There were two possible signals that a bottom of some kind is close. Keep in mind, searching for top and bottom is the most expensive hobby. However some signs are hard to miss. First, CNBC ran special program (http://video.cnbc.com/gallery/?video=3000093787 ) “Markets in turmoil” where Cramer tries to scare the hell out of retail. If you have seen this man in action and have compared his recommendation for the last five years, you should know to do just the opposite of what he says. Secondly, GS comes with potential for return of bear market. ( http://www.bloomberg.com/news/2012-06-04/goldman-sachs-sees-potential-for-s-p-500-bear-market-on-europe.html ) I know GS loves the Muppets and have the welfare of all Muppets in its heart. Therefore, Muppets, beware. Most likely they want to buy your stocks cheap when they know that QE is around the corner.

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We are standing at a very interesting fork on the road. Which way will it go and which road shall we take. This is important because we want to be where the puck will be next. At the same time we are aware of the danger of front running. The mind keeps telling that we are missing the last great opportunity. The meltdown is here and if we do not join, the train will leave without us.  Our job is to rationally analyze all the arguments and see which one has better odds. Wining is not guaranteed. Never. That is why it is said that “better be lucky than smart”.

Back to the markets. Few days back I wrote that 1283 will be a good support area and  ( http://bbfinance.blogspot.ca/2012/05/same-boring-stuff.html  ) unless we see the range broken either way, it is better to sit in cash. Luckily, there is no penalty for sitting on cash, at least not yet. But now that 200DMA has been broken, will it open the floodgate to lower price? Lets us see the both sides of the argument.

Yes we will see much lower price:

• 200 DMA has been broken and the selling momentum is strong.
• Europe is getting worse and there is no sign of any intervention from ECB.
• Economy is stalling here in USA.
• Unemployment remains a major problem in USA.
• China is heading towards a hard landing.
• Commodity sector is in bear market territory.

No, we will see a bounce:

• The sentiment is too bearish.
• Commodities and Euro is over sold.
• This is an election year and election year price movement patterns are different.
• Greece is not going to leave Euro-zone because everyone knows that a Grexit will be the disaster which will make Lehman look like a trailer.
• The Fed will intervene. Bad news is good news.

These are some which I could come up with and I am sure there are many more on both sides. Given all that information, what is the verdict?

As you know, I am a believer of cycles. They come in various forms, short term, intermediate term, long term. The intermediate term cycle does not bottom till Mid-July but very short term cycle is bottoming just about now. When I combine the cycle analysis with the technical analysis I get the following picture:

• The next level of support is around 1260 and below that 1200.
• It is not going to be one straight line down.
• I expect to see a bounce starting next week but it will be just a bounce. Max. upside target remains 1360-1380.
• Selling is not over yet.
• There will be QE3 or 4 whatever you call it. But Bernanke has only two possible dates to announce, June 20 or August 1. I think it will start from August 1.

This is the road map I have in mind but the market is the boss. If it keeps going down next Monday or Tuesday, I would not fight with it. But if you have been in cash, like I have been writing all these days, you will have enough fire power to get in at excellent prices. I think we are not at the end game stage yet and we will see one more upswing before everything starts to unravel. If 1283/1285 level holds on Monday, I may do a bit of bottom fishing but that is for traders who can get in and out quickly. Absolutely not for investors. Investors better wait for good trends to develop. Do not underestimate the powers of the CBs and I think we will again see concerted efforts by all the central bankers to re-inflate the balloon.

I would like to share a chart from Bespoke. It is a kind of analog and I do not have much faith in analog. So take this with a pinch of salt.

I personally think we are following the old script of 2010 and 2011 with minor variations. Let us see how the story unfolds this year. Patience is the key.

Hope you are enjoying the weekend. Thanks for reading http://bbfinance.blogspot.com/ . Please forward / re-tweet / post it on your wall and invite others to join. (Twitter @ BBFinanceblog)(Stocktwits: Worldoffinance)

Everything so far suggests that we will see a re-run of last summer.  Like last year, Europe is at the front and centre of everything. Last summer QE2 was getting over. This summer Operation Twist is at its end stage. What is new this year VS. last year is US Presidential election. More the reason for free money. I keep looking at last year’s price action and I get a feeling that the Algos are following the same program with minor variations. Even in 2011, they were following the program of 2010. In effect it is the same program for last 3 years. Take a look at the weekly chart of SPX.

Why would it be any different this year?

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Last Monday, May 21^st SPX closed at 1316, on May 25^th it closed at 1318. It is as if the last few days did not exist at all. All intraday highs and lows for nothing.

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WOW! That was some intraday reversal.  Are we still playing the old tape?

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