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Thursday's Closing Comment 5/6/2010

Bottom Line: Fat fingers are to blame. Whatever the reason, the timing of the decline was more of a surprise than where we ended up.

It’s almost laughable. For those of you watching today’s meltdown in real time, you probably agree the decline felt surreal. Although we were advising caution for weeks, even we were caught off guard. You could say we were in the right casino, just not sitting at the table at the time of the fallout.

Targets for several markets and commodities were reached, and then some. Today’s sell off was the worst day since 1987. But crashes are rare so close to a trading top. It normally takes more of a trapping sequence and an even higher level of complacency to insure that the last guy is indeed in. This was one of the reasons we felt we would see another minor push up before we saw the likes of what happened today.

As expected, today's internals were absolutely horrible. OTC volume exceeded 4.4 billion, which is huge. Down volume beat up volume by nearly 24:1, and almost 20:1 on the OTC. Not much you can say about that. There wasn't much that held in well.

Our challenge looking ahead is to figure out how today’s decline fits into the larger degree wave count. If we’re falling in 5 waves from the high (daily and weekly charts), than it’s pretty easy. This tells us the price top is in and all the caution we have been preaching was worth the effort.

Tomorrow’s jobs number sets the stage for another interesting day. The now oversold and bearish sentiment extremes should allow for some relief, which is confirmed by the wave structure we see. It would come as little surprise if we bounce off the jobs number, and break to an even lower level early tomorrow. If today’s intra-day sequence was indeed a wave 3, we should see a minor bounce (wave 4) followed by one more move lower to complete this leg down. From there, the stage should be set for a pretty good bounce.

Our trading sense says to focus on the Dollar, Bonds and Crude, since all exceeded our targets. A few names appear to be close to finishing up 5th wave declines, which means we can expect a counter-trend bounce at the very least. FCX, RIG, WLT and POT come to mind. These are ripe for an A-B-C patterned bounce, which we know is a set-up to sell into.

On a side note, the Aussie and the Loonie both fell hard after reaching their longer-term upside targets and if this weekend's COT analysis confirms it, we may have witnessed the end of a commodities counter-trend bounce that started in early 2009.