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Monday, August 8, 2011

Downgrade Tremors Shake Global Markets

You already know the bad news: S&P sent shockwaves throughout global markets in an unprecedented downgrade of  U.S. debt, from its long-established AAA rating to AA+ with a negative outlook, sending already skittish markets plunging ahead of Monday's open. There is also some good news to consider as markets are put to the test, however: oversold reading are now at such extreme readings that the probability of a near-term bounce is exceedingly high, long-term charts of the Nasdaq indices in particular are still very bullish suggesting dramatically higher prices over the intermediate to longer-term, and despite a spike in doomsday scenarios permeating the drama-prone blogosphere, the world is not about to end. Indeed, the recent correction is serving a very constructive purpose and will ultimately strengthen charts that had become increasingly gappy and unstable. This is not to say that it is necessarily time to pile in heavily to new swing longs, and bear in mind that the head & shoulder patterns on major indices resolve somewhat lower should they fully play out. While a tradeable low is likely not far off, the market has yet to establish a bottom, and once the bleeding stops, stocks will need ample time for base-building before longer-term commitments on the long side should be considered. In the meantime, risk management is paramount, and short-term trading opportunities are abundant.

Take a look at the Nasdaq McClellan Oscillator since its inception. At Monday's gap-down open readings will likely approach an all-time low.

Trade well.

-- Brinkley
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