Short sellers can get squeezed by a positive news surprise, but that will not change longer term sentiment. Large-cap industrials like United Technologies (UTX) and Caterpillar (CAT) may be first to experience this bounce. But eventually, and even though the company is turning into a more service oriented organization with the cloud, stocks like Apple (AAPL) will follow suit. This bounce will be short lived, and the declines will continue afterward. Continue to avoid the Proshares double short long term US Treasury Bond (TBT), but recognize that on days when the market looks good, TBT will have eye-opening percentage increases. We will continue to short after the next bounce, shorting the peaks and buying back at the dips along the way. That is now the best way to make money.
When markets begin to move everyone seems to jump on the bandwagon. This happened when the market increased, it is happening here while the market declines, and over time I expect this to be the norm because most everyone scrambles to take action after the best opportunities have already passed. Over the past few days we have heard about major losses from some of the biggest hedge funds on the market, including losses from John Paulson who, although his fund has had excellent returns over time, has lost a considerable amount in the month of May alone. Over-leveraged institutions seemed to be driving this market lower. Prior to recently, we could only guess that they were over exposed to this market, but given recent declines that is now obvious to everyone.
From here, the question on everyone's mind is will the market fall out of bed and decline all the way to longer-term support levels in one fatal swoop, in one day or a couple days, or will the market trade back and forth within defined down channels instead as it makes its way to longer term support? The answer to this question will be provided over time, but notice the similarity between these two possibilities. Declines in the market appear likely regardless of which of these two occur.
Although our longer-term charts remain overwhelmingly bearish, and our mid-term charts have developed bearish signs along with our near-term patterns, and therefore all of the terms we follow are now bearish in cohesion, the market need not fall out of bed immediately. In fact, the market is still capable of oscillating back and forth, higher, then lower, then higher, and then lower, as it always has in the past. Even when the market was increasing there was an oscillation that took place. Arguably, that oscillation was not severe, the declines were short lived, and the increases were much more aggressive. But the oscillations that existed then were natural and if an oscillation higher takes place from current market levels it will also be construed as natural.
My words suggest that the market is capable of increasing because it is capable of doing exactly that. In fact, if any bit of news surprises the market in a positive way I expect a rather aggressive increase. Everyone seems to have adopted a bearish point of view; everyone seems to believe that the market and the economy are going to crumble, and everyone seems to be short. Quite clearly to me, the fast money is on the short side of the trade, but if they are given a reason to stop thinking bearish for a minute that will change. Fast money gets into and out of positions very quickly, and if there are any positives I believe that the market can claw back a considerable amount of the recent losses.
However, if the market does this it will not break the bearish tone stemming from the longer-term charts. The bearish tone in the near-term channels may break, and the mid-term patterns may change, but the longer-term patterns are largely bearish and they will stay that way even if the market claws back a considerable amount of the recent losses.
On Monday, close to the end of the trading session, I sent an e-mail that told everyone if support levels held in the Dow Jones industrial average, the Nasdaq, and the Russell, a bounce was likely. Those support levels have all started to break. So instead of holding, those converted resistance levels will need to break higher again instead if the market is to bounce. Consider this when evaluating the inflection parameter for Tuesday's trading session.
The chart patterns, the Investment Rate, the Periodic Oscillator, they are all currently bearish, but sometimes when everything points one way the market surprisingly does the opposite. Be cautious in this environment because everyone seems to have jumped on the bearish bandwagon, and if they are given a reason they could turn tides quickly. If we manage our expectations, that will not be a surprise if it happens, but it has not happened yet, and for now the probability rests of the shoulders of initial resistance.