Was Friday Just a Really Good Headfake?

We are getting some very strange mixed signals this week. Major indices, including the NASDAQ, Dow, and S&P 500 are setting up classic bear flag scenarios. Strength over the past two days has been nothing short of a dead cat bounce. These indices scream to be shorted. At the same time the small cap indices such as Russell 2000 have broken out into new all time highs. Adding to the puzzling information is the fact that scans continue to turn up very bullish set ups. Last week before the market crash we commented that the market was providing the best set ups we had seen in years. After Friday's crash this has not changed. In fact, the few short setups we are finding are failing to follow through. A great example of this is THC, a stock which showed up as an excellent breakdown set up before yesterday's market open. THC did in fact break down yesterday, but only to be scooped up by bottom fishers. Rather than evoking panic, the breakdown triggered a signal for money to come of the sidelines in a bargain hunt. What to make of this? We frankly don't know. The market appears to be setting up for a big move and the perfect short set up on the major indices might just be "too perfect." Either shorts are going to get burned yet again, or the small caps are in for a major correction as the divergence is ironed out. Underlying strength in individual stocks seems to predict that shorts are going to get burned.