I think the stock market is now in real trouble. The last week, when I was on vacation, has been absolutely devastating for the bulls. The rally that started in mid June has now officially failed as it posted several distribution days from the top, it sliced through MA50 and formed a failed swing low (an ABC reversal). My SMI indicator is showing extreme downside momentum. Actually, I have never seen values below -60 since I keep track of SMI and now we had a -80 and a -100 in one week! I don’t even know what this means for the short and intermediate term price trend, but according to history lessons, I suppose being long now is not a very good idea. Besides, several top glamour stocks have broken down and sliced through their 50 day moving averages. I’ve been thrown out of my RRGB and FOSL longs. I’m still in SLV and EL, but have tighten stops on both issues. In brief, this doesn’t look like a normal market correction to me, but the beginning of a bear market.
Now, after 6 down days we should expect a rally attempt sooner or later. I’m going to monitor every day of the rally very closely. A low volume rally attempt (wedging rally) for me is a sell short signal. On the other hand, if we get a decent volume rally I’ll rethink my strategy and wait with shorting. Additional problem is that right now I don’t see very many low risk shorting opportunities. Most stocks are extended to the downside and I like shorting stocks rallying into resistance, not breaking down. So a relief rally for me is a must.
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