Impending Doom?

The heat of the Dubai debacle is slowly fading away, as markets rallied massively the past few days. The central bank of the UAE soothed fears by saying that it would back up the deposits of local and foreign banks in the area. It also became public knowledge that the potential losses of global banks in the event of a default by Dubai are relatively small compared to the hundreds of billions lost during the bursting of the US real estate bubble. However, despite the brief and muted response of the markets, we should all be wary of how "fragile" and "panicky" investors and traders are right now. Using the Chinese market as a reference, these sudden and unexpected big down days may indicate an impending deep correction.

As you can see from the chart below, the Shanghai Composite (represented by HK:2823) also went down by as much as 10% (intraday) last August as people sold into the rumor that the Chinese government would start draining liquidity to prevent overheating the economy. After the big down day, the market then rallied for 3 days(bargain hunters), breached new highs, before correcting heavily for a whole month.

In my previous post, I already mentioned that the safest immediate buy for the Dow and the Hang Seng is at the 130 day SMA. But that doesn't mean that you shouldn't trade the bounce. As you can see below, the Hang Seng itself went up by a thousand points in just a couple of days. It filled the "Dubai gap" and is now right smack at resistance (trendline and 32 day SMA). Within the next few days, I expect it to retest the 23,000 barrier or hit the parabolic resistance at around 22,800 before going down.

The Dow, although seems resilient, is still the laggard. There is still nothing wrong with it technically as it hasn't broken any major support areas. But you have to be cautious of the multiple bearish divergences (upward price channel + weakening MACD) that are showing. The Hang Seng had similar bearish omens before it broke down.

So yes, I'm already short-term bearish on the markets. I will continue trading since the Santa Claus rally may still bring us to new highs, but I will not carry heavy positions overnight.