On The Verge Of A Bear Market

In last week's trading plan I revealed two scenarios, one bullish and one bearish. None of them happened exactly as I predicted, but overall behavior was much closer to the bearish one.

Instead of giving us a mini rally SPX just sliced through support at 1295. The very next day it tried to regain that level, unsuccessfully. On Thursday we got a rally into resistance levels and another hard drop on Friday, almost exactly as I predicted.

Now, as I said many times, shorting into deeply oversold levels can be suicidal. That's one reason why I did not take advantage of that one day rally into 1295. The second reason is that Wednesday's relatively narrow candle on high volume suggested that there may be a short term reversal coming. And the third reason is that none of my short candidates signaled any high quality sell short alert.

I'll post my trading plan for the next week tomorrow, but what can we expect according to this week's action? It seems that the market will have to go down further until big money decides that's cheap enough. There obviously was some buying taking place on Wednesday and Monday will show, what was going on into Friday's close. I do believe that a quick three or four day bounce above 1300 will have to happen before a plunge down to 1250 is possible and I'll explain why.

A drop below 1250 would be a signal for thousands of cyclists and technical analysits around the world that a new bear market has started indeed. This should produce massive short selling right under that levels. On the other hand a rally above resistance level would be a signal that the correction is over. This, obviously, means new buying. Now, a failed rally above 1300 would trap many buyers, which should freak out when the market slices through support at 1250. This means another selling climax, which big money should take advantage of. Shorters then covering their losing positions as the market rallies back above 1250 should provide just enough fuel to start another leg up.

Of course, this is just my best guess of what could happen. My approach to trading is day by day analysis of indices and individual stocks. I'm still waiting for my wedging rally and only if I get it, I will start aggressively shorting. More in my trading plan for next week tomorrow.

Have a good weekend!