Today's update

I need to develop some confidence - twice this week I've made a good call only to question myself and then see it come to fruition anyway. DIG hit a low of $26.50 today, that's about a 10% gain. It was hairy betting on new 52-week lows for oil, but it happened. The charts contradicted logic and they were right. Don't be fooled by the move up in oil tomorrow, that is just the December futures contracts rolling over to March. I suppose that could create a sucker's rally. Remember when "oil up" was a bad thing? Now we feel like it's too low. We've painted ourselves into a corner of irrationality.

It's important to keep perspective - the entire Santa Claus rally has been a series of often-irrational moves (both up and down) on light volume. You may have heard people say that the fact that the market did not go down in the face of some bad news must be a good sign. But if you look at the charts a few days later, they are down. For example, we're down 3% from the rate-cut rally. Hope is really the only thing keeping this market up right now. I'll take my chances making my decisions on the side of reason, and the dire economic situation tells us we have to go lower, sooner or later, no matter what the Fed does. In fact, the more the Fed does, the worse it gets at this point. The fall will be harder whenever it comes. They may forestall it, but we have to pay the piper for the excess in the system at some point.

On the S&P futures, we broke through some major support today and that should raise caution. 884 had shown some real strength late last week, and when we dipped below it last Thursday, we dove to 829. Then we retraced back over 884 in the overnight trading Sunday night, but by Monday's open, we were back below it again. Then there was a slow grind down until the Fed's announcement, and then the euphoric rise. Failure to break through that 918-920 area on Wednesday, and then failure to make a new high on Thursday, combined with a new test (and puncture) of 884 are quite bearish. Fact is, we smacked through 884 and dipped quickly to 874, which makes me think 884 doesn't have the support it used to. However, advances/declines yesterday and selling pressure weren't all that bearish.

Some testing of the 884 is in order to give the bulls some confidence. I do not think it will hold, as people continue to question the impact of the Fed moves on the future once they got over the buzz from rate cut. By the way, rate cuts have never had an impact on the stock market - the overriding trend continues in the face of rate cut after rate cut after rate cut. They can stimulate a short-term rally, but the trend continues. See article below.

Tomorrow will either be very boring (trading in the 884-902 range, 892 close), or a real whipper down to 830 or lower. Quadruple witching could make it really interesting.

Joe

http://www.elliottwave.com/freeupdates/archives/2008/12/17/U.S.-Stocks-A-Chicken-With-Its-Fed-Cut-Off.aspx?code=cg