Game Plan

Raymond James recently issued a technical report on the market conditions and highlighted an interesting parallel between the current market and 1998. We believe that this has some merit and can provide us with a good road map for where the market might be headed as we move into the fall months.

Friday's liquidity injection was quietly rescinded on Monday, so the bullish case for a short squeeze has pretty much gone up in smoke. This is further evidenced by the fact that bulls ignored their opportunity yesterday and went on a buyers strike letting stocks settle back again on very low volume.

This leads us into the Raymond James report. In this chart they show how in 1998 the S&P 500 broke out of a multi week range, but then failed spectacularly and slid lower on several wide-range sell days. Waves "a" and "b" on the 1998 chart below mirrors the S&P between this May and now.



Following the initial break out failure and slide lower, the market moved into a choppy trading range of what turned out to be the "b" wave of an a-b-c correction. It appears that this "b" wave is where the market is at now.

Given the distribution pressure that persists, we suspect that a move back up to the upper end of the range in the "b" wave (2007 SPY chart below) will produce a high-probability shorting opportunity just like it did in 1998.



Keep in mind that once the c leg of the 1998 correction played out, the market did a double bottom bounce and moved on higher to all time highs. We don't know if this time will be the same or not, but since we have yet to see the enthusiastic euphoria stage of the latest bull market, it may be possible that such a scenario develops again.