A lot of traders and investors seem to be surprised by the recent selling that we’ve been seeing in these markets.  It’s something we’ve been paying close attention to for a while. In fact, it’s something we called a few months back as we waited with patience for the markets to continue their rally up into this zone.  “Zone? what are you talking about?” We talk about this all the time and many of you have probably heard of it. We refer to it as the “pullback zone”.

If you don’t know by now, we are Fibonacci traders over here; we look at the markets purely from a Fibonacci perspective which we know works very well and very accurate in the markets; all markets in fact. What we also know is when a market makes an impulse move and then retraces to the 50% to 61.8% (what you’ve seen the market do from late 2007 till now) it usually (about 65%) has a difficult time getting through that level and pulls back.  We are at that level right now. What we don’t know, at least not yet, is are we pulling back or are we selling off?  There’s a big difference. You see, if this is just a pullback, then eventually we’re just going to go higher. However, if this is a sell-off, then watch out. This could be the start of what may end up being the carnage that some people have been talking about.

Many investors and traders have been arguing back and forth about how the economy is either recovering or that there are so many problems that this 18 month rally has been nothing but a “dead cat bounce”.  We do have a serious unemployment problem, a housing crisis that isn’t really getting better, and let’s not get started on debt. On the flip side, you do have some indications that things are getting better or at least not so bad.

In the end the market and its participants will decide where we are going. I continue to stay short and watch this pullback very carefully. Don’t get me wrong, I don’t want to see the US economy go through what I think it may go through, but hey, if it’s going to happen anyways, why not make a few bucks?