Summary of Last Week's Report 05/02/2010

The theme of this week’s report can be summed up: The precipice looms. Does the market tumble over or step back?

Many Indicators are reading “oversold”. On balance, once again, the outlook favours a short-term bounce.

The market is currently testing the Oct. 09 low at around 4500. If that fails, I believe we will see a resumption of the bear market. Or, at least, a major correction going down to the June 09 high.

The positive divergence on the Advance/Decline Line suggests that this is not the beginning of a new bear market downtrend. The very negative chart of the Hang Seng (Hong Kong) suggests otherwise. And not much else supports the bullish view. Plenty of Indicators and charts are teetering. But – until 4500 succumbs, the market still belongs to the (somewhat nervous) bulls.

The Decade Trend and the Presidential cycle (see previous reports) suggest a reversal to the downside sometime in the first quarter of 2010. We may be seeing the start of that process now. We’ll continue to monitor that scenario closely. Remember – that is just a scenario – not a prediction.

And watch for Black Swans – they can appear at any time. (PIGS, China, Iran, terrorists, tsunamis, earthquakes, volcanoes, Venezuela, Argentina, California, who knows what? … the list goes on and on.)

NOTE: The XJO is now setting up for a Connors and Raschke “Turtle Soup plus One” short term trade.

The rules were developed as an alternative to set-ups used by the Turtle Traders which have a high percentage failure rate.

The rules are relatively simple and based on fading a breakout:

Buys:

1) The market must make a new 20-day low. The prior 
20-day low must have been made at least three trading sessions earlier. The 
close of the new low (day one) must be at or below the previous 20-day low.

2) An entry buy stop is placed the next day (day 
two) at the earlier 20-day low. If you are not filled on day two, the trade is 
cancelled.

3) If the trade is triggered, place a protective 
stop one tick under the lower of either the day one low or the day two low.

4) These reversals are often short-lived, so take 
profits within two to six days and trail stops on positions that move in your 
favor.

The low on the XJO three days ago was 4524.1. The close on Friday was 4514.1. Best of Luck