Tuesday, August 19, 2008

mkt today

About Shark Watch

Tuesday, August 19 - 4:25 PM

Afternoon Comments

As we have said many times over the past few weeks, the driving factors behind the recent strength in the market have been no mystery, but those were put to the test today as oil bounced $2 and inflationary data suggested that higher input prices are being passed thorough to other areas. Moreover, the continuing weakness in the financials indicates that market players are becoming increasingly uncomfortable that the worst is indeed over when it comes to the credit crisis.

Most importantly, however, is the technical damage that both the Dow and the S&P 500 took. Their respective ascending support lines have now been demonstrably breached, which means that we need to start getting defensive once again. Even though the selling over the last two days sets us up for some reflexive action to the upside, we suspect that any such move will be used as an opportunity for shorts to press further.

The good news is that, for the past several weeks, we’ve been pointing out that the decreasing volume, lack of leadership and numerous failed breakouts meant that we needed to make sure we kept our time frames very short. Those who followed that strategy are in a good position to move quickly now that the technical conditions are deteriorating.

Of course, we’ll be hearing how this pullback is a great chance to go long, but the fact remains that we are in a bear market. We’ve had several opportunities to ride counter-trend bounces along the way, but each time, they’ve failed miserably. At some point, things will change, but until we get proof that the trend has actually turned, we need to make sure our focus is on capital protection. The charts will tell us when it’s time to start building longer-term positions, and that has yet to happen.

Have a great evening and we will see you tomorrow.

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