It usually takes 2-3 days to do what the markets did today and that is sell-off significantly without any bounces.  From the open, the markets sold without any relief until close.  It took us three days of bullish activity to makes the gains that were wiped away in just one session.  We went from overbought to oversold very quickly, with no effort at all from the bulls.  Can we receive a dead-cat bounce tomorrow morning?  We sure are due for it after today.

IWM Chart Intraday

The current trading range is still downtrending from the May 2nd highs.  This correction is still minor damage, but many stocks have sold off far more than the index would lead you to believe.  See the annotated chart for the iShares Russell 2000 (IWM) below for the current range setup and key support areas.

IWM Chart – Current Range

If we can bounce from here, off the 100-day SMA, we put ourselves in a position to create a new trading range that would actually be uptrending.  I would not be overly optimistic about this simply because it is uptrending, but it would definitely make the bulls feel far more comfortable.  With QE2 ending this month, no sign of QE3 being announced, terrible economic data recently being released, and the market not far off from the May 2nd highs yet all this negative news, it gives reason to believe a deeper more serious correction is still on the table, possibly just around the corner. (how’s that for a run-on sentence?)  This is the reason I’m not building too much long inventory, but rather sticking to day trades, albeit with moderate success the past week as we have not seen the enthusiasm (therefore volatility) needed to make money intraday on the long-side.  However, with the short-side, the action has been more profitable, especially if you went short one of the indices this morning.  We’ll have to watch the dark side a bit more and adapt with more short trades if that trend continues.  See the annotated chart below for the ideal trade setup for the bulls.

IWM Chart – Ideal Range

Thursday has a fair amount of data being released.  Pay attention to this data and how it is received to determine which direction the market will steer in the morning.  Look for a bounce, but don’t blindly trust it will just run-up.  The action today was a red flag we can not ignore.  You’ll see me as a net seller with any bounces.  The late day buying I did today is something I’ll sweat a bit tonight over.

Thursday’s economic calendar (Eastern Times):
Chain Store Sales
6:00 Monster Employment Index
8:30 Initial Jobless Claims
8:30 Productivity and Costs
10:00 Factory Orders
10:30 EIA Natural Gas Inventory
11:00 EIA Petroleum Inventories
4:30 PM Money Supply
4:30 PM Fed Balance Sheet

As always, do your own homework to see if you agree.  Good luck out there,
Mike

No positions

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