Securities Research Services

Wednesday, January 09, 2008

Market Get's It's Head Lopped Off

This is an ominous looking chart:

Above is the weekly SPY chart. A head and shoulders pattern has clearly emerged over recent months and this week we have seen the neckline of this pattern lopped off like Louis XVI's head.

Selling has been extreme in recent days, but extreme is a relative term. When the market turned the corner in 2000 the QQQQs fell 30% before a decent tradable oversold bounce occurred. The Qs have fallen 10% from their December highs so far.

We aren't suggesting a 30% drop here is inevitable, we are merely saying that just because we are oversold here doesn't mean we have to bounce. VIX levels indicate that fear isn't anywhere near extreme. This divergence between the VIX fear measure and price action indicates that prices are now firmly sliding down a slope of hope.

As much pain as this causes investors, frankly, we embrace this sell off. The market has been in distribution mode for a couple of years now and has been increasingly difficult to trade. This sell off relieves the pressure that has been building and opens up vast reserves of inefficiencies to exploit for profits.

They say that stocks take the stairs up and the elevator down. We are already enjoying quicker profits this week than we have in two months

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