I share some charts with you to show what I see is happening right now. At the same time today was a horrible day and all of our long plays were stopped out and the same time the market did exactly what it had told us it will do.This was the most interesting day for long time.

The previous rally back up to the 50’s and rejecting it was a clear sign that this baby is trading seriously inside the box. Typical bear market behavior. Running up to the strong resistance to unwind the oscillators before heading back to the bottom. That is exactly what we got. I have to admit that I was somewhat blind to that move also so don’t kick yourself if you missed it. This is also why we keep our trade size small during the difficult market times.

Today’s false breakout still have to be confirmed tomorrow before it is official but in case it is, the markets are poised to stay inside the box. Rally would logically run up to 1080-1100 area (50h EMA & 200h EMA).

However, if we get powerful move down, it might be just an fishing expedition where the pros steal the stocks triggering the stops just below the support area or it might lead us to ugly new leg down. There is no way to know it right now. In case the selling turns out to real panic, we would probably see a back test of 1040 level after breakout and before the eventual rejection. If this is the case, the next stop for the down leg and the bottom of this correction period could be around 870-930 on S&P 500. In any case we expect this no man’s land period to continue to somewhere around October and November 2010.

However, the bulls won’t give the 1040 area easily. Bears really need to work hard to break that. It is the line in sand that separates us from the total disaster and enormous suffering. If we break it, the markets will wipe out a lot of good people and leave them dying slowly when the markets continue their uptrend. To make sure you understand what I am trying to say here watch our earlier video of this subject. http://www.youtube.com/watch?v=sGGGoOZRpc4

Possible positive divergences and significant divergence on FI(2) and FI(13) brings us hope of some kind of bounce. S&P 500 is trading at its lower auto envelope channel line indicating short-term oversold condition. This does not mean we need to rally up here. Market does what is does. It doesn’t have to do anything. If we keep that in our mind, we will avoid a lot of troubles.

Also the stochastic on the hourly line chart tells the story of deeply oversold condition. If we fail to bounce from here even shortly, the markets are in DEEP trouble.

Anyway, the cash is still the safest position. I would not short the markets from these levels, even if it could go lower. This is totally unpredictable and thus we stay mostly in cash at the moment.

Peace,

Matias

Short Entry @ 23.36

Stop @ 24.68

Target @ 22.52