Been talking about this May short setup for a bit now (those reading are probably tired of hearing about it), but last Friday’s bullish reversal and continuation through Tuesday is beginning to resemble a bull trap. I was able to play some $VXX and throw on a few shorts I discussed Tuesday night in what felt like a week worthy of the short attempt.
Based on the price action recently, the mood seems to be setting up for a doubting bulls (no Thomas) scenario, where recent memory clings to the big run from mid-February, a contained pullback during Passover week and the first week of May, that was reversed and bought Friday and catapulted into the big Tuesday move, leaving the cocaine eyes of bulls fixated on a run back to the highs. However, Wednesday’s price action seemingly came from nowhere; a sudden, unexpected, reversal whose implications the processing speed of bulls may not have caught up with. Doubting the credence of Wednesday, we gapped and crapped today, chopping around sloppily with a late day recovery – end of day price action that may have lured more bulls. Something over the past couple of weeks has felt different, and that looks to be translating in the increased chop and waning fortitude of bulls.
Last thing to point out is the non-textbook, upward sloping neckline, head-and-shoulders pattern setting up across the indices (I’ve annotated the ETF versions below). Have bulls run up prices since mid-February into this famed distribution pattern? Does this pattern get factored into a bear thesis over the next few weeks/month to lure bears into shorting into the hole? What does the market narrative need to reinforce/norm the behaviors of market participants only to later take advantage of that predictability? Headline risk is palpable, June Fed tomfoolery looms, Brexit referendum lurks, and oil’s correlation to the market and its increasing holdout as bulls’ weighted claim that the market can’t go down if oil is running (dangerous thinking) all seem to warrant a cautious stance going forward.
Stay nimble.
