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Dorn: What Is Market Psychiatry Telling Us?

There is one word to describe the general atmosphere on Monday: Terrified. Investors are terrified. Traders who are not nimble at day trading and scalping are terrified. Everyone wants to short and is waiting for a break below 817-820 on the ES for the move to 700 and then 600.

If that is not terrifying to those who have been in the hold and hope mode and have not learned the two most important words in trading ( SELL and HEDGE), then I don’t know what is. Is this downage going to happen? We believe it will. When will this happen? We don’t think it will be Tuesday. We would not be at all surprised to see a rally Tuesday or Wednesday that will catch everyone off guard. (Everyone except for those people that are selling puts on the indices) Everything looks horrible.

Short interest is high (although the OEX put/call ratio is not at levels we consider safe for buying in anticipation of the rally) and the Trading Doctor Terrified Index is off the scale. This morning as I write this( 3 am EST on Tuesday Nov 18), ES is down 7.75 at 843.25, and Dec Gold is down 4.90 at 736.40. It looks awful with bear flags on all of the indices. What would spark a rally that takes everyone by surprise lasts a day or two and then burns out? A bunch of economic reports come out between 7:45 am and 10 am EST, and any positive surprise might do it if it’s going to get done. Otherwise, let the waterfall begin.

It would be just too easy if that happened and the markets rarely make things that easy. Remember—markets are diabolical. This rally will beg to be shorted, and shorts attempting to do so may find themselves on the wrong side. This would lead to short covering and further upside. That said ,the $SPX would have to close above the 916.8 area to keep any possibility for continued rally alive. Right now, that looks a long way off—but anything is possible.

That said, the markets don’t care one bit what we think or say and they are going to do exactly as they please. For now, we watch, wait and do not anticipate.

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Janice Dorn, M.D., Ph.D., is a financial psychiatrist and chief global risk strategist for Ingenieux Wealth Management in Sydney, Australia. She also offer trading consulting and coaching services via her Web site, TheTradingDoctor.com.