Thursday Thump – Big Chart Review

What a day that was.

We got our sell-off to 7,800 and then we got our bounce to 8,200 and then we got our retest of 7,800 and then we failed that and all hell broke loose!  Today's 444-point drop in the Dow coming off Monday's open at 8,400 brings us down exactly 10.09% for the week.  Our members will know that means we expect to retest the breakdown line at 7,750, which will be a meaningless bounce unless we get through that and hold 7,800 so we'll be playing accordingly tomorrow.

Once again we had a day with what used to be a year's worth of major Dow moves all in one session.  We've been taking bullish but hedged plays that protect us all the way to 7,000 and I was starting to think that maybe that wasn't going to be enough in the late-day sell-off and it still may not be if 2 of my big 3 concerns that can take us to 7,000 (GM going BK, a major bank (C) collapse, or a minor country collapse) come through. 

As I said in the morning post, the energy sector capitulating by itself could take us down to 7,000 and the OIH gave up 12.5% yesterday and the XLE fell 10% with XOM and CVX causing much of the damage to the Dow.  We did manage to hold the 2002 low of 7,528 so yay for that and I noted during the drop that things were different this time as some things were actually getting bought – which was not the case in other major sell-offs. 

What caused today's sell-off?  We had a terrible Philly Fed report and and massive unemployment filings and then Congress fumbled the ball on bailing out the Big 3 (increasing our chance of seeing 7,000) and Paulson gave a speech that sounded like he had already left office AND CitiGroup fell below $5, causing the company to issue a "we're not dead yet" statement that didn't convince anyone.

The Big Chart is a sea of red and I've had to add an official 60% off line column as the SOX, Hang Seng and Shanghai Composite are all below that mark.  The good news is 70% seemed to hold on the SOX and the Shanghai so I guess we may have a firm global bottom 30% away from zero that we can buy into.  That would be Dow 4,200 for those of you keeping score!

How would we get to Dow 4,200?  It will be easy if all three of my worries kick in as each one was good for a 1,500 point drop from 8,800.  We were worried about a major bank failure but C is not A major bank, it is THE major bank and if they fail, the other 2 will quickly follow as we are likely talking about the collapse of the entire banking industry followed closely by Western Civilization.  As I said last week, it's a BBB-type of market and that's Bullets, Beans and Bullion, which is what we'll need to ride out the global collapse if all three worries come to pass.

First things first though and we'll keep an eye on the 50% line, which must be retaken in the US BEFORE Europe fails it so let's root for the CAC to get back over fast and for the DAX to hold the line or we are almost certain to drag them down to our pathetic level.  The Dow is our US champ so far, down "just" 46% from last year's high.  That's why we were focused on shorting them and if our other indexes don't hold their own 50% lines, Dow 7,000 could be here by next week.  Below that mark may spark a fresh global sell-off that drops us very fast but let's not worry about that unitl we see how real yesterday's sell-off was as it cost us the 50% levels on all of our indices and could be just as quickly undone.

Unfortnataley, undoing yesterday's damage will require leadership and we haven't had any of that lately so let's continue to be very careful out there and not to be impressed by anything less than a MASSIVE recovery that takes us back at least 2.5% across the board by tomorrow's close.