The Bullish Side of the Market You Might Not Be Considering

In this post I want to present a case for the long side that many people may not even be considering because sentiment is so bearish right now and everbody is uber focused on Dow 4000. Anybody who has been reading my articles for awhile will know that I’ve been a very bearish for some time, and I’m not saying load up on the long side by any means, but there may be a “trading” opportunity that is upon us. I have a feeling that if we can bring some buying into this market at the beginning of the coming week, then some of the divergences that I’m seeing may have relevance. It’s always important to look at both sides of the trade.

I must also state, that it would not surprise me in the least to see the markets crater 10-15% on either Monday or Tuesday given the orderly declines we’ve been experiencing. And if that did I’d probably be screaming buy, buy, buy. However there is something to be said when sentiment reaches a certain point, when everybody just assumes the market is going to move straight down into the abyss. Markets do not go straight down, they bob, weave, ebb, flow, and do exactly what you don’t expect them to do. That’s why the majority of people lose money. It’s their expectations of what the market “should do” vs. what it does do, that keeps them in losing positions, even when all signs are pointing to sell/cover.

3 points I want to direct your attention to on this chart.

• Trix looks to have bottom and has formed positive divergence against the Dow
• McClellan oscillator has also formed positive divergence and is nowhere near the October lows (not seen in this chart).
• Doji on the Dow candlestick

On a closing bases, above 500 for new Nasdaq lows is high. It’s not capitulation high, but it is high as possibly a short term low for the market.

Note the climactic volume in the weekly charts. We’ve just gone through an extended multi-week crash that was very orderly and painful that has zero percent of stocks trading above their weekly 200dma. You can’t go lower than zero.

As I finish this post up I can almost hear the crowd here calling me out because the other day I said there was no good reason to buy any stocks long, and there wasn’t at the time of that post. Being a trader, it’s important to notice subtle changes in sentiment, indicators, and charts and sometimes things can change quickly. Other times it takes a few days to even recognize a trend change, or divergences. Sentiment is real bad right now and we’ve had a few days very close together of 90%+ downside selling days. Coupled with a few other indicators and you could easily see a 500-1000+ point rally. In fact, by my count this market could rally to 7046 easily, and still be very technically weak.

The point of this post isn’t to convince anybody to go buy stocks blindly on Monday or to proclaim a bottom. It’s to offer up the possibility that a rally could be coming and to take the necessary precautions to prepare yourself for such an event, such as lightening up on your shorts and/or prepare a watchlist today.

Comments

[3percenter]

So basically you're saying the market could go up or down this week, so we should be prepared either way-wow, what a concept! Wish I'd thought of this before!

2009 Mar 08 08:59 AM

[J. D. Swampfox]

The writer says, "...it would not surprise me in the least to see the markets crater 10-15% on either Monday or Tuesday given the orderly declines we’ve been experiencing." It wouldn't surprise me either. I agree the latest movements have been so solidly down that a bounce is in order. It seems that fear is so high though that another big move down is likely before the bounce.

2009 Mar 08 10:13 AM

[mariocavolo]

.......all good Jeff, thanks for your thoughts.....I'd like to point out the global economic fundamentals....every rally attempt is brief and weak for damn good reason, anything resembling a rally "should" come, but any rally is simply unsustainable and supported by nothing more than shorts getting squeezed. Why?...because the economic news coming in almost daily is getting worse and worse and worse....Friday's move up was a 10 minute short squeeze / day trader's liquidation before the weekend...nothing more...we are going to see the WORST of the economic reports and happenings starting now... hate to be a doomsdayer but its reality

2009 Mar 08 11:23 AM

[diadi]

Taking blue chip stock losers out & playing some hot sector penny stocks is worth exploring to help moderate the losses.

2009 Mar 08 12:13 PM

[socrateazz]

How would People take more negative news? would a jobs lost rate decreasing cause people to think the economy may be turning around? There are any number of changes in perceprtion that could make people think things will improve. And the market acts more on perception than on fact. Facts do lead to perceptions But also beliefs lead to perceptions. The fact is no matter how idiotic Obama's policies are, sooner or later he will do something good for the economy (even if by accident) and more people will buy hoping not to be left behind. and that will cause more buying raising the values of stocks. Even if he does not act the limit is Zero and as you approach zero Probabillities of opposite reactions increase. I think a good ralley is very possible even if no good news is seen. My guess is a little rally on Monday with another drop Tuesday followed by a big move up Wensday assuming Obama just shuts up and says and does nothing. I wonder if I am right!

2009 Mar 08 12:19 PM

[Prudent Man CFA]

I don't believe a person or business in this country that will not be negatively impacted by the government spending, devalued dollar and higher taxes.

That is what the market is telling us.

2009 Mar 08 12:49 PM

[LionCub]

I totally agree with Jeff. I have been following his articles since few months and most of the times, he was very right and unbiased. One should note that, he is just giving his thoughts but not recommending or foretelling. Personally, i admire Jeff and he is the only one in my watch list.

2009 Mar 08 05:45 PM

[Paul_L]

Good work Jeff. Keep it up. I agree with LionCub. Also the dramatic down volume is interesting. This 20% drop coincidentally with Obama inauguration (how many days?) is almost the same loss as Bush II's administration of 8 years. HOPE, sound familiar, it will not all go to zeros. The rate of decline is more than dramatic.

2009 Mar 08 10:41 PM

[Jeff Pierce]

Lioncub,

Thank you very much for your kind words, as well as everybody else that shares that opinion of what I do. And you are exactly right, I only offer up scenarios based on my observations.

I try to use what I've learned in the past to guide me in such a way as to help others who may have not been doing this as long as I have. I do not get paid to write any of this and have no vested interest in influencing traders.

2009 Mar 09 02:32 AM

[LionCub]

I am feeling previliged when I saw Jeff posted a reply to my comment.
To all other friends here:
-- I usually read an article from any author and see what he/she is saying and based on what.
-- How good they are at using what they are using to infer the market situations.

This will give me an opportunity to 'learn' how to look at markets and explore several corners that we are not aware when guaging market situation.

Thank you again Jeff P for your articles and you do have people with all ears and waiting for your articles.

2009 Mar 10 12:58 PM