Thursday, June 07, 2007

Will Friday’s Close Spell Doomsday for Stocks?

On Friday we could see a rare occurrence in stocks, a fourth day down right after a new high in a long term move. Why is this important?

This formation at a top (or the inverse at a bottom) is so powerful that it often signals not only the end of a major move up, but the beginnings of a big long term move in the opposite direction (down). In this case, the beginnings of a major bear market.

This formation is so rare that it does not make much sense to expect a fourth down day to occur. However, I will say this; if the market starts spiraling down in the last hour of trading you should consider taking some serious protection.

If the market does close lower Friday it is going to end the week in a dramatic oversold condition. Many might see this as an opportunity to cover shorts on the open come Monday morning. Scalping the market is usually a good strategy when the market is oversold or overbought but I can tell you from experience you won’t want to be an early buyer on Monday should the fourth lower close come in. History tells you this is not the time to buck the market or its trend. We could see the sell list as long as they ever get so you might want to check the buy/sell lists prior to the open.

If you have been watching the market closely since May you might have noticed that momentum has been flat to down. Any time a market is going up against a background of dwindling momentum you should be careful. You always want to be careful when you begin to see a series of negative divergences in a trend that has been persisting for a long time. Some would say look for an “edge”. In this case it just might be a classic.

I’ll save the discussion of the real weakness in housing and the effect this is likely to have on GDP and the psychological effect the ten year above 5.125 percent will likely have on the market. For now, keep your eyes open going into the close on Friday. You could be looking at an opportunity to make a rare trade.


I want to thank everyone who stayed on the mailing list after the close of the CNBC trading contest. If you stay you will be hearing from me from time to time. You will also notice that the other information I am putting on the Blog could awaken you to trends which you can exploit by identifying good stocks. I am particular interested in Alzheimer’ treatments and alternative energy right now.

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