-->Last week we said:"As we had expected, the previous week's attempt to rally failed miserably. The indices declined further reaching price support levels, while most technical indicators reached oversold levels. Consequently, a"bounce" is quite natural at this point. However, the real importance of the current combination of price levels and market internals suggest that we are once again at the demarcation point between the end of a bull market and the beginning of a bear market. In bull markets, under the current circumstances, one can expect the bounce to carry a bit further, to be followed by another decline during which the internals improve, thus providing non-confirmation of the decline, resulting in an upside reversal and the bull cycle goes on. On the other hand, at the beginning of bear markets, the bounce that comes as a result of the current combination of price levels and market internals is either quite sharp and violent, exceeding even the expectations of the bulls, which is followed by an abrupt and even sharper and more violent decline, exceeding even the expectations of the bears, OR, the bounce fails almost immediately and it is followed by a another decline during which the internals deteriorate even further, thus, providing confirmation of the price action and forewarning of more to come.

The human temptation is to try to get ahead of the market and determine in advance what the ultimate outcome is going to be, thereby, proving to ourselves and to others our"superior" understanding of the markets and its inner workings! Although we do have our own beliefs and suspicions, our approach has been to act on what the market is telling us, opposed to what we think it is telling us. Right now all it is telling us is to watch out for a possible change in character, but there is NO evidence that such change has taken place. According to our indicators, (see table below) we have suggested that the preferable position is in cash, and thus at this point we can afford the luxury of waiting on the market to show us its true colors!

In summary, for next week we have got to expect the bounce to carry a bit further and then another decline. It is that decline that will give us important information about the character of the market, and whether the bull cycle that started in March of 2003 is still in effect, or if it has come to an end.

The Transportation index supports the bullish view due to its chart pattern; on the other hand, the Volatility Indices are at channel resistance. A break-out above a two-year trend line would suggest a change in character at least to some degree. The point is, if you look, you can find evidence to support your own bias, which ultimately may turn out to be wrong. The key to long-term success in the markets is to recognize those circumstances when risk is elevated and to avoid the human temptation to be a"hero" with your money! If you end up poor by trying to be a hero, you may get some sympathy, but you will never get invited to parties and you won't get the girl at the end of movie (or, the guy)!

(Current) Last week the markets got rather oversold by any measure. Moreover, sentiment--as measured by the RYDEX cumulative nest cash flow--has gotten to levels that in the past have marked important market lows. Therefore, we ought to expect the bounce that started last week to carry further into next week. However, given the technical deterioration that has taken place, it would be quite unusual to see a"V" type of recovery. Consequently, although we do expect the current bounce to carry further, we also believe that it would be a mistake to assume that the final low for this cycle is in.


<ul> ~ http://www.financialsense.com/Market/iossif/2005/1018.html</ul>