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After Friday's close, we muttered about our current S&P 500 short position - and while the entry was certainly mistimed from a short term perspective, we do expect this position to be a winner eventually. At least that was our thinking going into a nice summer weekend of beer drinking and pool carousing.

And now that we've cleared the sun and hops from our heads? I woke up Monday morning to find the S&P up 10 points after opening - and almost headed back to bed. But alas, we circled the wagons, and rallied the motivation to head into our converted motel room office and get the work week kicked off with a bang.

All told, we got through today's trading day in fine order. This morning's rally quickly retreated, showing less conviction or willingness to complete than the Lakers' sorry bench last night.

So now, with Monday mostly behind us, we're feeling pretty good about things, as it appears the market has tipped its hand. How so? Well here are 3 reasons we think this rally is pretty much toast:

  1. There's no volume. None. The rallies have no marbles. Meanwhile the declines boast very strong volume. The past 3 days have been particularly, increasingly pathetic from a volume standpoint. I think the only suckers buying this rally are the jovial commenters bullishly weighing in on our comment thread here (ha!)

  2. We rallied back to the 200-day moving average - and stalled a rally back to the 200-day SMA on low volume, after an initial break to the downside; a classic snapback formula. The next move is usually down. We've talked before about the importance of respecting the 200-day moving average. So, as long as we're below the 200-day SMA, the trend is DOWN.

  3. We are (back) in our initial target range. From our intraday low of 1040 a few weeks back, we rallied as high as 1108 on the S&P - about midway between our original S&P price target. We're there. So the market could rally higher from here - but it doesn't have to.

Click to enlarge:

S&P 500 Price Chart June 14 2010

(Source: StockCharts.com)

Let's see - no volume on rallies...we're still below the 200-day moving average (blue)...other than that, everything looks great!

How do we know if we're wrong? A strong, sharp rally above the 200-day line - on increasing volume - would give us some bearish heart palpitations. But right now, it's hard to see that happening. This market looks like a complete disaster in waiting.

So get your popcorn, and short positions, ready...we're excited for the fireworks to get rolling!

Disclosure: Short the S&P 500
Source: 3 Reasons This Rally Is Toast