Waiting for a Better Signal

There is a big difference between what the market should and could do and what it actually will do. For example, the market sold off hard at the beginning of the month and then last week strong signs of support appeared, which were confirmed by generally oversold conditions and overly bearish sentiment. As such the market COULD have and even SHOULD have started an oversold rally. What the market actually did do however is put in a weak dead cat bounce that is quickly running out of steam. Now we are faced with an altogether different set of market signals than we were at this time last week. The oversold conditions are working themselves off without a significant price level improvement. Now we find that the market COULD and even SHOULD sell off further from current levels making another leg down in the downtrend started October 4. But will the market do what it could and should do here? Since this is options week the answer becomes a bit more tricky. We think the market will make a new leg lower before it finds a significant level of buying support. If the market follows through on yesterday’s weakness the odds will more heavily favor such a breakdown raising the probabilities of success on the short side. Today is a good day to stay sidelined as we wait and see if yesterday’s weakness was the real deal or just a one-day wonder.