Wednesday, May 17, 2006
When we scan this market the only thing we see right now is a lot of ways to lose money. The refusal to capitulate has kept this market from a relief bounce and while we believe that we are very near a reversal this market still has a lot of falling knives. Until these knives stick in the ground they will continue to cut those who try and catch them. There are some tempting reversal set ups in the oils and industrial mining sectors but frankly we don't trust them. Selling pressure has been so strong over the last few days that support levels have not just been blown through, but gapped over. With a lot of trend lines broken and the Nasdaq crushing long term support we have to go with the idea here that the intermediate trend is down. Since surprises occur in the direction of the trend trying to buy a bottom in an expected relief rally too early can teach traders a very painful lesson. We have already learned this lesson so we remain sidelined here in this situation that just does not offer a very good reward for the risk that weighs. The fact that we are not getting any relief from selling pressure yet indicates that when the tide turns, we may get a very strong countertrend rally. This is why shorting is so dangerous right here; a lesson that the options crowd has not come to terms with. Options traders bought 5 put options for every call option yesterday betting on more downside from current levels. This tells us that a turn is very likely to come from these levels and perhaps could even occur today. Is it a good idea to buy now in anticipation of this turn? We would argue no. While indices may be ready to turn back up, at least for a relief move, a lot of stocks have sustained severe technical damage. Finding the stocks that will move back up significantly and the ones that will only tease you into a bull trap will amount to guesswork at this point. If we get a good strong capitulation day today or sometime this week, we will start to see some reliable set ups emerge. Until we get some capitulation or get a relief rally of some sort that sets up a better short play it is very important to calm down your urges to get back into the market here. This will be especially hard to do if you recently lost money. The worst thing you can do in this situation is redeploy your money too quickly in an effort to recoup losses. Keep the powder dry here because the patient will have some very strong trading opportunities soon. Try to get back in too early though and you will only find yourself further behind making it even harder to catch back up.