There are a lot of reasons to be bearish. Some of our favorites include, but are not limited to the following:
1.) On Monday, oil broke to new lows, disappointing those who thought a bottom was in
2.) The VIX continues to find support at its previous breakout level of 20-22 and remains in an uptrend
3.) 10 year bond yields in Italy and Spain are above 6% and trending higher
4.) The Russell 2000, Midcap 400, and Dow Jones Transportation index failed to break above their most recent highs of late May and as a result have put in “lower highs”
If we wanted to we could cite continued weakness in financials, copper, and strength in the dollar as further reasons to be bearish. So we have all of these reasons, yet SPX is still above 1,300.
That brings us to our most recent conclusion, above 1,290-1,300 support, one has to consider that all of the reasons to be bearish on the market right now have been factored into the market. We still haven’t seen the panic flush out that typically marks bottoms but if SPX doesn’t break below the 1,290 range then we may not seen one at all. The desire by most on the sidelines for a panic flush out before jumping into the market may be the very reason the market is near a bottom.
When picking bottoms one must know which indicators to follow and observe the signals they give, but there is more to it then that. One must train themselves to think like the smartest person in the room. This does not require being the smartest person in the room, but simply anticipating what their plan of action might be. To us, after being in favor of the short trade for the last month or so, the better risk/reward scenario has now shifted to the long side.
The market is only 1.3% above what we believe is key support at 1,290, yet after the way the week started many are expecting more downside. In addition, given the way the week started, most probably don’t believe that the bottom is in, something they might have believed last week after the 3.5% rally. However, where is your point of reference on the short side? In our view it remains at 1,334, or 2% away.
So if you want to have a short bias we recommend either waiting for 1,290 support to fail or bounce back towards 1,334 to initiate a short using it as your stop. If you want to be aggressive you could short the 1,300 breakdown. For our money though, we finally have negative sentiment in accordance with not so bad price action, so we’ll trade cautiously on the long side knowing full well there are still a lot of reasons to be bearish.
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