The bulls managed another impressive recovery today, as the $SPX rose 1.37% to close at 1171. We have now convincingly closed above the 1150 area, which has been a key zone since January. We also closed pinned against the 50 day moving average, which sets up an interesting scenario going forward. On the one hand, we have seen a fast and furious V shaped recovery from last week’s high volume selling event. On the other hand, we now find ourselves back to where we were the day before the flash crash. Beyond that, we are directly below the choppy and ultimate toppy trading range where we spent the entire month of April. As you can see in the daily updated chart below, you really have to question how much more upside the bulls have left in the coming days.
Moreover, the volume today was far from inspiring. Thus, despite (or perhaps because of) the exuberant rally that we have seen this week, I initiated several bearish bets today. I went long three inverse ETF’s, $SKF (double short financials), $SDS (double short S&P) and $TZA (triple short small caps). I did not buy what I would consider to be full positions in any of them. I am simply putting my money where my analysis is for now. If my thesis proves correct, I will likely add more. If I am proven wrong, I will sell all three within a matter of days. I still hold a large cash position north of 55% of my portfolio.
One of the main reasons why I have chosen to bet against the financials is because of the unimpressive nature of their sector ETF chart, shown below.
Clearly, the time to initiate a short position here was not in the middle of last week. However, now that the gap has been filled back up to the trend line, I see an edge as a swing trader here to the short side.
The small caps are also showing a weak daily chart.
Perhaps I am completely wrong and we will blast through what should be strong resistance. Frankly, if that happens I will be a big boy and take my lumps. I think your job as a swing trader is to conduct rigorous analysis on a daily basis while looking for potential trades that have an edge, where you think you will profit over the long run by using that same analysis, regardless of short term results. Here, we have seen a heavy volume selloff followed by an immediate V shaped low volume bounce right back up to a heavy congestion zone that trapped many bulls before we broke down.
By all means, if you have been sitting in a lot of cash and do not want to go short here, allow me to be the sacrificial lamb. I believe that I have made the proper diagnosis and that I have an edge for this trade, and I am willing to accept the risk that accompanies it.Twitter