It is widely recognised on this BB that I have been one of the most aggressive bears on this market and remain so due to the over riding macro economic conditions.
However stocks although destined for far greater falls , for technical reasons do not go down in a straight line.
A number of factors lead me to believe that the selling will soon be exhausted and a rally may ensue.
The targets I list below are critical and if they are violated on closing basis by more than 3% then the situation could get very ugly.
But technical indicators and contrarian indicators are pointing to a rally.
Sellers and shorters are exhausted and have made obscene amounts of money in the last few months and the risk reward from these levels is not attractive enough to promote further aggressive selling
Capitulation is so widely discussed in the media and BB forums that it may become a moot point as after all if everyone is aware of it they are not going to be mug enough to be the last seller at the market bottom.
Even the perma bull Maria on CNBC was discussing how investors could make money from shorting stocks and forget about looking for a bottom...that is a contrarian indicator.
For the first time in this bear market the short interest from private investors has surpassed that of professional investors..that is a contrarian indicator.
Professionals look for this as retail investors panic and cover at the first sign of a rally driving stocks higher.
The outflows from mutual funds in the USA is reaching record highs.........that is a contrarian indicator as private investors always sell market bottoms and buy market tops.
The VIX indicator in the USA is spiking higher indicating increasing fear amongst investors..........that is a contrarian indicator as it often preceeds market bottoms..
Nothing is written in stone, but the warning signs are there, and it pains me to read daily the tales od woe on this BB and the indication that many are ready to throw in the towel...........that is a contrarian indicator.
Be careful if shorting all Dow and Nasdaq influenced stocks as my work indicates we are near ro a short term bottom.
Some stocks will continue to go down regardless but it is not safe to short sentiment influenced stocks from this level.
I would envisage that institutional portfolios are so beaten up that they will need to recover some value quickly and will be chasing beaten up high beta stocks in the TMT sector and insurers.
These will offer the best returns due to the high short interest in these stocks but shorts will still be available in defensives as institutions whose cash free ratios are very thin need to free up money and switch out of these stocks
This will not be the ultimate bottom as there is much further to fall but technically we should find support around the following levels.
Dow 7650 with a potential upside to 8100 before a retest of 7650 and then a significant rally to 9100 level.
Nasdaq 1205 with reaction rally to 1255 before retest of 1205 and significant rally to 1378.
I am looking for the larger rallies to start around mid August when the CEO's will "kitchen sink" their earnings for fear of prosecution and to run till late October, when the next quarterly reports will have been published and it dawns on investors that earnings are not recovering and stocks are still massively overvalued.
After this time I still expect a further 40 to 50% downside
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