Calling All Traders: Get Ready to Make Money Shorting the Market (Part 1)

05/26/2009 10:35 am EST


Timothy Morge


I am not trying to paint a grim picture of the US stock market and the US economy. I sat quietly watching, carefully buying a few stocks and then taking profits as the markets rallied over the past three months. I still believe we'll see new lows in the US stock market, but I am a trader and am more than willing to buy a few stocks here and there in a countertrend rally.

I know some of you think this three-month rally is the beginning of the turnaround. In fact, some of you have sent me e-mails asking if I have “thrown in the towel” on my call for new lows. The answer is simple: Price hasn't even approached the 38.2 retracement area measured from the stock market's 2007 highs and the recent lows. Until price breaches that minor retracement, it's as weak as a newborn pup and just as fragile. Let's look at an updated version of the chart I used when talking about the coming decline all the way back in November of 2007 during an interview at Traders Expo in Las Vegas:


The Dow has rallied fairly steadily for the past three months. Note that it rallied above the blue, up-sloping Median Line and spent some time above it, but was unable to pull away to the upside. As this week closed, price has closed right on the blue, up-sloping Median Line two days in a row—so we are left to see what next week brings.

If price breaks and closes below the blue, up-sloping Median Line several days in a row, it should accelerate and head to a re-test of the prior lows at 6600. Should it approach that level, I think it will find little support, and will instead accelerate through the prior lows.

Let's look at the S&P 500 chart to see if it is telling us a different story:


The e-mini S&P market tested the red, down-sloping upper Warning Line, which acted as good resistance many times earlier in the strong downtrend. Note that the S&P market was unable to rally above this line and turned lower. It has now penetrated and closed below the blue, up-sloping Median Line two days in a row, also giving a weekly close below the blue Median Line.

If price shows any downside momentum at all in the next few weeks, I expect we will quickly revisit the lows made earlier in the year. And I do not think the lows for 2009 have been made yet. Let me show you a chart that tells just one reason why I think there is more downside price action to come…

More tomorrow in Part 2. Read Part 2 | Read Part 3

Timothy Morge

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