Sunday, November 7, 2010

Still looking bullish, but next pullback is key

So, if you are on board with the Fed and believe that they can magically wave their wands and all the trillions of bad mortgage loans will no longer have any impact on the economy, that we have entered the next bull market, that earnings will only get better from here, then you'll be wanting to get long in a bad way.

Okay, assuming you are correct, then I would wait for the next pullback, because right now we are in a spot on the weekly charts that have historically marked good sized pullbacks. The difference, of course, comes from being in a bull market or a bear market. Being with the overall trend is critical in what happens next.

You see, when you are with the trend, the market gives you lots of divergence before the next temporary reversal. Being against the trend, however, leaves you with little warning before the market suddenly reverses. Don't believe me, just try and capture the tail of any of the last corrections since the March 2009 low. The drops have been reversed quickly before any divergence could ever set in.

So, if we ARE in a BULL market, then the next drop will be shallow as the market will setup solid divergence over several weeks, and likely even through the end of the year. In other words, look for more consolidation as the next drop instead of a scary drop of the cliff for weeks kind of move.

However, if we ARE in a BEAR market, we are in the last stages of primary wave 2, and the market will reverse soon with no divergence warning coming on the weekly chart. The next move down will be furious. Let us see what clues the market gives us this next week.

One thing to keep in mind: when the market historically topped in October 2007 it was on a grinding retest of the July top. Deja vu?
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