Three Days Until Armageddon

Three Days Until Armageddon
By Jeff Clark
July 14, 2009

Two weeks ago, I warned you about the bearish "head and shoulders pattern" developing in the S&P 500. This was when the pattern was still incomplete and well before the masses – including the talking heads on CNBC – got excited about it.

Last week, though, as the pattern threatened to break, I told my Short Report subscribers it wasn't going to happen. Not yet.

The more likely scenario was for a rally back up to between 893 and 908 in the S&P 500. This would shake out all the newly confirmed bears and get the talking heads crowing about how the head-and-shoulders pattern had failed.

Yesterday, the S&P closed above 901.

Lots of folks are now saying that last week's breakdown has failed. The head-and-shoulders pattern is invalidated. And now stocks are off to the races.

Get ready for Armageddon.

The stock market never does what the majority expects it to do. In fact, the real purpose of the market is to separate the public from its money. Yes, I know, that's a cynical view. But decades of evidence proves my point.

Too many people were looking for the market to collapse last week. So a rally was inevitable.

Yesterday, we got that rally, and now we have enough people declaring the worst is over to make financial Armageddon a high-probability event.

Here's an updated chart of the S&P 500...

S&P 500 Large Cap Index

The bearish pattern is still intact.

The negative slope of the volume (middle chart) and MACD (bottom chart) confirm the path of least resistance is lower. Many of the folks who took on bearish trades last week in anticipation of a widely expected breakdown are now out of the trades (at a loss). And the talking heads are, once again, preaching about the potential for an economic recovery and the return of the Great Bull Market.

A New Short-Term Target for Stocks

Another Ominous Sign for Stock Prices

My guess is the head and shoulders pattern breaks down by this Friday (or earlier) and the S&P 500 runs toward my downside target of between 810 and 820 by next week.

Or sooner.

Best regards and good trading,

Jeff Clark

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•	Investors head back to safety... 10-year Treasury yield falls from 4% to 3.3% in the last seven weeks.
•	Small-cap bookseller Books-a-Million hits new high as bigger rival Barnes & Noble drops 25% off June peak.
•	Banks jump ahead of Goldman's earnings announcement... financial ETF up 5%.
•	Earnings today... Altera, Goldman Sachs, Intel, Johnson & Johnson, Yum.

	Last	Change	52-Wk
S&P 500	877.82	-0.55%	-29.96%
Oil (USO)	32.31	-1.40%	-71.74%
Gold (GLD)	89.68	+0.19%	-4.12%
Silver (SLV)	12.49	-1.42%	-31.07%
U.S. Dollar	80.13	+0.26%	+10.53%
Euro	1.39	-0.58%	-11.68%
VIX	29.38	-1.34%	+14.81%
HUI	315.42	+0.36%	-27.09%
10-Year Yield	3.30%	-0.10	-0.44

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Company	Sym	Industry
Orchids Paper	TIS	paper products
Clearwater Paper	CLW	paper products
Aixtron	AIXG	machinery
Books-A-Million	BAMM	book stores
Walter Investment	WAC	mortgages
Dyncorp Intl	DCP	business services
Sapphire Industrials	FYR	acquisitions
Cytrx	CYTR	biotech
inContact	SAAS	long distance
Dorman Products	DORM	auto parts
Triplecrown	TCW	acquisitions
United States Lime	USLM	building materials
Virtusa	VRTU	computer services
Schweitzer Mauduit	SWM	paper products
OMNOVA Solutions	OMN	chemicals
Dollar Thrifty	DTG	rental cars
Oshkosh	OSK	trucks
Pre-Paid Legal	PPD	legal services

Company	Sym	Industry
Cephalon	CEPH	pharma
Cardima	CADM	medical devices
Harris	HRS	telecom
Bronco Drilling	BRNC	oil & gas drilling
GTx	GTXI	biotech
Hansen Medical	HNSN	medical devices
CIT Group	CIT	credit services
Omega Navigation	ONAV	shipping
APP Pharmaceuticals	ABII	biotech
CardioNet	BEAT	medical devices

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