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As long as the stock market can see an $800 billion Dollar Chinese stimulus expectation, a 50 basis point Canadian interest rate cut and the unveiling of quasi socialist government spending programs the trade can temporarily discount the fact that numerous sectors of the US economy are still in the process of falling apart. However, not even Obama and Pelosi can give away money every day and on those days lacking the promise of spending it will be difficult to play down the evidence of carnage in the US economy. In fact, the sharp contraction in US auto sales early in the week would seem to suggest that the US is destined to see the “Big 3″ become significantly smaller and that severe contractions in other parallel US industries are currently underway. Because of the sharp down side action over the last three weeks, it is possible that the stock market will avoid an aggressive capitulation type washout in the face of the US payroll report Friday but given the fact that the stock market basically discounted the ongoing slowing in the economy from the middle of November, to the middle of February, suggests that the latest downside breakout on the charts was indeed justified. In fact, the short covering/Chinese stimulus program euphoria rally, really puts the stock market in a better technical position to thrust sharply lower over the coming two trading sessions.

S&P 500: The prospects of downgrades in the financial sector and downgrades throughout the S&P 500 Index would seem to rekindle the sub-prime/credit crisis/financial sector concerns in the marketplace. News that GM delayed its 10-K filing and talk from the company that they may no longer be a viable concern has to foster some renewed concern toward the US economy. With the added threat of another new high in the ongoing claims data this morning, we have to wonder what Washington plans to announce today to distract the market from reality. We think the purchase of just out of the money, near to expiration puts is the play for the coming two sessions.

DOW: With the US Administration indicating that Wall Street is unimportant or that action in the stock market is not indicative of Main Street conditions, there appears to be a very hostile environment within the US economic system. With the market rallying off overly optimistic expectations for a second Chinese stimulus package and the Chinese failing to come forth with such a plan, we have to wonder how the market is going to avoid a continuation of the downside tilt. In looking at the last COT positioning reports, the Mini Dow was still net spec long 13,000 contracts last week and that hardly depicts a market that is anywhere near a sold out status.

NASDAQ: In the most recent COT positioning report, the Nasdaq Mini showed a net spec and fund “short” of 29,682 contracts and that continues to suggest that the Nasdaq has the best technical setup of the actively traded stock index futures markets. However, the record spec and fund short in the Nasdaq Mini was a very significant 203,000 contracts so one can’t come to the conclusion that this market is approaching a sold out condition. However, given the recent bounce and the well defined downtrend pattern on the charts, we have to leave the path of least resistance pointing downward. Down trend channel resistance is seen up at 1116.10 today.

This content originated from – The Hightower Report.
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