Wednesday, May 24, 2006
Bears have continued to remain aggressive even though stocks are at extreme oversold levels. Yesterday's rally was used as an opportunity to open more short positions. Likewise, the options market shows that participants are overly bearish, giving a contrarian buy signal. Think about it like this. When a stock or the market have recently made a strong extended move higher, it is not at all uncommon for traders to become overly bullish, using every dip as a buying opportunity. Bulls enthusiastically buy calls in anticipation of a fleeting upside breakout even when stocks are vastly overbought. This is what has occurred yesterday, only in reverse. Yes it is possible that the bears could get a slight spike lower, but such a spike would only embolden smart money to buy more aggressively. Shorts were right last week. This week they may find that newly opened short positions fuel a rebound rally as they are forced to cover. Today is a good day to be patient. If the market dips temporarily lower, we should see another nice mid day reversal. If the market firms up at the current price, we will have a solid floor to buy from. There should be no reason to exit in panic here, but likewise, there should be no hurry to enter either. A "V" type rally that regains losses in one big burst is very unlikely here so keep your emotions at bay.