Wednesday, October 26, 2005

The Bull & Bear War of 2005

Until Friday of last week, the market was a bear's dream. On Monday the 24th it became what looked like a nightmare, as the Dow rocketed over 160 points and there was strength across the board.

Now that a couple more days have passed, I have had the opportunity to look again at the markets overall. My point-of-view remains utterly unchanged. I still believe we are at the beginning of a major descent, and Monday's action was one of many "one-day wonders" that we are bound to see that will frighten less stalwart bears away.

As you may recall from my earlier postings, the market (specifically, the IWM, which is the broad Russell 2000 ETF) "kissed" the underside of its broken trendline not once but twice (as shown by the down-pointing red arrows on the graph below). On Monday it kissed it again, then it kissed it good-bye as it jumped to the other side.

This was discouraging at first, since it seeemed the broken trendline had been overcome. But look at the graph below. A violent war is ensuing between the bulls and bears. You can practically see the opposing sides shoving the price from one side to another of this "line in the sand" that is so important to the market's future direction.

The key, as always, is which side has more strength. Judging from the charts I am looking at (and I look at hundreds), there is an overwhelming case for a severe downfall. Trendline after trendline, Fibonacci after Fibonacci, they all point to the same thing - - that the market IS broken already, and we're going to keep heading lower in fits and starts.

Since I mentioned my beloved Fibonaccis, I'll point out again how marvelously helpful these can be in trading. OIH, which is representative of the oil group, descended sharply from its wild ride recently. It bounced perfectly off the retracement line, as you can see in the highlighted area below.

The upward bounce has exhausted itself. I re-entered the oil market on the short side in a big way today. Just look at the massive shooting star pattern (for you candlestick fans out there). As always, just click on the image to see a bigger version.

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