Shifting to Negative Bias as Odds Favor a Near Term Move Down

While on vacation over the last two weeks, I remained mostly in cash with a just a few bets that actually worked out OK while I was away. I covered my shorts before I left and had one small short bet that got kicked out on a stop.

The recent rally has corrected the oversold condition, but I still see the intermediate trend as being down. What that means in practical terms, is that there is a decent chance that we may revisit the 1000-1010 level before the end of the summer. This has been confirmed with a much publicized 'death cross' (a 50 day moving average crossing below the 200 day ma) in early July.

As I've written in my previous post, I would be an aggressive buyer on a move to 1010. I was fully prepared to add there when we tested that level on July 1st, but the timing sucked, as it happened a day before my two week vacation. I was not planning on trading or even spending much time monitoring the market while in Alaska, so from a risk management perspective it would have been wrong to have too many open positions.

Currently, in my brief assessment of the market (still just getting oriented after a long absence) the odds favor the near term move being by roughly 2:1. There are just too many technical confirmations to ignore.

While I certainly see a possibility of moving and testing the resistance at 200 day ma (~1115 on the SP), I believe there is a higher potential that a leg down could bring the index back to revisit the lower end of the short term trading range near 1045-1050sh. This morning the index has unsuccessfully tried to move higher, bumping against a down-slopping trendline from the April 26th high. With Semis fading and unable to provide any leadership to this tape despite the strong INTC numbers, confirms that this rally is running out of steam. The volume remains seasonally weak and the sentiment has improved from a panicky mood of just a few weeks ago.

So while I was not able to capitalize on a the recent bounce from a major support, I am beginning to add slowly to my short positions both individual stocks as well as index. The risk reward is unfavorable here, and one should get more aggressive shorting it if the SP gets closer to 1115 for an even better setup to move back to the lower end of the trading channel.