8200 Final Test

What I learned in my brief stint on the markets , was that the markets themselves don't actually trade on information that we, the public, are receiving. Which is why I was happy about 8200 holding a few weeks ago - the data we're getting today has been leaked 70 times since then.

And so today is the final test of my predicted market bottom. Let me explain how things are going to work, today, at 4:30. There was short interest last week - that is - people who are betting the markets will crash, loading up. A short buyer always looks innocuous at first, because the market shows activity at a certain price range but his order to actually buy doesn't go in until he sees the price go down. So there's money in the markets when the short players are there. But it will snap up the stock maybe two weeks later or so.

Alot of what pushes markets up quickly are these people covering - a short investor has an unlimited downside - the stock can go through the roof and whatever option he took out to sell at - ie. a short investor loads up on an option to sell a stock at a certain price of the day (lets say, Ford Motor at 10.00 a share). His loss potential is unlimited. If he waits too long and the market goes up too fast he will lose way more than his initial investment, because he's got a contract to buy the stock at a future market price. So short investors "cover" or quickly buy into a rising market and what usually lifts the market off the floor are these guys buying to get out of the market. If in our example, Ford Motor rallies to 100, there will come a day when he will be required by law to cover his investment and buy the shares at 100, losing 900 percent.

IF the 8200 is going to hold, this is the way it will work. The short investors are going to try to work the market down all day. If they can't get it below a certain level , they will try to cover in the afternoon. However, if they are still able to make the market - that is, get on the phone with their friends, and log into instant messenger, and text the blackberries of traders all around - for various stocks - they will not try to cover.

We hear a lot about free markets, people who think they're conservative. But here's a secret. These guys are constantly communicating in code, with their buy and sell orders. They change a number on a particular buy order and it tells the other market maker to move their sell up to chase it, or hold - to let the buy order stand. They work together in this way. Its very similiar to the Natural Gas companies trading price per therm. There are a few really big players, and they use codes like the last or third to last digit of the price - to indicate what they want their trading partners to do. Odd if up, negative if down. Etc.

And they're pulling favors with each other - as well. They all have domain over some piece of market information and they trade this information just like money, all day long. Now, the ones to watch out for are the offshore types. Those are the ones that can push American companies way down because they've got safe haven. And thats one of the reasons why derivatives and regulation are needed. But we'll get to that later. Lets just call these guys the short traders for today , because they're the ones that will make their move at 8200.

The bands around 8200 might tighten. The short players will be looking to see if anyone else in their band of brothers thinks its time to push the market lower, and take more out of the market. If the bands start widening, that is - if more money starts flowing in - then 8200 will break because they'll know their brothers in arms will be working to find a new bottom to the market and that means more money to be made downside. But if the bands tighten, they will make a decision.

They will decide if the market can react to anything worse, that full-on crash of the investment banking infrastructure, the big three in trouble, huge recession reports and joblessness, and massive government debt reporting. They really will wonder if there's another shoe to drop.

If they decide yes, they will make their move at 3:00 - and start pulling back any buy orders - the floor will get quiet and the traders will start running after panic sell - investors that put in market sell orders will chase the market down. But sophisticated investors that boxed their investments will stay put. Generally, the market will move with the unsophisticated investors who basically ordered the traders to chase the market down and thats what they're going to do. While they're chugging pepto bismol in the hallways between trades they'll laugh about it. But they'll do it because its their job.

And we'll see the market move down 500 points, break through 8,000 and then likely work lower until a new bottom forms at 7600.

However, if the short players dont see the banding they want to see, they're going to get very nervous about being caught in an oversold market. And remember, short players have almost unlimited loss potential. A big rally could wipe them out. A long player will only lose the value of their investment, no more. Say you bought at 1.00 per share. And it drops to nothing. ok. you lose just that 1.00. A short player buys options to sell at 1.00 and if it goes to 40.00 he loses 3,900 percent of his cash.

8200 holds as market bottom if today we see the market drift sideways today, end of day (at 8200) , which just pushes the game to monday. Or, if we see an up-tic at the end of the day to 8300.

But if we see the market do a 480 point correction downward to below 8,000 or worse still, anything over 700 and the market will be chasing to a 7500 index count which would mean we're going to get another great depression.

So, take it easy. You're going to be ok. After all. Your 401K is already affected is it not? How much more pain can you take? What is your physical limit. Find out at market close. Almost guaranteed the market will move one way or another at the close. Good luck Bears!

12/05/08 - 4:00 PM - Update: The Market is up! Bounce off 8200, covering ground to 8500 !