Wednesday, February 27, 2013

No reason to panic (yet)

Once again I find it frustrating to make money on the short side. This is the third time in a row when market gives a "sell" signal just to rally immediately afterwards. Despite the two days rally little has changed at the technical level. We still have a bearish EMAs crossing and market is making lower highs and lower lows. Granted SPX moved above rising SMA 120 today.

Let's look now at the previous two plunges.

As you can see from the two charts above SPX moved strongly up after a "sell" signal, strong enough to generate a false "buy" signal that was also short lived. Notice that SPX could not make a higher high during the short lived rally. It looks like this scenario is repeating itself. For market to resume a long sustained rally it needs a higher high, at least 10 points above the curent high at 1,530. Anything bellow 1,540 is not going to do the trick for bulls. Since March 2009 only one time we had a major whip-saw, in november 2011 when market gave a "sell" signal followed a couple of weeks later by a real "buy" signal. At that time SPX rapidly established a higher high. 

So, for now, I would say not to panic if you already switched to the short side (like I did) since most likely the rally we are seing now is nothing but a bull trap. I went short a little bit two days ago, a little more consistent yesterday and a little bit today. On the way up I usually go "all in" the first day I get the "buy" signal but on the short side I tend to be a little more cautious. I warned you a few days ago that a rally towards SMA 120 may happen and unfortunately, it did really happen. That means we need to suffer a few more days until the market is going to go down for good. 

All the best!


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