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The stock market is oversold by routine standards. But we are not living in routine times; and the next 7 trading days in the stock market appear poised to bring some significant movements.

We will likely experience one of two scenarios:

  1. The professionals have sold and sold and will be happy having gone away for the summer with a lightened exposure to equities. The market will rally.
  2. The professionals have sold, and sensing opportunity are prepared to sell more, and sell short for relatively quick profit. The market will sell off hard in a waterfall decline. Read this option to be more bearish than the first option is bullish.

A point of recognition may have been reached recently whereby the many are starting to recognize what the few have been saying for some time. The economy is at great risk of going negative once again. However, recognition sometimes means a recent directional movement in the market has come to an end, at least temporarily.

Trendlines can be drawn from many perspectives but this chart below suggests uptrend is about to meet downtrend.

click to enlarge

Expect a good sized move in the stock market soon and among the next 7 trading days. July 14 is the 55th day from the April 26 top and may carry implications under Fibonacci technical analysis. The McClellan Summation Index made a significant low recently, rebounded for a brief period and now has rolled over again for 9 days running and is in a freefall. The McSum tends to trend. Also, most individual stocks have awful looking charts. And big moves down in the market have been known to come from a point where the market is already "oversold".

Ironically however, and out of the blue, the "spending" index at Consumer Indexes has just posted a strong 10 day run. It has been negative for most of 2010 and is predicting a negative 3rd quarter GDP. (Research shows that their index leads the actual quarterly GDP as reported by the Bureau of Labor Statistics by 17 weeks.)

I do not sense we have seen capitulation and therefore remain bearish as I have been since before the April 26 top at SPX 1219. We'll likely know well before the next 7 trading days have concluded if I am correctly positioned.

Disclosure: Author is long SDS

Source: Uptrend Meets Downtrend: Which Way Will It Go?