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May 5, 2009

Are We There, Yet?

I'm going to first answer the question over which half of you came here tonight with inquiring minds: yes, I am still short the S&P 500. Of course, this answer leads to the next obvious question... or rather answer: no, I am not a glutton for punishment. I have kept my position size quite restricted during these stabs at the short side, mostly because I respected the possibility of seeing this relentless buying pressure. First, the Elliott Wave count calls for the current rally to represent the primary counter-trend rally of the bear market. As such, it should extend further than other rallies. Another important characteristic is one I described several weeks ago: it should convince everyone the bull is back by continuing to rally into very overbought conditions. Sound familiar?

Unfortunately, I found myself shorting too early despite the foresight. No one said this game is easy. What I do know, however, is that these types of rallies typically end when bears cry uncle and bulls think a new breakout is occurring. Monday's action still fits the bill for such a move. I also expect some kind of bull shakeout prior to opex since the game has been way too easy for call option holders.

s&p 500 chart

I'll also play devil's (bull's) advocate here and point out that today's session posted a narrow-range day, staying within Monday's range and posting lower volume. If Wednesday follows up the NR act, we'd be looking at strong odds of another tall candle higher either Thursday or Friday. As scary as it would be for short positions, I'd prefer the market gap higher to touch that ascending trend line, then fail and close below today's low. Given that the futures are down 12 handles already this evening, our next best scenario is simply to see Monday's open/low taken out.

As you can see, silver continued its breakout today. The signs of strength here are building.

silver price chart

Furthermore, mining shares are performing from their own bag of tricks:

stock chart

That's it for this evening. Hopefully, we'll have more to work with tomorrow.

 

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