got a little bounce this afternoon. Many believe that shorting gold is the most "DANGEROUS" trade and this is based on gold typically being a safe haven during times of stress in the stock market. But these are not typical times. After calling for a short in gold last week it has now dropped about $50. I believe we'll see gold continue to drop along with the stock market.

I've said repeatedly that the largest credit expansion in history inflated all asset classes and that a credit implosion (which I've said will happen mind-numbingly fast) will deflate all asset classes. Strong assets will be sold to cover losses in weak assets. I consider being long gold as riskier than being short gold. The safest place for your money? Boring cash. Park it there while we wait for the market to correct. Play a little on the downside but be careful in that game, especially right now. Remember, protection OF capital is more important than return ON capital during rough times in the market.

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