Monday, September 26, 2011

Market Overview - September 26, 2011

There is a lot of news out of Europe suggesting that no agreement has been reached on the Greece issue. As a result, Dow futures are down more than 100 points.

Today, I noticed that various financial websites are publishing articles comparing current situation to the 1930s and 2008. Although it might be true, these type of articles on prominent financial websites might be a contrary buy, and could result in a short-term but sharp market bounce. A similar message is being conveyed by the evolving Market Structure (shown below).

After completing a triangular correction pattern, market sharply broke to the downside on Tuesday - September 20, 2011 (predicted by IPM on September 4, 2011). After Tuesday's highs, market declined more than 7% in 3 days in a clear 5 wave impulsive fashion. This impulsive decline highlights the fact that the primary trend is down, and after a partial retracement markets should resume their decline.

Since August lows were not broken by the recent decline, some analysts are regarding this as a positive test of the lows and that one should take advantage of this opportunity to buy stocks. However, one should keep in mind that we are in a bear market and in bear markets these kind of tests typically fail until unless these tests are accompanied by excessive pessimism and despair. That is why, capital preservation is regarded as the most important task in a bear market

On the sentiment front we are starting to see significant pessimism from Individual Investors, as shown by two prominent market surveys. Furthermore, VIX generated a buy signal on Friday. VIX based buy/sell signals are generated every 2/3 months and have been very good over past several years. Both of these developments - Sentiment and VIX signal, can result in a short term but sharp rally to work-off oversold market condition.

Greek default or a significant bailout package might be the event which could result in widespread capitulation. This package might be announced around October 15, 2011 - date by which Greek could default if new loans are not secured. At the same time, in mid October corporate earnings will be released. It is often seen that if the market declines into the earnings season, it rises when the earnings actually start. Although both of these observations are interesting and coincide with the mid October 2011 time frame, UST team will continuously analyze the market structure for potential bottom, in conjunction with various technical and sentiment indicators through the lens of the Market Matrix. Trading Algorithm will then utilize the Market Matrix data to generate a buy/sell signal in conjunction with the Inflection Point Model turn window.

Note: As mentioned previously there is a turn window right around the corner. This IPM turn window might be the market top and could provide a good shorting opportunity. It would be very interesting to see how the market behaves when entering this turn window. Detailed IPM model analysis will be presented in the coming days.

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