A few reasons why I am shorting this bounce

Discussion in 'Trading' started by Trend Fader, Feb 26, 2004.

  1. I believe this bounce is yet another shorting opportunity.

    The main culprit is the VIX. If you look at the chart of the $VXO its right next to multi year lows. Its very hard for a market to sustain much of a rally off these super low levels.

    Volume has been anemic at best. The theme of the past few weeks has been decline on heavy volume and rally on weak volume. It is clear that many big players are using strength to distribute.

    The dow and nasdaq are diverging. To me this is a sign that the momentum to the upside has ended. Throughout the bull run the past year.. the broader markets were more correlated and there was strength across the board. Looks like traders are becoming more selective in their stock picking and the buy anything on the dip mentality has ended.

    According to my own stats 60% of tradable stocks are above their 50ma and %50 are above their 20ma. Clearly the average stock is diverging relative to the Dow and S&P.

    Just to clarify things and make it crystal clear before Mr. Waggie begins to attack me and discredits everything I am saying. I am currently saying that over the course of the next few days to weeks the market has a higher chance of continuing its move lower. It very well may be that the economic data tomorrow will revive this market and push everything up over the course of the next 1-3 days. However.. I will still be shorting into strength because I am not daytrading and building a swing trade. I will cover shorts and re-asses my bias assuming the Nasdaq closes above the 2100 level. Between todays close and 2100.. I think it is wise to scale into a short position. Notice! I use the word scale because I am not smart enough to pick exact reversal points.

    I am starting this thread to stimulate discussion based on recent market action.. and I am curious as to what other traders think. I am not promoting a pissing contest ( waggie please control yourself).

  2. Mecro


    Where do you see this? Last few weeks have been on the downside with low volume and volatility which basically means absolute squat. There seems to be a slight bounce off late Jan lows but it really all starts to look like a sideways market.

    What are you shorting? VIX, IMW or SPX?

  3. I am trading the IWM, DIA, SPY, QQQ. I usually just pick the weaker one.. but right now I favor the IWM.

    If you use tc2000 u can pull up a 50ma on the volume for the nasdaq. You will see down days greater than %1 were all followed by huge volume spikes.. which were greater than the previous days volume and greater than their 50day avg volume. Whereas the majority of up days have been lower than the previous day and lower than their average. I looking from 1/26/04 onward.

    I agree the market is in bounce mode right now.. but I am saying this bounce is shortable.
  4. Mecro has a point this market is sideways
    too many forces pulling things while feds on hold
  5. It really depends on your timeframe reference. To expect the market to break down from here and to proclaim end of this bull run is premature, because bull markets end on emotional extremes. Which we have not seen so far. The leading sectors are not breaking down.
    With interest rates as low as what they are currently, there is still lots of stimulus. Bullmarket end with interest rate going up. So I am still bullish and fully invested.
    sideways moment with another leg up is the most likely scenario based on at least my study of past market tops. But in speculation business you can never be sure.
  6. I disagree... Nasdaq is not sideways.. we put in lower low and right now we are in bounce mode. There is a ton of support at the 2000 level. We very well might trade between 2100 and 2000 for quite some time.. but I think its prudent to either dump longs near 2100 or begin scaling short near these levels.

  7. I agree the market will not breakdown all of the sudden and slice through 2000. But I do believe we are setting up for another lower low on the Nasdaq. I hate to break it to you but interest rates are gonna be raised very soon. You dont have to actually wait until the Fed raises them.. sometimes you can anticipate things just like the markets tend to do.
  8. I also trade the bonds and I see no sign of market anticipation yet. In fact I know of tons of people who have burned themselves in bond market by taking position in anticipation and getting whipped. So you have to consider that possibility in the market also before you take a short position.
  9. whowah


    ... onm the QQQ and IWN (russel)
    SPY and DIA hav not given sell signals yet

    QQQ Chart attached
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  10. Just to put things into perspective.

    Assuming I am totally wrong and the Nasdaq churns and makes new highs. Most probably the VIX would be trading near 10 or even lower. To me thats super dangerous.

    From a purely risk standpoint.. buying a market at such a low VIX is highly risky... this is the dillema of many big players that I speak to.

    #10     Feb 26, 2004