Grinder Market Continues

We're up, we're down, no we're up, no wait a minute - we're back down.....So the Grinder Market continues with lots of chop and slop. The Dow is sitting at the halfway point of Tuesday's long candle as the market swirls around with indigestion. The CPI came in with a fairly benign reading on Friday, and the economic numbers really weren't all that bad this week. It appears that producers are still trying to maintain prices to consumers without passing along the inflation that is growing on their end of the food chain. Raw materials, commodities, energy and the like are experiencing more and more inflation, but so far the consumer is not getting hit. The real story continues to be the meltdown in the Financial Sector, specifically Banks, Brokers, Bond Insurers, Private Equity Funds, Insurance Companies, Mortgage Companies, and Homebuilders. The biggest focus is on all the write-downs, defaults, meltdowns, and implosions from Banks, Brokers, and Insurance companies that vastly over-speculated on CDO's and other subprime derivatives. Every time it looks like the uncertainty has cleared up, i.e. Standard & Poor's stating on Thursday that the write-offs will max at 285 billion and we have already taken care of 188 billion, then we get another blast across the bow. Friday it was Bear Stearns turn to churn the market's guts with a huge, huge liquidity crisis. I think my favorite part about all this mess is the gamesmanship of the Financial industry.....Never disclose too much too fast, just bleed it out to the market slowly and hope that it doesn't get noticed with all the rest of the trash flying around.
Well, the bottom line is that the market is trying to focus on the Fed and the potential good news, but the Financial sector just won't allow it. It's like the line from the Godfather III, "just when I thought I was out - they pull me back!" Therefore.....Chop and Slop, a real Grinder Market.
I am still holding some of my calls on energy. There are pockets of strength here and there, especially Energy, Gold, Steel, Mining, Copper, Chemicals, Machinery/Agriculture, and a few other areas. The whole Financial sector, especially Banks, Brokers, and Insurance continues to be bearish, along with HMO's, some big cap Tech, and Casinos and other discretionary spending groups.
If, and it's a big if, we don't get some more acid rain falling from the Financial sector on the market Monday or Tuesday morning, there is the possibility of a nice swing trade on the DIA or the SPY on the 60m charts Monday. The Fed Funds Futures are predicting a 100% chance of a 75bp cut on Tuesday, and even a 52% chance of a 100bp cut. I think it's insane, but it really doesn't matter what I think, it only matters what I think the market is going to do. If, and again it's a big if, the market is allowed to focus on the possible HUGE rate cut coming on Tuesday, then the shorts in Financials might get scared and the longs in Energy and Commodities might get bolder. It really doesn't matter if the Fed actually cuts 100bp, it just matters that the market thinks that they just might do that. So here is the setup. We have a confirmed bounce in a Rectangle on the 60m charts in the last 2 hours of Friday. If the DIA clears 120.70 on Monday then it has a probability of running to 122.00 - 123.00, which would be a nice little 1.50 to 2.00 type move. I will play the swing on the 60m charts and be out of at least 2/3 of the position by the end of the day Monday, and out of almost all the position ahead of the Fed on Tuesday. I will take out 1/3 of the trade at 121.75, 1/3 at 122.30, and see if it will reach 122.50 - 123.00 before the Fed announcement. I don't want to give the trade much room below 119.50 before I stop out because if it goes through 119.50 it's probably headed to 118.50 and maybe even 117.50.

Here is the setup on the DIA:

This is what it looks like on the Daily's
(click on chart to enlarge)


Here is the Setup on the 60m charts:
(click on chart to enlarge)

I don't know if the setup will be there on Monday, (or if it will be profitable), but I will look for it, especially if the market holds up early and we don't have any more nukes coming out of Financials. We'll see what happens on Monday.