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A Map for our Market?

I've been trying to find a graph that would give you an idea on what I think our market action will look like in coming weeks.

The first two graphs above show a fairly close parallel between the stock market price action in 2002 and YTD 2008. It includes a big spike down selloff after several months of grinding lower. After the spike down, you have a big recovery day followed by a couple of week days as the market consolidated the big recovery day.

Then, looking at the third graph, you can see that the market moved upward in a fairly sustained advance for several weeks, followed by a re-test of the lows. (thanks to Doug Kass at the Edge for identifying this pattern)

If you read yesterday's blog, I noted that I thought we'd rally into year then selloff again after the first of the year. That fairly closely parallels what happened in 2002. If that is to come to pass, in the next few days – give it tomorrow through the 24th – we should begin that move higher. If we don't move higher in that timeframe, and the hedge funds continue to sell and short the market pushing it lower, then this pattern is not likely to be repeated.

If it is not repeated, then the impact of all the liquidity that has been pumped into the system won't impact investor psychology until it actually begins to show results. That would mean six to nine months of additional volatility – something I don't think anyone wants to see.