Gigantic Bull Trap, Bear Market in 3, 2, 1...

Well, the markets broke pretty bad last week. I saw heroes stepping in to buy the dips on Monday, Tuesday and then again on Thursday but they were made suckers of by the market close on Friday. The fact of the matter is that these folks have been trained time and time again that this behavior will be rewarded. Those that have bought the breakouts have also been rewarded handsomely and all of this adds up to a market for the big stock holders to unload their shares onto (a requirement since otherwise they wouldn't sell). I've heard traders say that "from failed moves come fast moves" and that is exactly what we are seeing in the broad market right now. In the dow jones weekly chart below you can see that two recent breakouts to new highs led to swift high volume sell offs. This type of action is indicative of a top because now there are many recent buyers who are underwater and will be happy just to get out break even if the market should try to climb. It also demonstrates that the big money waited for suckers to jump in on the breakout before distributing their shares, in other words smart money trapped the bulls.

I am not ready to declare a full scale bear market yet, but we are getting pretty close. The dow closed below it's 200 day moving average for the first time since mid 2006 on Friday, and while it is not the end of the world it is a huge red flag. The media is trying to spin it like this is just another "10% correction" but two of these in four months? At some point I think this market is going to run away to the downside fast and everyone will be left staring with their jaws open. It might not be tomorrow, it might not be this year, but at some point there will be a wide scale realization that the US is headed into a recession and that we have actually begun a bear market. When that day comes I think the dow will drop 1000 points or more.

The cracks are certainly showing but the stock market hasn't really begun any major hemoraging yet. While the 20 week money flow has turned negative, this wouldn't be a big problem so long as it rebounds quickly. And although the dow closed below its 40 week (200 day) moving average, so long as it regains it quickly the slope should stay positive. Long story short (no pun intended), the market needs to rebound quickly from Monday's ensured big gap down. If it does not rebound, and there is no reason why it fundamentally should... the the last six months will look like a gigantic bull trap. I'm drawing the line in the sand at $126.62 on the DIA or 12,795.93 on the dow jones industrial average. A weekly close below those levels and I am going to declare a secular bear market for US stocks.


For traders looking for some action, I ran into this nice looking DECK chart over the weekend. I think it has opportunity for longs and shorts alike. It could rebound nicely from the trendline test that occurred Friday or it could pullback further to some the fibonacci levels shown above or even test the recent low in the 90's. Which ever direction it moves, there could be some big swings in DECK this week for options expiration. And speaking of which, we could see some major upside in the mortgage insures (ABK, MBI, MTG, RDN, PMI) on put covering.

Ok, that was a bunch of technical stuff, for the more fundamental types check out this video of Jim Rogers I linkjacked from Ugly:





Or theres even more charts here.

Disclosure: I own December DIA 138 puts