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To Meltdown or not to Meltdown, that is the question.

I have been writing about S&P 1190 for a while, and yesterday’s article called for 1270 before 1120, 2/3 odds, with a stop at 1175 and a trigger at 1215. Time to revisit the bottoming process.

We closed Thursday at 1141, not a meaningful support. Central Banks around the world, as dumb or unwilling as they may be, know that today is Friday, and then there is such a thing called a week-end. They also look at the same charts I do. Four scenarii:

1. No overnight news, the market tests 1100-1130 and breaks. Brace for Black Monday, with a 1020 objective. (See Stock Market Meltdown-This Time It's Different, But Does It Matter?)

2. No overnight news, the market tests 1100-1130 and inches back to the 1150 area, AND the EuroDollar stays in the 1.43 range. Cover your shorts and start nibbling at the leveraged low P/E stocks, preferably with a high short interest. Leave the high dividend to the I-Think-I-am-safe crowd. If stocks are going to crater, they will too. If we have a bounce, buy what is trashed. If the Euro breaks down, keep the shorts on.

3. No overnight news, but the Euro breaks 1.44l; same as above.

4. Overnight news – subject to what it is!

Confronted with irrational fundamentals and news, it turns out that technical analysis proved useful in identifying pivot points. I had been wondering about the 1120 level which so far looked like a triple bottom. A reader pointed out the 50% retracement of the 2007-2009 move. When you write too much, sometimes you forget your own work. I had identified the same on August 2….

Technicals are still at work here, and a lot hinges on the 1110-1130 area, as well as volume. But it now becomes time to load your guns with fundamental bullets. At some point, we’ll have to buy into this decline. Make no mistake, though, it will feel extremely painful.

I have been asked what to buy, just in case. My personal inclination is to look for what has suffered the most. If the problem is cured, this is where the real money is made. I recall 2009. In February, I made a few such purchases. The S&P was around 840. Three weeks later, on March 6, we hit the intraday low of 666. Talk about pain. Since then, some of these stocks have been 5 to 10 baggers. Simple businesses, nothing exotic. Thursday, minutes before the close, there was a spike in the SPX. The Eurodollar September Futures, while down from 1.44 the day before, had only lost 1 cent. Given what was happening in Europe, it should have collapsed. I took this an encouragement. I bought some United Rentals (URI), down 17%, WesBanco (WSBC), 11 PE, Federal Agricultural Mortgage (AGM), 5 PE (extremely thin), and Ingersoll Rand (IR), 10 PE. I also shorted some SDS, but that’s the gamer in me…

Note: this article was submitted yesterday after the close, but SA editors rightfully recommended some editing. Reading it now suggests the benefit of hindsight but I left its conclusions as they were. As of 9:45 EST this Friday morning, I am not changing my mind. I continue to be impressed by the Eurodollar September futures, currently trading at 1.4412. But the day is young…

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Disclosure: I am long URI, AGM, WSBC, IR.

Source: Technicals Work, Time to Look at Fundamentals