Friday, February 5, 2010

Scary Days Are Back Again? Or Not?

I can't decide. But ever since the Presidential temper tantrum in mid January, the market increasingly feels like it is a replay of February-March 2009, if not September-October 2008. It was downright scary sometimes, like the day Dow went down more than 200 points.

But I just want to point out one repeating pattern in the weekly charts of Dow and S&P 500. We will find out soon enough, whether the scary days are back again or not.

This is a Dow weekly chart from December 2009. The final plunge (for now) in February-March 2009 took 4 consecutive down-weeks. Then a sharp reversal took place. In June-July, 4 consecutive down-weeks happened again, again followed by a reversal that took the index higher without much of a correction (on a weekly basis) until January this year.

It is a log chart, so you can compare the magnitude of each correction. The correction this time is about the same percentage as the correction in June-July 2009.

I noticed this pattern in July last year, after the reversal happened. "Hmmm, it's fractal... the pattern repeated on a different scale..." Maybe I mentioned it in a post here, maybe not.

This week was the 4th down-week. Will the pattern repeat itself?

Today Dow went as low as 9835, only to reverse all of a sudden out of nowhere to end above 10,012. I was planning on buying gold and gold miners EOD, thinking this was a solid, no-recovery down-day.

According to Jim Cramer of CNBC's Mad Money, it was the job of one hedge fund, who wanted some action in a thin market. The fund used 100 to 1 leverage (I think that means either options or futures), according to Cramer.

That reversal was reminiscent of March 09 reversal, when out of nowhere buy orders flooded the market. Rumor at that time was J.P. Morgan, buying a large quantity of S&P futures that cascaded throughout the financial markets that were open at that time. Who could that hedge fund be this time?

If this is their game plan - 4 consecutive down-days in a volatile fashion so that retails are scared away (again), and pros (hedge funds, market makers, banks) will jack up the market higher on a thin volume. It would be easy to jack it up, precisely because the volume is thin.

In the chart, I put in a target number just in case this pattern repeats itself and the market miraculously reverses from next week on. The target is 12,664. I know it's ridiculous, but I'm just calculating, based on a simplistic assumption that the pattern may repeat.

Now let's laugh at it and be merry. Doesn't feel like it's going to happen, and analysts and pundits are predicting 20% correction from here. But then it felt like the market would never go up again back in March 2009.

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