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The Stock Market: Poised on an Edge?   (December 29, 2007)

The stock market seems poised on a rather interesting edge. By all rights, the looming recession should make the future easy to predict: the market should fall hard as the reality of recession kicks in. But the future has proven to be remarkably resilient to easy predictions, and so all we have is charts and other tea leaves.

Let me start by noting I don't have a prediction. As frequent contributor Harun I. has said (and I paraphrase): no one knows what will happen, we can only know how we will respond.

As noted in the chart, the large head-and-shoulders formation which may have formed can be argued to mark a long-term top. On the other hand, the market has bounced twice off a line that was once resistance and is now support; double bottoms often denote market strength.

MACD is neutral, and could go either way, so there's no strong short-term trend in place. The multi-year long-term uptrend is still in place, and until that's broken then the Bullish stool (however wobbly it now seems) is still standing.

The confluence of the three moving averages suggests some major break of the red wedge up or down is nearing. If the 20-day and 50-day moving averages dip below the long-term 200-day MA, that is a bearish signal (i.e. "cross of death"). It wouldn't take much of a decline to create such a Cross of Death.

Since prices tend to oscillate between the Bollinger Bands, this suggests that the DJIA may move down to the 13,100 level before starting its next bounce to the top band.

As noted here before, I remain profoundly suspicious of any market move which is heartily supported by a dominant majority. The Market tends to take away the money of everyone betting on "the sure thing" as reflected by the options market. Right now the options bets are heavily weighted against the DJIA and the financial stocks rising, and in favor of oil continuing to rise.

As legendary trader Jesse Livermore trenchantly observed, the market moves to reward the fewest possible number of participants. If everyone is betting it will drop, then it somehow contrarily rewards the relative few still riding the "up" tram. When the majority are firmly confident that the market will rise, it contrarily decides to drop, taking along the fewest possible number of participants on the profitable "short" train.

Fundamentally, the market may be reflecting the great question which as yet has no clear answer: will the rest of the world shrug off the coming U.S. recession, enabling U.S. global corporations to grow profits in their non-U.S. markets?

To some degree, this has been the dominant theme of corporate profitability since the dot-com crash in 2001-2002. Domestic growth in most markets has been weak while overseas growth has been strong. Global U.S. corporations already earn most of their profits overseas, i.e. in non-U.S. markets. So it is not inconceivable to expect "more of the same." This is the Bullish case for the U.S. stock market's global companies.

On the other hand, if you see the erosion of the U.S. economy--still a quarter of the global GDP-- as dragging down the global economy and financial empires (as I do), then profits will eventually sag for all companies in all markets. That would remove the raison d'etre of the six-year old Bull Market.

But we shall see. January, and indeed 2008, will be interesting.

Thank you, Fred R. ($50), for your generous support, intellectual and financial, of this humble site. I am greatly honored by your gift of Mark Heard music and your readership. All contributors are listed below in acknowledgement of my gratitude.

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copyright © 2007 Charles Hugh Smith. All rights reserved in all media.

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