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LUCKY #7

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The various US market averages have seen six straight weeks of rally, and one must wonder is "lucky #7" is in the offing. We don't know honestly; however, there are signs the rally off the March 9th low is becoming "long in the tooth" and primed for a rather "nasty correction"in our minds. To this end, we think it instructive to look at the weekly CBOE Volatility Index or VIX.

Cww20090418r-1


Our interest here is upon the recent decline from rough panic-level of 80 to its current complacent-level of 34. Quite a bit of marginally good or second derivative news as we could say has pushed it lower; however, we would caution as it is on the verge of forging a bottom that should result in a sharp upward move that would coincide with a larger downward movement in the US market averages. The decline has reached back into trendline support levels, and has done so with the 20-week full stochastic moving back into oversold territory. This latter point is most critical: during bear markets, an oversold stochastic reading such as this has led to sharp upward adjustments. If we had to venture, then we would put the retracement higher at 50% of the downward move, which would roughly target the 55-60 zone.

If this forecast were to come to fruition; then we would likely see the major averages "test" their March lows. Thus, we foresee quite a bit of downside remaining in the equity markets; although there are interim hurdles that must be broken before this will occur. If they hold, then certainly higher prices could materialize in a larger mean reversion exercise; although that isn't our preferred forecast yet.

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Good luck and good trading,
Richard

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