What is worrying, however, is if you look at the bigger picture. The major indices have put in a mammoth, long-term double top. Here is a chart of the S&P since 1970. You can see it very clearly in the chart below ? in 2007, at the 2000 highs, the markets ran out of buyers. But you can also see, the market is now retesting those 2002-3 lows. They were first tested in November 2008 and we got a rally. Now they're being retested again.
This really is a key juncture for the stock markets. If these lows hold, we could be marking an important bottom (although I have no doubt this will be retested). But if we break down below these lows, we're going back to test 1996 prices (600 on the S&P) and possibly even 1994 prices (S&P around 450). These current lows will then mark an important point of resistance that will slow any future bull markets (in other words, when markets rise again, the current lows will be where they start to falter).
On the positive side, Bloomberg reported this week that Elliot Wave International's Robert Prechter, a notorious bear and practitioner of 'Wave theory', has advised his clients to cover their shorts (bets that the market will fall). He first recommended that his clients short US stocks in 2007, saying that "aggressive speculators should return to a fully leveraged short position." But Prechter wrote to his clients this week, saying that "the market is compressed. When it finds a bottom and rallies, it will be sharp and scary for anyone who is short. I would rather be early than late."
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