Securities Research Services

Monday, June 19, 2006

Play the Downtrend

The Japanese Central Bank has exerted pressure on the global market draining billions from markets around the world over the past several weeks. These are the realities of the global economy we are now in. It is likely that the US will pressure the Japanese banks and the bleeding will be tightened before the emerging markets are sent into a tail spin toward depression and western markets slump even lower. At this time the shock is serving to cheapen stocks and create a very nice buying opportunity as investors start to throw out everything in fear. Nevertheless, the downtrend we are now firmly in has not yet found a bottom and until it does shorting strength and breakdowns is the way to go. The stall on Friday should mark the spot where the market will once again turn lower. A move higher this week however should not be taken as a bullish sign, but should rather serve as an opportunity to short higher. As we outlined on Friday the market does not have a base of support and the move on Wednesday and Thursday is unsustainable. A move higher would merely take major indices up to the top of their falling Bolinger bands, setting up another waterfall-type leg lower. In essence, a move lower from the current level would actually be a more bullish scenario. Traders became too bullish once again last week and another long failure would very likely create the kind of demoralization that is needed to set the crowd in the right mood for capitulation. With the economy making some real strides over the past few months a move lower is the ideal set up for a very strong move higher, much stronger than that which we have experienced over the last two years. There is a good chance we will see capitulation this month, but again, until we see it, we need to be selling strength. Because we don't know if the market will fall from current levels or go up to test higher resistance first, it is a good idea to scale into trades.

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