$INDU update - 07-05-2010

On Friday, market looked like it was going to hold and make some kind of rally (which I found quite surprising since I thought people would not want to hold long positions over a long weekend).  But in the end the sellers took over and the market closed down.  We now have a definitive break of the neckline of the head and shoulders pattern.  This is very bearish for the market.  I would expect the market to not drop a lot immediately.  It should drop a little (maybe hit the target I mentioned in an earlier post around 9500).  I would then expect a rally back to the neckline around 9850 give or take a 150 points.  But 10,000 is the real test.  If the market cannot break back above 10,000 in the next 3-4 weeks, I would expect a large drop in the market to follow.

Even if the DOW makes it to around 10,650, its still now out of the woods, since that would show the formation of a monthly Head and Shoulders formation.

Again, all we can do is watch and continue to stay out of the market for now.  The big decision will come if the rally takes us back to the neckline.  I may be tempted to play the market short at that time.  But there is old wisdom "never fight the Fed" and we know that the Fed is doing everything it can to help the economy along.   We will pay for the rescue in the long term but betting short term against the Fed can be scary.  Unless I am convinced that a big drop is coming, I am likely to just stay out of the market and maintain my cash posture for now.

With the European and Asian markets posting losses on Monday,  and the precious metals index ($XAU) showing weakness and a potential top, there is much to be worried about.  A weakness in precious metals could signal investor expectations of deflation which could push the economy back into a double dip recession.