Oversold and Headed for a Triple Bottom?

Ugly. But still not fearful. Below is a chart of the Volatility Index or what cool guys on TV call the VIX. It's, in theory, an indicator of fear. (notice how complacent we were a month ago - I mean the 2nd half recovery Kool Aid was everywhere - Boo Yah!)



As you can see during market bottoms (January 08/March 08) it has closed north of 30, in fact in the mid 30s

Now, we are really oversold (almost 8% straight down - June 2008 - yowsers) and in most cases (ex January 2008) we'd be expecting a dead cat bounce rally soon. I believe it is possible if we do fall to 1275 here to close the day we'd get some sort of reflexive rally. Or an Invisible Hand rally. Or some combination of the two.



But this would create a technical condition called a triple bottom. (January 2008, March 2008, now) Now, just from years of experience, triple bottoms usually don't end well (unlike double bottoms which seem to create very nice rallies). In a socialized market helped by the invisible hand I don't know what would happen at a triple bottom, since we have little historical record. But in a free market, it usually ends badly.

So a theory could be, crumble to S&P 1275... followed by all the King's Horses and all the King's Men buying futures like mad to create the appearance of "real" buying which pushes the indexes up and then snares hedge fund computers into buying, which self reinforces onto itself .... creating a rally (boy I sound cynical)... which will peter out after a few days, and then we will retrace to 1275... and break it on the next attempt... causing the VIX to spike. Since breaking S&P 1275 will cause even hedge fund computers to break out in a cold sweat.

That's one theory... it's complicated, it's cynical and it's "half empty".

As an ulterior investment strategy, I could offer you the "half full" theory - which is followed by the pundits on TV and sponsored by your government and Federal Reserve - and simply show you this (thanks to Bluedog for his artistry) I'll leave it up to you to decide your path.

Did I mention the "2nd half recovery" starts next week?

Comments

[gene inger]

you are 'korrekt'.. a double bottom is essentially our 'w bottom' as called to fail after the breakout-fakeout (above declining tops weeks ago now). It measures some horsing around here and another dramatic break as forward earnings revisions follow. The combination should result in an ensuing S&P drop into the lower 1200's or below in time (as we outlined to our readers).

I'll reserve sharing our measure; but with a macro short from nearly 1600 (forward roll-adjusted in the S&P futures); we believe by no means is this over; and we're historically usually optimistic relative to many. Kudo's again for the humor and getting it right!

gene

gene inger
ingerletter.com

[pooramerican]

Why you think hedge fund computers are bullish?I think they are instructed to be bearish and they sell all rallies with volumes.