We are at a very tricky juncture here. Sentiment remains sky
high and the VIX remains near extreme lows - both of which indicate too
much complacency. The dollar pulled back sharply off of resistance
yesterday as we indicated it was likely to do, driving stock prices
higher. Yet, the Dow remains firmly under resistance and virtually
nothing out there achieved new recovery highs on yesterday's rally,
meaning that all major indices and most stocks failed to break above
Monday's highs.
None of this is to say that prices can't continue higher here frustrating our short positions.
However,
if prices do break higher, the risks of a reversal sometime next week
are extremely high so if there is upside left before a more serious
correction kicks in, it is likely to be muted. The real money, in our
opinion, is going to be made on the short side over the next few weeks.
The tricky part is going to be getting the timing right.
Bottom
line, we will just have to wait and see if yesterday's bounce was just
a one day phenomenon that will quickly reverse. Given the way the
dollar typically behaves when it is correcting, probabilities are
reasonably high we will see yesterday's rally faded today. This is not
a prediction, but rather an assessment of probabilities based on past
market behavior so we will just have to dig in today and see what
develops before we act further.
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