Rolling Downhill

The 1357/1358 level on the S&P 500 has proved to be firm support over the past month. Today, we are finally seeing the bears crack it with a swift move lower in the market. At issue now is whether we see a similar type of false breakdown like that which the market experienced back on October 4, 2011. Many indices, including the S&P, and sector daily charts are now pierced below their respective lower Bollinger Bands, usually an indication of some type of oversold condition. However, in and of itself, simply becoming oversold is not a sufficient reason to turn bullish or even play for a tradable bottom.

Instead, the idea is to continue to let the dust settle in this ongoing correction. There is still little evidence that we are entering a fresh bear market, although that may come down the line. Rather than getting wrapped up in a game of semantics, I have been more concerned about being properly positioned during this correction with a focus on protecting capital and picking off high probability trades here and there. Overall, the momentum winners to the upside for the first quarter of this year have been cracking in recent weeks. Over the past few days, some of them are starting to roll downhill now. When this happens, there is usually little point in trying to fight the tape, since the tide has turned if only for a few days or weeks.

I came into this morning’s sell-off positioned net short, with a heavy cash position to boot, all catalogued inside the 12631 Trading Service. We have been in rhythm with this market all year, and the only thing standing in our way from continuing to outperform is complacency and becoming sloppy with trades.

You can be sure there will be plenty of traders looking for a bottom as today’s session progresses. I am not interested in calling out a bottom yet, as my sense is that there are too many traders still holding and hoping rather than shaking and selling.