Don't Forget the Big Picture

Lately we have been repeating our thesis that this market is in an A-B-C correction. On Tuesday we provided an alternative scenario for how this correction could play out in the "B" wave of that correction, noting that within a larger wave smaller waves oftentimes develop. Yesterday's bounce was bullish on its face as breadth was just ok (around 52/48 risers/decliners) and volume was very good. However, the larger trend must be respected here and while we and no one else knows what the future holds, probabilities continue to favor more downside following the culmination of this B wave we are now trading in.

Let's review again last May's correction and see how it continues to parallel the current correction.

May 24th of last year the Dow, pictured below, tested its earlier lows and found support on a high volume reversal day very similar to yesterday's test and reversal (in the lower chart). Following this test the market followed through higher for two days and tagged the falling 50-day average only to reverse lower again. This scenario played out twice in fact.



Key here is the fact that the 50-day average (red line) was declining last May and it is declining now. Could the market have put in a low yesterday and now be ready to rally back up to this year's highs? Yeah, anything can happen, but once again, probabilities and history are not on its side. In fact, bulls may have used up most of their firepower yesterday and the bounce that is likely to follow should be as weak as the bounce that occurred late May.

The game plan is clear here. Wait for the market to run back up to its 50-day averages and short some more.

In the meantime manage your open positions and take options day off tomorrow.

Our Schedule: We are taking our own advice and our office will be closed on options expiration tomorrow. Our next update will be on Monday.