November 11th, 2008

A Weak and Tentative Equilibrium

There’s not much to say other than “Be cautious and be careful.” We’re in terribly agitated and turbulent waters, a course that’s difficult to navigate. I circled this area between 850-950 on several earlier charts as prime for a consolidation or bottoms since this level produced pivot points several times since 1999 (see charts of November 3 and September 29).

Most pundits are now talking about the severity of the world economy and the catastrophic impact of a new crises, the potential implosion of the auto industry. I may be naive and short-sighted but I see the issue more as deciding who should bear the losses and in what proportion – Federal government, union health/pension plans and private/financial investors – rather than 300,000 employees of an inefficient, unresponsive and uncreative smoke-stack industry all losing their jobs. That just won’t ever happen under any circumstances. Many bankrupt companies and industries are revived, restructured, slimmed down, and become more competitive.

There’s no telling how this is going to shake out so we’re stuck between the Fairy Tale and the Nightmare I described in the two prior posts. Here’s a close look:

A tug of war is being waged between buyers and sellers. Both are getting tired and depleted as volume is withering. At some point in the near future volume will bust out but we just don’t know now whether the momentum will resume among the sellers or be turned over to the money waiting on the sidelines in the hand of potential buyers.

No one can predict what the precipitating event will turn out to be. It could be domestic or international, it could be financial or political, it could be economic, industry or individual company based. But whatever and whenever it happens, it will ignite momentum that will continue for several weeks/months and carry the market +/-30% in either direction.

This is either part of base building or a consolidation (and don’t let anyone tell you that they know for sure which). There’s only one thing to do at times like this – wait for a resolution. But if you’re compelled to trade, be prepared to be whipsawed. I have to confess that’s happened to me (I wish I’d be reader of this blog than writing it because then there would be a greater probability of my taking my own advice.). If you take a look at the Model Portfolio and the Twitter post at the right you’d see those trading mistakes.

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