Bear Trap being set?

Posted by downtowntrader | 10/02/2008 08:58:00 PM | 0 comments »

The Nasdaq and Russell 2000 made new lows today, breaking under the lows set Monday. Todays volume was much lower then Mondays and we are setting up for a possible bear trap. It seems that most of the ingredients are here for an important bottom. Fear is through the roof. The fear based indicators such as VIX are spiking higher. The impending doom of our financial markets is being broadcast on every channel, and every Joe Schmoe on the street is debating how we got here and who is responsible. We've also had other clues as to where we are from a cycle standpoint as well. If you pay attention to how sectors are rotating you will notice that late cycle sectors like Agriculture stocks have been getting creamed. And has anyone noticed that the financials as a whole are not making lower lows inspite of the fact that the news couldn't be any worse.

Ideally, we would have another plunge followed by a snap reversal to trap the bears, but there are no guarantees that the market doesn't crash either. Maybe we are on the brink of financial armageddon. The truth is we won't know until it's in the rear view mirror, so the best we can do is wait patiently to pounce on the rebound. I am getting excited because I think we are gonna have a heck of a rally coming soon. We only get a few scenarios like this where everyone is caught leaning heavily to one side of the market, and when it reverses it catches most people off guard. The key as I've mentioned before is to not get too cute and try to get in early. And once we bounce, we can't assume we have the bottom either. Thats why we set our stops accordingly.

Good Trading,