Today we recommend tightening up short stops. Likewise, if we get a panic sell off this week and the SPY moves down to 125, it might be a good idea to fade the dip by buying fear in the banks, real estate, builders, retail and perhaps even the semiconductors; all of which are vulnerable to more short squeezes.
On the other hand, if prices continue to just bleed lower, like they have for the past two days, this decline can continue unabated for some time to come.
More importantly, keep position sizes small, be quick to admit if you are wrong, and keep a good cash reserve that you can put to work when risk levels decrease.
Game plan summarized: Stay short, keep stops above your entry points, and if the market panics and washes out, consider buying small positions into the panic. A wash out would constitute a quick SPY move down to $125.
Explanation:
Long term, the market is in a confirmed downtrend.
The near term trend turned lower once again yesterday. However, note that sentiment has once again moved into the overly bearish area.
Due to the fact that there are several levels of support currently being tested, risk of a short squeeze reversal is high. Likewise, the Fed continues to be a factor. If the market threatens to plunge again, they may be ready to throw in another big rate cut.
Outlook:
Prices may test recent lows; especially in tech. However, we continue to look for a rebound rally back up to the 40- and 50-week averages at some point over the next few weeks. Until prices regress back to their mean, risk of whip saw will remain high and position sizes should be kept small.
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