Brain Surgery 101...

Today's price action presents some real concerns for me. We broke the intraday high of September 29 and we closed higher than we did on September 28th. This is a threat to our downtrend which is now clear on all time frames - Hourly, Daily, and Weekly. If we do not reverse course next week, we may see another leg on the rally and a strong finish to October.

I have decided to look at the weekly chart again to get a glimpse of how bad it could get and determine how I might handle my core short positions if this keeps running.



As you can see, the closing price action (green line) suggests that a full rebound of last week's pullback has occurred. This suggests that we had a 1-week correction. Hmmm. Is that all we get? Last week I listened to a Bloomberg interview with a bullish analyst who said "I hope we get a full 10-15% pullback, anything less spells greater trouble for the sustainability of the rally in the near term." I would like to agree with his thinking, but it is getting tough to agree with logical statements in this market.

From a technical standpoint, we are right up against 50% and 62% retracement levels of the last two fibs, that should help to contain the rally - and I believe it has been doing just that in the last couple of weeks. We also hit resistance from a prior price level in 2004 - where the market consolidated in the 1000-1150 range after a 1 year bull rally off the 2003 lows. Don't let the time period phase you, it does effect current price action. The market's memory is much better than our own. We are also smack against the middle blade of the fib fan that stretches from the high in 2001 to the low in 2009 (a weak, but not insignificant, technical level). We are also approaching the top trend line of the downward channel formed during our crash of 2008. It seems price action could intersect with that trend line around 1120 - which happens to be right about the 50% retracement level of the entire crash when viewed on the weekly closing line chart.

I have highlighted the 1120 level several times in past posts. I have also stated that the end of October is my time frame for holding my short position. If we reach 1120 and do not reverse before the end of October - I will begin "rolling my short positions". This means phasing out my current holdings and adding at higher levels. I will target the next logical level which looks to be from 1200 - 1300. This is the 200p MA and the full retrace of the last support shelf in this crash.

I will go on record as saying that I do not believe this should or will happen. I believe the market should reverse soon and the S&P should be below 1000 before the end of October - possibly to levels as low as 900. Remember, these corrections happen when you least expect and usually after the last short has given up. They are violent - taking down the indexes by as much as 5% in a day for several days in a row. It is time to watch the smart money and specific sectors such as financials and technology - when they roll, so will the index.

Having said all of that, I circled the start of the bull run in 2003. In comments that I made many weeks ago, I suggested that this bounce resembles the bounce we saw in 2003 more than any other in history. Though the economic drivers are completely different today (we are not recovering and unemployment is rising) it would be prudent to study that run carefully. Note the relative positions of the MAs then and now - very similar. That run didn't slow down until the 200p MA was reached and even then, it only consolidated. It took 5 years to see sub 1000 again. I am not sure I want to hold my shorts that long!

Let's hope for some sanity next week! (I just finished chapter 1 of "Brain Surgery for Traders")

Good luck out there.