We should be careful not to underestimate the power of the short squeeze begun from last Wednesday’s lows. The past tells us that bear rallies are usually more powerful , fleeting and ferocious than upthrusts that occur in bull markets. A such, the 450-point rally that occurred last week could be just a warm-up. My gut feeling is that the most devastating bear market in history has already begun. But that doesn’t preclude the possibility of a blow-off top that would serve two purposes: 1) disemboweling the last remaining bears, and 2) trapping bulls for the killer avalanche that would follow.
If such a scenario is about to unfold, we have a precise Hidden Pivot target to use for the bull market’s last gasp: DJIA 17622. That is exactly 1828 points above Friday’s closing price, and it would put a fitting end to the low-grade mania that has pushed stocks relentlessly higher since March 2009.
In attempting to catch The Top, I will continue to recommend the purchase of put options at promising rally targets. Subscribers have already done so — again — via the purchase on Friday of March 150 weekly puts in the Diamonds. We have taken pains to limit theoretical risk to relative nickels and dimes, using a 15-cent stop-loss. It helps that we are playing with the ‘house’s money’, having racked up a paper gain of $1920 from DIA puts purchased in mid-January.
In recommending short or long positions, I almost invariably shun gut feelings, relying instead on purely technical indicators. In this case, however, I am acting on the belief that the so-far moderate slowing of global economic activity has fatally damaged the illusion of recovery that the central banks have worked so hard to create. ‘Inflate or die’ has long been the number one imperative of the bankers, but my gut feeling is that deflation is finally about to defeat them.