One of the most profitable stock market patterns is the Bull Trap, defined as an upward thrust in prices that suddenly reverses, trapping unwary investors in long positions while the market tumbles to new lows. It is in the throes of the thrust when it so very hard to short, making those that are so inclined so well rewarded for their efforts.
Multi-year bear markets do not end because the Fed lowers it's target interest rates. The bond market had already priced government securities within the new targeted range well before the Fed acted. Today's rally, so enticing, so Crameresque --did you catch him jumping up and down on CNBC worshiping at the alter of Ben the Bernanke, exhorting all to Buy, Buy, Buy--what are the chances this guy is getting it right this time?
Lots of questions in my email bag today, asking me about this action and right you are to ask. It sure seems inviting, a turn-around economy and cheap stocks just off their lows. Except they are going to be a whole lot cheaper before any of this is over.
I kept the Elliott Wave labels off this chart in order to keep this as simple as possible. Instead, one downward sloping trend channel that contains all of the price movement from the past three months. Circled is the confluence of the top trend line and probable target for this rally, only a few hundred DJIA points higher. Also circled is the MACD which is spoiling for a cross-over that will take it a long way lower along with the market soon after that top channel line is addressed. There is nothing very bullish about this chart and it is showing everything we need to know about where we are, where we've been and most importantly, where we are going.
Is it any surprise that as prices approach the top of the channel that market sentiment is turning gigly again? We are still 3,000 DJIA points lower then we were just this past summer, yet according to Cramer happy days are here again.
The severity of the damage already done to our economy is poorly represented in media hyperbole surrounding a 300+ up day. Nothing is fixed, nothing has changed. Cycles have to play themselves out and this rally is playing a crucial role in creating enough optimism, enough bullish sentiment with attendant buying power to fulfill the underlying structure of the Bull Trap from Hell.
The only question is whether or not the trap door opens before or after Christmas? How utterly poetic to time the descent to coincide with the end of this Administration, timing rock bottom for the eve of Obama's new era.
What a game.