Friday, January 15, 2010

Where's the capitulation?

Lately I've been thinking a lot about how obvious it is that the market will decline substantially in the near future, it seems too easy to short the market here and that worries me. The coming decline has become so obvious that I suspect many shorts who have held out this long continue to do so, despite large losses. Bearish sentiment is so low right now that there is very little possibility that this isn't a major top. So will the market behave like its supposed to and just roll over and die? Not a chance, at least, my experience tells me that the market needs to wipe out any hold out shorts and top pickers before it will crash. Thus I am going back to my old mantra of expecting this rally, this bull market, to end in capitulation, as all major market moves do. Some call it a blow off top, it certainly will involve a failed breakout and the volume will surge. Thus, although I am short I have decided to remain hedged until such a capitulation move occurs. In the chart below I have added a few daily candles depicting how this might play out in the next week or two. If i am right look for a very large move up on record volume followed sharp reversal.

Disclosure: I own QQQQ puts and calls.


Chicagostock said...

Nice chart. Take a look how the futures looks:
It just may be possible that this is the headfake? We will just have to wait and see!

Chicagostock said...

Weekly: almost a 100% retracement from September 08 reversal/

pythagoruz said...

Exactly! Doesn't it seem super obvious that we are at the top here? Nice charts, you outlined the reversal argument pretty well.