Tuesday, September 26, 2006
A few days ago we used the analogy of The Little Boy Who Cried Wolf in relation to the market's uptrend. We pointed out that as long as the market participants continue to try and time the top by buying puts into the rallies, the market would keep on climbing the wall of worry. Each time the market rallies higher, these shorts are required to cover their short positions at their stop loss points. Covering shorts drive the market ever higher. Eventually they will learn the market's lesson and stop shorting the rallies. When this finally occurs, the market, which has been crying wolf, will then reverse. The time is not yet considering that 2-1 puts were purchased against calls yesterday. This market could be headed for a blow off top this week, which will hopefully finally convince the bears to turn bullish. When they do, we can get the correction that we admit we have been way to anticipatory of. Much of the current strength can be explained by end of the month window dressing. Later in the week it is likely that this will be faded and we could see a quick reversal that at least does the job of shaking out the bulls. We are likely to see higher prices before that occurs though.