Monday, October 09, 2006
On Friday the market dipped, or rather the uptrend slowed, and options traders once again got bearish. No doubt about it, this bull run is in its end game here. Even so, as long as the crowds continue to get bearish on dips, the uptrend is likely to continue to chip away at their trading accounts by stopping out their short positions. The reason for this is relatively simple. The market rallies and the crowds get bullish. Short term profit takers sell the strength and the market dips. The crowd suffers a bi-polar-like mood swing and gets bearish, opening up large short positions as they attempt to pick the top. Subsequently, the trend (which is still up) reasserts itself and the new short positions add fuel to the rally as the crowds are forced to recover. This cycle will spin the market higher and higher and is the mechanics behind the phenomena oft referred to as "climbing the wall of worry." Eventually though, the crowd will learn the lesson and will begin BUYING the dips instead of selling them. When this happens, we can count on the fact that the top is either in place, or very close to being there. This week we wouldn't be surprised to see some consolidation or even pulling back. With the QQQQ and SPY both a few points away from overhead resistance, we would not count the uptrend over yet – especially with the crowds still selling the dips. Most likely longs will be tested this week and then the market will make another run higher before the uptrend finally starts to show signs of ending. Understand two things here and you will do well this month: First, this bull run is in its end game and downside risk far exceeds upside potential. Second, be slow to turn bearish, lest you find yourself being stopped out as prices refuse to follow through lower. In other words, wait for confirmation before going short, but don't be too aggressive on the long side.