Process of Illumination (bearcare for dummies)

(your friend) Michael Davey again…

Conviction is a bitch, eh?

Bears hate life again tonight – heads hanging low (those not rolling on the floor); eyes reddened and bleary; shouts of could’ve, would’ve and should’ve murmuring in the midnight air.

So boring.

Still, I can’t help but think I should lend a hand. It’s been a long and hard struggle and no one should fight this forever. Let me have a swing with that axe Eugene.

Yes, it may be early (snort!) and indeed, it may be just a little trade for the time being. But by a simple process of elimination I’ve been green-lit to take a walk now on the short-side.

1.) There is an ugly divergence at present. The back-of-the-coaster DJIA (the only major index to reach new highs today) is out-performing leadership; which is clearly lagging. The daily charts of the NDX (a leading index), the Russell 2000 (a broad index of smaller, growth and financial companies), GS and AAPL (two bellwether generals which have led the market higher with Swiss-watch precision up until this last advance) all tell the sordid story when compared to the 30-stock Dow.

2.) Because of #1, I am not allowed to increase longside exposure (indeed, leadership growth in general and everywhere, is flashing the same negative divergence). And…

3.) I’m not really interested in a vacation just now (which is what I’d be in store for if I was not willing to get a little in front of this trade).

If P, then Q = I’m going to take a stab short (for relevant accounts).

I know it’s sick, but I know so little. I can’t say it’s perfect, but now seems like a dandy time (what with you drooling incontinent). For the moment at least, let me hold your position and you can catch your bearings.

While I won’t make any Kondratieff predictions here, I have that much on my side. Further, when the market turned lower the week of October 19th, I had no substance to predict any terrible downside, but I wasn’t any genius to interpret momentum had topped (for the intermediate-term at least). Prices may or may not see higher highs following such an occasion, but the shift in momentum generally means that selling strength is +EV going forward.

Now we see momentum at lower highs (no shock there), while the Dow-30 diverges as the only index at new price highs. In other words, we have a top in momentum, combined with a rather daunting divergence.

Beartards who study the history will find the good old Dow is commonly the only index to snap-back to higher price highs following an initial break in price and a top in market momentum. True for both major and intermediate-term tops; commonly.

If P, then Q.

Easy game.

Note: SPX and NDX closes at higher-highs will be my benchmark for failure (intraday highs are okay, depending, but closing above previous, October highs will mandate my exit and put me to shame for coming on here and suggesting such foolishness).

12:20am EDT: Thought in the spirit of Michael’s post I offer a little ‘Zugabe’:

Now remember – this is a weekly chart and a weekly stochastic. But it rarely lies and based on what I’m seeing this rally is in its final throws. Of course until this bitch resolves there will be more pain – if you are not prepared to endure this go into cash.