Our short trades suffered on Thursday as prices moved sharply higher instead of breaking down as we had been projecting. We are embarrassed to admit that while this move certainly didn't inspire bullish confidence in us, but that we did decide to just cover and step back out of the way as it looked completely plausible at that late stage that the market was ready to shrug off resistance and inch its way further up a wall of worry.
It turns out that we had been 100% right all along, but we ended up dead wrong on the very day that we should have stuck to our guns.
It happens, unfortunately.
Friday the market got slaughtered. Oil prices gapped up and broke out to new highs on volume and the major indices got killed.
The head and shoulders top pattern on the SPY, which faked us and a lot of other traders out, confirmed on Friday with an exclamation point.
After a sell off like we got on Friday, we can now be more than reasonably sure that the SPY is headed lower. In fact, it looks a lot like it did back in 1987 when prices also head faked the pros into thinking that the market was climbing a wall of worry only to open down big time October 19, 1987.
We are not predicting a market crash this week, but it is certainly something that could happen.
While short risk is low here, be careful and listen to the market. It's going to be tough to pick an entry. It may pay to get aggressive here, but then again, it might pay to be patient and look for a bounce. It all depends on how the market opens today and behaves during the first hour. A weak, low volume bounce today should be shorted aggressively. A gap down is going to be a tougher call.
With sentiment at extreme levels, the market favors a bounce here.
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