Nov 26, 2011

Equity markets completed the impulse selling wave on Friday. The next step is the follow-through/redemption wave which concludes in either a high volume dump or short-covering which will mark a tradeable bottom. Time-wise and magnitude-wise, the follow-through wave depends entirely on the specific news event which is driving the fear emotions now.

Europe – and particularly the credit markets there – are the origin of the problem. That is where the news event is going to originate. If, however, nothing breaks in the next week or so; then sellers will simply exhaust themselves. Probably at or near the summer lows. If a news event breaks, then the markets will have to find the value which prices in that event – which could take a bit longer than a week or so.

Selling so far has been orderly. Technically, the equity markets are where they were on August 3 – but on much much lower volume. If volume ramps up from here, which is what really characterizes the follow-through wave, it is very possible that the follow-thru wave could hit an airpocket of no-bids. At any rate, volume is key in the equity markets.

The European credit markets OTOH may become very good buys pretty soon. As too, gold. The US dollar is catching a bid — but is surprisingly weak given the favorable tailwinds IMO. Once the bad news re Europe is truly priced in, the news cycle will likely shift over to the completely dysfunctional US. And you’ll want to get out of the dollar very fast when that happens.

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