We were right on the money yesterday here at Matt-That.com, with our prediction about the US stock market. As we expected, after washing out a false rally, the market turned downward. Howsoever, the sellers came out, presenting the kind of volume, that suggests we’re only closer to the second part of my prediction: that the market goes unfeelingly sideways.

In today’s session, traders and investors alike, from all around the world, will be forced to learn about a new mechanic taking shape in this market: Conjuration, I call it. Its certainly existed before, but not nearly as it does today.  Conjuration is the first step in creating pump and dump bear traps.

How do you create a Bear trap?  First, you conjure value out of thin air by suggesting if you miss a particular buying opportunity, you will get no other. This conjuration of value creates the same panic used during selling to initiate worry about being left out of the market, causing panic buying.

Today, we will conjure such value, in the form of a rally of immense proportions, with almost no basis in reality. This will form the upside dressing of the next stairstep down, continuing the wash-out of millions of new investors/positions. Soon, this exact ebb and flow will drive the market sideways.  The disinterest will be more profound when there is no dumb money to dump your shares on, nor trade volume to pump them up.

Many people have been taking advantage of the traders nature of this market — full of ups and downs. So, in order to remain safe, how can we time the beginning of this rather troubling event, of a side-ways market, to avoid holding positions on either side?

Monitoring the pessimism, using its reversals, we see its strength has grown to the downside, not diminished. So, we can begin to sell our short positions here (the most leveraged first). And we should not look to acquire many more leveraged positions going forward.  Leverage on any direction is the most dangerous position to be in, in a sideways market.  Logically though, what indicates the coming sideways market?

We’ve had sellers from 14,000 to now 7900.  And sellers came back into this market to take us to those levels. There can be only so much more selling pressure on the sidelines as we go.   But, what about the positive story then?  If we’re out of sellers we must be full of buyers, no? First rally almost 1000 points.  Second rally half, at just 550 points. Third rally, half again, some 250 points.  Strange, we’re running out of buyers too.  And that, is how you end up with a sideways market.

At points of maximum pessimism and optimism there must be cyclical reversals, otherwise a market has no psychological basis with which to use as function for pricing.  Todays cycle suggest the kind of rip-your-face-off rally we saw the first time.  And, like the first time, it will not hold.