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Stunning move – to the upside

(February 20, 2002)

We know the Dow has been manipulated to the highest possible extent in recent days.  We also know the Fed has made liquidity injections of over $18 billion during the last two days.  And finally, we know the short interest in this market has been huge.  However, a stunning rise of 200 points was still surprising.

While the recent action of the Dow still has some correlation to the action earlier last year (see chart below), it will take some big events to happen for the Dow to test its September 2001 lows.  At this point, it seems that comparable action to the July/August action would be more likely-some consolidation with a downward bias and then a plunge in late March/early April.

DJIA Closes (January 18 to March 22, 2001 vs. December 21, 2001 to February 20, 2002)

We maintain today's action was mostly due to short-covering and manipulation.  To propel the market higher from here, volume would need to increase.  Today's volume was okay, but it wasn't a day to write home about by any means.  To confirm this move, volume would need to increase dramatically.  We do not believe this is very likely.  On the other hand, the latest downside move in the market has been accompanied by "good" volume, signaling a confirmation.

DJIA Price and NYSE Volume Information (November 1, 2001 to February 20, 2002)

To conclude, we regard today's move as being a blip in the radar screen.  The Dow 10,000 level wasn't breached, and neither was the 200-day MA.  Taken into context, it is merely a dead-cat bounce and the market will be resolved to the downside quite soon.

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