August 20th, 2008

Bottom or Consolidation Channel? What’s Your View

Some will call it a upward-sloping channel, some call it a wedge, some see it as the right-shoulder of a broad head-and-shoulder formation and the eternal optimist again sees it as a bottom. But I’d rather let the chart speak for itself.

Some show a short-term chart that zero’s in on the spurt that’s taken place since the July 15 Fed intervention in the Freddie and Fanny debacle and consider the 7.5% move a bottom:

But the recent action is cause for concern. The angle of the channel is too step for a bottom formation; it’s usually either a consolidation followed by a continuation in the same direction or the left-hand part of a larger pattern.

I’d rather take a longer-term view that takes into account all the events since the credit crises began over a year ago:

It seems obvious to me that the recent upward-sloping channel isn’t a “v-shaped” bottom – it rarely is, if ever. The recent movement may broaden out and morph into a true bottom formation but that wouldn’t happen until the Index returns and tests the resistance at 1200. If it passes, then the attempt to form a true bottom pattern will continue. If not, then the channel was a consolidation and the decline will continue.

On July 31 , I made a bet with Cramer in response to his “Bye, Bye Bear” call that “the market, as measured by the S&P 500 will see 1150 (10% down from 1278 as of 10:22 today) before it sees 1405 (10% up from current)”. Of course, I didn’t actually make it with him but I’m keeping score any way.

I’ve been consistent telling you that my MTI (Market Timing Indicator) continues to signal that an all-cash position position is still the best strategy. I’ve also been consistent in calling for a move to 1150 ever since the beginning of the year. It looks like the market is now heading lower so we’ll see if Cramer now tells his viewers “Boo, Hoo Bull”.

If you want to play the downside, I wrote a piece on June 28 entitled “How Do Ultrashort ETFs Work” that displays the relationship between the underlying index and the etf. You might want to take a look at it again.

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