Fear is in the air, and the masses have just moved to the border of the Hysteria zone. The trend is still up on the NASDAQ and the Dow, so the outlook remains bullish. As volatility levels are very high, view very strong pullbacks as buying opportunities. A test of the August lows is likely, with a possible overshoot to the 14,800-15,000 ranges to destroy the last of the ardent bulls. The RSI has generated a nice series of positive divergence signals too.
Market volume is increasing on up days and decreasing on down days; this indicates that the smart money is buying while the dumb money is selling at or close to the bottom. All our proprietary sentiment indicators are trading in the extreme ranges, indicating that panic is in the air and opportunity is waiting to give you a big hug if you will welcome into your domain. Do not become one with the crowd; crowd psychology states that you should be buying when the crowd is selling and vice versa.
The SPX already traded below its Aug lows and in doing so triggered a rather strong positive divergence signal. Hence, the necessity of the Dow testing its lows has been negated to some degree. The ideal set up calls for the Dow to trade to or below its Aug lows. Make a list of strong stocks and use pullbacks to add to your position or open new positions.
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