Market Update Email 2-20-09

To: Friends and Family
Subject: Weekend Reading Rainbow - Market Update

Things pretty much played out exactly as I expected them yesterday and today. We got our very clear 5 wave move down from $875 and are currently getting our double bottom bounce. I haven't been by a tv this week, but I hope the media has done its part calling for the double bottom. The bounce probably started this afternoon. The clear five waves down the last two weeks almost certainly means we are now in the 5th and final wave down. See the attached chart. There is one kind of bullish scenario that I have outlined below, still left. But it is really weak. Then the bear scenarios I have laid out afterward.

The key line in the sand so to speak that I am looking at everyday is I DO NOT EXPECT THIS MARKET TO GET PAST THE TOP GRAY TRIANGLE TRENDLINE currently at $900 and falling. Therefore I will remain net short at any price movement below this.

The Bullish view (I give this only a 15% chance):I do expect a follow thru to todays afternoon bounce next week. In fact I expect a nice short term bounce back up to $800 area (shaded in red). Longer term the only hope for the longs is that we are still in our triangle as I have labeled black D with an expected Black E bounce that theoretically could get all the way back to that upper trendline, but this is a very low probability event, primarily because the Dow and a lot of other indices have already made new lows. I will be able to tell if this is playing out based on the action around $800 when/if it gets back up there. Bottomline is this will be a time to get out of longs and lay on the shorts again.

The Bearish view (85% chance): Bounce occurs next week like the bull scenario, but it stalls in either the redzone or just above labeled by the fibonaccit retracement lines. I do not expect $875 to get taken out. If it does we are probably in the bullish scenario outlined above. I will be able to tell by the way the price shapes up if we will stall in that red zone or just above. That is where I will lay on more shorts. That is the double bottom bounce of hope I expect. Ideally I hope we get above $800 on this bounce and stay below $875 because that most likely will mean that we are in an embedded 3rd wave and have only completed wave one of it. That would also mean we have a very long way to go down (talking sub $650 here). We will cross that road when we come to it.

Bottomline is I expect a decent rally next week that hopefully gets to the red zone. This will bring the put/call back down to big time bullish and also bring the VIX back to the trendline. This is also where I will expect to short and short heavily with a stop above $875. A break below today's low will also be bearish and I will have to see how the waves play out and update the chart, but we should eventually get a decent bounce that probably started today.

On a side note, I find it very interesting that the NASDAQ has become the safe haven. It seems money managers have nowhere else to put their money since 8 out of 10 sectors have horrible earnings coming thru. I plan to look more into this Sunday. Usually the NASDAQ leads the market in both directions, so perhaps it is signaling that this bounce will have some legs. I guess the question is, when will the recession start hitting the techs harder?

Have a great weekend.

Your reporting from New Orleans and about to go catch some beads in Mandeville, analyst,
Chad