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Handle the Debt Downgrade Like the Smart Money Does

August 7th, 2011
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smart-money by Guest AuthorDavid Grandey, All About Trends

Here's our take on the markets and what could happen Monday:
As we're sure you all already know S&P downgraded the US to AA+ from AAA. And of course the repercussions are being heard all over the media and the net. More hype folks, more hype. However,we say GOOD! It's about time someone pulled Washington over for speeding. Of course the AAA to AA+ is the equivalent of a warning to slow down.

Follow up:

A lot of people are talking about how it was bad form to release the news after the close Friday into a weekend considering what the bulk of us all went through (we get that) and all, but we see it differently. We say GOOD because can you imagine if they did it during market hours in a highly nervous market?

The timing accomplished two things. One is it allows for maximum impact over the whole weekend which we like because it¡¯s really the perfect time to wake Washington up! People are glued (out of fear) to the TV about all the goings on in Washington and the markets.
It brings the issue of WASHINGTON - GET YOUR ACT TOGETHER front and center. We pray they got the message!

The second thing it allows for is cooler heads to prevail and sort the impact it may or may not have come Monday morning.

Speaking of accomplishing, believe it or not last week was positive in the sense that we got a lot of pressure relieved that has been hanging over the markets for several weeks. Let us explain:
  • We had the debt ceiling pressure issue - relieved
  • We had the jobs report pressure issue- relieved
  • We had the ECB issue about buying PIIGs debt- relieved
  • NOW we just relieved the S&P downgrade pressure issue.
So now that we have all the fears answered and relieved, what's next?

The downgrade is just a downgrade of quality. Albeit it seems a lot is directed at the politics involved as well as credit quality and to that we whole heartedly agree. We disagree that a big part of that was the basis for the downgrade but applaud them for bringing it front and center to mainstream America in a major way.

Sure it's a bit of an issue. However it changes nothing. The US doesn't have a default issue - it has a WASHINGTON SPENDING ISSUE and political issue. If anything it's another wake up call to WASHINGTON to get its act together once and for all. Time to take off the gloves once and for all and play nice, boys and girls.

Now to those of you who are thinking or rather FEARING the open, you are fearing A MOMENT IN TIME subject to the next moment in time. Could we get a knee jerk open? Of course, in fact we'd expect it. So if that happens what are you going to do sell AFTER THE GAP DOWN? AFTER THE OPENING DAMAGE has already been priced in? Or are you going to let the dust settle and think forward and let a cooler head prevail. You can choose to fear or you can choose to use it as an opportunity.

We mean you should think about this (and it's very important) - just who are you going to sell to AFTER the markets have been selling off the last 10-12 days? Nellie? We doubt it. Just remember for every seller there has to be a buyer and after all Wall St. Buys Fear and Sells Greed.

Should we get a knee jerk open, the only reason we see for that is the nervous money over the weekend doing anything they can to stop that unsettled feeling of fear. Such moves often end up being the wrong decision after a few more days go by.

For us, it's an opportunity to buy two kingpin stocks - they are the first stocks the market will run to once the market wants to move up.

In Friday's mid-day update to our paying subscribers we highlighted a chart of SDS as an example of just how extended the short side of the market is here via inverse ETFs. This chart is telling us that the short side is currently the wrong side to be establishing new positions in at this moment in time. To do so is being impulsive and if it's too late to establish new positions on the short side? Well you know where we are going with this.


Any takers? Anyone interested in buying this chart? If there is one thing we've tried to instill in you it is to NOT chase buses.

What does this all tell you about the short side of the market here folks? It says stay away! You are chasing a bus.

On to the indexes


There is an old saying in Wave land for those who follow that style.
If it looks like a Wave 3, ACTS like a Wave 3 chances are it's a Wave 3.

Wave 3s are coined as wonders to behold, they are the strongest and wickedest depending upon which side you are on. A chief characteristic emotionally is that they are big time impulsive in nature (shoot first ask questions later).

It doesn't take a rocket scientist to see that this current swing down has all of those characteristics. In fact, from a psychological standpoint, lows of this wave typically correspond with a big fearful event and we just got one in the downgrade. Good we say because more often than not lows occur with panic selling and psychological throwing in of the towel. We saw that last week and MAY see it at the open. We sure hope so (a gap down that is). Why do we want to see the market get slammed at the open? So we can step in in the face of fear and pick a few things off and see capitulation take place in the weak emotional holders. If you see it, welcome and DON'T FEAR IT! (Nervous Nellies need not apply). By the end of the day it would not surprise me to see it end up being a reversal day. We surely expect a reversal by the end of the week.

Once we get that out of the way (a capitulation open), it's bring on the wave 4 bounce up to red line resistance (for those of you who don't get Elliott).

Bigger picture, in all likelihood, based upon what we are seeing here, odds favor the market truly topped. It's going to take a lot of horsepower over the coming months to repair this. The alternative count is that this whole 123 is just a big abc pullback wave 4 in an ongoing 5 waves up on a longer term chart of this cyclical bull. IF that is the case then that says a retest of the highs if not new highs are coming for the 5th wave up. We doubt it but nothing surprises us anymore. We'll see.

Now think before you REACT (What do we preach about reacting around here? DON'T DO IT) to the statement of "In all likelihood the market has topped." Keep in mind that those 123 waves down should end with a five waves down affair (assuming we actually did top mind you). As you can see we've got 3 waves showing with wave 4 and 5 yet to show up. We've included what those might look like in the charts if they were to occur from here.

The alternative count says we are done or near done going down by the way, so that count says up is the next sequence too. But it doesn't matter in the sghort run whether it's a wave 4 bounce we are on the verge of, or a full blown rally here - both counts say up soon. Hang on to your hats as this is going to be fun over the next few months and all filled with big opportunities to make money especially if your name is Jack and you can be nimble and quick.

In Summary:

1. Let the opening dust settle Monday a.m. and pray we get capitulation;
2. Look to buy common stock and calls on two market kingpin stocks presuming they open at or near their 50-days moving averages or some other area of support, or just plain get slammed at the open;
3. Look for a snap back rally in the markets up to the new areas of resistance we¡¯ve outlined and AT THAT POINT, we¡¯ll begin to initiate short-sell positions in stocks on the short-sell watch list for our paying subscribers.

For us - it's all about taking advantage of the early selling Monday to secure gains in two leading stocks. What we aren't going to do is break down and sell into fear. Especially AFTER the market has already been pummelled and the inverse ETFs are in chasing a bus mode here. If we gap down you already know your in for more emotional pain (For those stuck living in the moment of FEAR and can't see past they're fears) so why look at it, you need to move your mindset to where to from here and we just gave you the road map. Remember Wall Street buys fear. If we get sold off at the open - think!  Now that we got that out of the way! Folks you gotta think forward and positive.

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