A man was sitting on a chair in a park with a dog walking around him when another guy came up and sat besides. He asked the man – "Does your dog bite?" The man responded – "No". This guy then went up to this dog and started to mess around with him when the dog bit this arm off. Crying aloud he angrily came over to the man and said – "You told me that your dog does not bite. He's bit my arm off." The man replied – "This is not my dog."

Asking the right questions is perhaps more important in today's market than at any time before given the dramatic pull that we have on both sides of the argument. Will QEII work? What happens to Ireland and the European periphery from here? What happens if rates continue to rise. Is the rise in rates a loss of confidence or the start of a normalization period where rising yields and rising stock values go together? Has the Dollar reversed its trend and have Gold and Silver made blow-off tops? Is China ready to disappoint again given how poorly its property stocks are trading and finally (and perhaps most critical of them all)….has Dr. Copper finished its uptrend and turned bear?

To our simplistic trading mind, there is one question which stands tall above all others. And that is – Has a new bear trend just begun or is this a correction within the larger bull move? Yet again, we turn to the FTSE to provide us with the clues. The trend channel that has been in place since September broke down with conviction yesterday. Materially, this breakdown came after one minor warning of a lower top on the 15^th of Nov with a clear RSI failure at 60. Yesterday's wide range down day managed to break the low of the reversal day of last Friday. On Monday we wrote that reversal days carry useful information. If a reversal day sees follow through to the upside the next day, it should continue to make new highs. However, if it fails to follow through and instead ends up breaking the low of the reversal day, then that becomes a high probability failure set-up. And failures have a signature. They bring sharp moves in the opposite direction.

This is precisely what yesterday was. A sell-off from a failed rally that closed on the low. Immediately, such a close can bring in a low as it could have exhausted all the weak sellers within a day itself. OR it could just bring in a small range consolidation day today which follows through to the downside on Thu and Fri. What immediate path the market chooses from here is unforecastable but what is solid piece of evidence is the trend channel break, a failure rally and momentum aligned downside. The high print on the 15^th was 5832.88 and that is the level that the market needs to overcome quickly to reset the bull trend. It can recover it, but the sharp decline makes it low probability to do so near term.

5832 is so close to current prices that it would be ridiculous not to respect it. We advise a stance of caution against that level and recommend reducing long exposure on minor rallies. We do not expect anything other than minor rallies from here. If VGA offers a print around 2800-2820, put out a protective short there with a stop above 2858, the high of the 15^th. It's a small price to pay just in case this bear has sharper intentions.