Friday, October 2, 2009

Dow Jones on a Knife Edge

My best guesstimate is that the downtrend over the last few weeks is a shakeout fakeout. The declines in short interest last month* means there is less buying power from short-covering, which would mean faster and deeper down-moves. These scary down-moves should set up a final run up, with fear of loss reverting to the fear of not participating that we saw in August and mid September.
From Money Morning Australia:

The index lost 2% yesterday (early morning today for Australian time zone) and closed at 9,509.28 points. The recent high has been posted at 9,918 points last week (point F). The current level is 4.12% lower than this peak.

The weekly chart suggests a further correction. First, the recent price action failed to breakout above a resistance line (horizontal blue line) that was previously a support line. Let’s see this in details. The initial point was a high posted at 9,903 points in November 2003 (point A). Several months later, in 2004, the level around 9,900 points was a support area where several bounced were generated (points B, C and D).

One year ago, the sell-off easily cleared this level and drove the price to 6,470 points (point E, in last March). The rebound started in March has been already strong so far. Between points E and F, the index jumped by 53.3%. As a result, several indicators have posted extreme high values or have already started curving downward. This means that the weekly momentum has weakened and that a correction is probable. The technical Momentum indicator has soared and reached historical high value. This may be the set up of a trend reversal. The Orriols and Quantin bands confirm this swing and suggest a move back to 9,000 points...MORE

*Here are some of the short-interest headlines from September:
Sep. 14
Short Interest in Financials Sharply Down From 1 Year Ago
Sep. 24
NYSE short interest declines to 13.52 bln shares
Sep. 25
Short Sellers Flee Tech, Hit Weak Balance Sheets