Mixed Messages

After a nasty day like we had on Tuesday where almost all the volume is downside volume, it’s not uncommon to see a bounce for a week or so.  So far, we’ve had a pretty mediocre bounce.  But, today’s bounce as of noon of about 1% on the major indices is encouraging.  Next week, we’ll see if we can resume the uptrend.  In the short-term, there are still several indicators I’m watching that point towards lower prices in the next couple of weeks.  However, my medium term indicators have not turned negative and which is why I’ve been saying to short this market is dangerous.  I did add some shorts in the past couple of days as trades against my long positions.  This was simply to reduce my equity exposure for a trade. 

One development I’m watching is whether or not we’re setting up for another head & shoulders pattern like we had in May & June which resulted in a 10% correction.  Below, you can see on the SPY that we made a high in mid August (left shoulder), then made a bigger high in late August (head), and now we may be headed towards a right shoulder.  This would be a negative sign that could be leading to lower prices.  Something to watch.

sp500 9 4 09

 

It’s very important that you understand that betting against the markets right now is tricky.  If you do that through shorting or inverse ETFs, keep tight stops.  I think the fundamentals are too good to be short the overall market.  But, adding a few shorts and reducing exposure for a  trade is fine.

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