Securities Research Services

Tuesday, July 01, 2008

Oversold Conditions Do Not Favor Johnny-Come-Lately Short Positions

If you shorted back when the risk assessor triggered a strong sell signal when the SPY was in the $141-$142 area, continue to hold. However, if you are looking for new short set ups here, save yourself a great deal of pain and be patient for the upcoming bounce before adding any more money to the short side.

As can be seen in the daily SPY chart, the price is now trading outside of its down trending channel. This is indicative of an oversold condition. While conditions can remain oversold, the most likely scenario is that we are very near a bounce, which should squeeze late comer shorts.

We wouldn't even consider putting on new short positions until at a minimum the price bounces back up to the falling 20-day average, now at $132.88. When the bounce does come, it will need to be assessed for volume and price action before new shorts can be considered.

Juxtapose the 50-week average and B Band price today against recent reports. You will notice that the 50-week is turning lower and the lower B Band is spreading out to lower prices. This is a strong weekly sell signal. Again though, this market is due for some type of bounce before prices head significantly lower.

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