Following a heart wrenching and tear jerking 9/11 tribute at church yesterday we decided to come home and just sit in front of the TV to watch the first week of the NFL season.  As we mentioned last Friday, we certainly have not forgotten what happened 10 years ago, but part of the reason I am so optimistic that over the long-run our country will be able to fix its problems is the American spirit.  One of the things that certainly helped in the aftermath of the terrorist attacks also helped ease the pain yesterday -- watching football with your family and friends.

The first and most glaring is literally a flag.  Last week when we asked whether or not the rally was the bottom or just an oversold bounce, we showed the attempt at an uptrend the market was making.  I mentioned that to me it looked and felt like nothing more than a bounce from some deeply oversold levels.  When you draw the underlying intermediate-term trend onto the chart you get an ominous picture -- a flag pattern.  In this case it is a penalty flag, because more often than not, this pattern resolves itself in the direction of the underlying trend.

The spike in volume when the sell-off started and then the rapidly declining volume on the bounce is text book for this pattern.  Markets do not go straight down (or up) and they tend to frustrate the maximum amount of people possible.  Too many people have said we've seen the lows of 2011 and they have been sucked back into the market (or didn't follow our advice to sell the rallies and move into active management).

Since the market is looking to break the short-term uptrend this morning, we'll be watching closely the 1120 level for support.  This level has been tested and held multiple times & is the "bottom" everyone is talking about.  If that breaks, the market could quickly fall to 1100.  Below 1100 there isn't much support until 1040 -- the bottom from August 2010.

Speaking of 2010, the debate continues whether or not this is like 2008 or 2010.  Obviously the buy & holders are saying it is like 2010 and the bears are saying it is like 2008.  I still think it is a little bit of both, but much more like 2008 & 2010.  This chart is certainly a penalty flag for those hoping that the worst of the year was over.

The reason it is acting more like 2008 brings us to the final penalty flag that is ruining the "touchdown" the buy & holders thought they had -- Europe.  There are so many penalties over there that we don't have the time to go through them all.  The main thing to realize is that problems do not magically disappear.  European countries have chosen to go down with the ship as they continue to attempt to kick their debt problems down the road. 

The problem the market is facing now is that we are getting close to the possible end that I've been predicting the past 3 years.  The strong countries (like Germany) are tired of bailing out countries that have no chance to ever pay back their loans.  Germany appears to be preparing to help their own banks survive a Greek default by using the money they would have lent to Greece to bailout their own banks.

Adding to the problems is the fact that Germany's representative at the ECB abruptly resigned late last week.  I couldn't help but think of this image:

I've said all along -- if your problems are caused by too much debt you do not solve them by creating more debt.  It may help over the short-term, but focusing on the short-term is what got us into this mess to begin with.  There are no short-cuts.

Checkout our Podcast page to hear more on the European mess

Our portfolios remain in "bearish" mode, with little or no equity exposure.  We plan on remaining there until we see signs that the market is able to run for a touchdown without any penalties.

The comments and posts published in the SEM Trader's Blog ARE NOT investment recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.

Investing in the stock or bond markets involves risk and may not be suitable for all investors.  Before making any investment decisions you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with your investments and seek advice from an independent financial advisor if you have any doubts.  All investments involve risk including those managed by Strategic Equity Management.

Opinions expressed at www.stratequity.com are those of the individual authors and do not necessarily represent the opinion of Strategic Equity Management or its management.  Any opinions, news, research, analysis, prices or other information contained on this website, by Strategic Equity Management, its employees, partners or contributors, is provided as general market commentary and does not constitute investment advice. Strategic Equity Management will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

The use of this website constitutes acceptance of our user agreement.  Past performance is NOT indicative of future results.