By Ryan McGuire
www.goldavalanche.blogspot.com
07/31/2012
If you are long the market, don't be a weak hand! Peak divergence in the Dow/transportation relationship is indicating that the next move will be down - though how far down is a matter of debate.
There is a slight chance that as much as 7-8% could be shed off the Dow - and if that is the case, and both indexes make new intermediate lows below the established lows of the current intermediate cycle, then the chances of a new cycle beginning will be high. But short-sellers beware, because we could be heading for a false bottom ... data coming out of the US has been slightly positive this month, so chances are that the High Frequency Trading algobots will bid up the market once the algos digest the conflicting information coming out of the US and Europe. Right now, it's all whipsaw reaction with no critical thinking.
Most likely, we will see continued short term divergence and volatility as the market trades it's way to a bottom. I think you can definitely expect the Dow to trade down into negative territory for the month at least, but I'm not convinced this is going to be the "big decline" the markets are worried about. But if it is, be ready with your bids.
The longs here simply need to stay strong, and wait for a reversal signal (both indexes making those new cycle lows). Adding some government and high quality corporate bonds to your asset mix might be a good idea as well, if you haven't done so already. For Canadians, you could try a Canadian bond index ETF or mutual fund (the key is low MER with short-term 1-5 year provincial, corporate and/or government bonds).
Stay strong
R
