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Keene Little : 9/21/2008 11:20:58 PM

Monday's pivot table: Link

After doing lots of reading and studying charts and market internals I can't say that I have much better of an idea for what to expect over the next couple of days. After massive market interference and manipulation by the government it's obviously more difficult to say whether or not last Thursday's and Friday's rally will develop some legs or if it was instead mostly a short-covering inspired rally that will have no follow through this week.

Certainly most people understand nothing has been changed with the government's bailout. The banks may have been relieved of some of their debt but the mood that got us here is still the same. Nothing really has changed. We might see a rally continue for a couple of weeks but the longer-term wave pattern is very clear and it's bearish--we'll either decline to new lows directly from here or after a little higher rally first. The daily SPX and NDX charts show the two most probable scenarios as I currently see them:
SPX: Link
NDX: Link

If we're getting what's called an expanded flat correction from the July low, the leg up from Thursday's low should achieve 162% of the leg up from July to the August high. For SPX that's near 1314. As you can see on the daily chart that would also coincide closely with a retest of the broken uptrend line from July. The leg up from Thursday achieved equality with the July-August leg up by tagging 1246 so it's possible the rally is already over, especially since it shows a clean 5-wave move.

If the bulls can keep the buying going, in a pattern shown in dark red, we could see SPX make it up to its downtrend line from October by early October, which is currently near 1360. It would be an interesting occurrence on the 1-year anniversary of the market top in 2007. But a break back below 1162 would indicate the 2-day wonder rally finished the correction and new lows are coming (and harder selling to follow).

If NDX pushes higher in a 3-wave move, shown in pink, it could make it back up to its broken uptrend line from October 2002, currently near 1830. Otherwise a drop back below 1630 (that stays below) would be a bearish heads up that we'll probably see new lows and very strong selling to follow.

The next two days of trading should clear up the wave pattern enough to know whether or not we can expect a higher rally into October, before reversing back to new lows into November. If the decline looks impulsive then I'll start leaning bearish again earlier rather than later. In the meantime I'm going to do more watching than trading until the dust settles here. Equity futures are down hard tonight but it's been volatile already (DOW is down 113 points but up 100 points from its low so far). Let's be careful out there.

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

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Linda Piazza : 9/21/2008 1:32:12 PM

The SEC considers reinstating the exemption for market makers, allowing them to short sell (including financials) to hedge their risks. Friday's wide bid/ask spreads and volatility, along with the stated intention of several market making firms to stop offering a market beginning Monday and strong protests by Brodsky (see below) and the Options Clearing Corporation prompting that rethinking. Here's the link to a Reuter's article discussing the reconsideration: Link

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