Shorts Sent Scrambling, But Need More Signs of a Bottom

Holy moly, the long awaited oversold snap back rally has arrived! Time to locate those cash bundles under the spare bedroom mattress and buy, buy, buy!  Eh, well not exactly but after 6 consecutive weeks of market declines, it was good to see the green return in a big way.  While I don't consider myself a bull or a bear, but a momentum trader, I do prefer a market that rises.  It's quite a bit easier to make money in a rising market. 

Getting the market off on the right foot this morning was the report out of Wells Fargo which beat estimates and increased its dividend.  No it wasn't a great quarter and profits decreased 21% from the year ago period, but quite extraordinary news under the circumstances and the market is going to reward companies that come out with any kind of positives.  I would imagine that is the largest single day percentage gain in its history (or darn near).  I think we're really going to start seeing the market separate the wheat from the chaff in the financials, with those responsible financial institutions that largely avoided the sub prime mess seeing exceptional gains over the next few years.  You could put Wells Fargo (WFC) in that category. 

Also aiding equities today was another sharp drop in crude which has fallen about $10 a barrel in the last 2 days.  I'm still riding my DUG for nice profits and looking to lock in around resistance of the 200 day moving average, but it may get a little pull back before it tests that area. 

So what about today's move on the technical side?  At this point I don't see this as being a bottoming out move.  There is a ton of money on the sidelines trying to predict a bottom and shorts have to have an itchy trigger finger looking to lock in some great profits in the last few weeks.  There is no doubt that much of today's rally was due to short covering.  Volume came in lighter than yesterday, so no indication of accumulation by institutions today. 

Much has been made of the VIX in the past few weeks as a bottoming indicator and I've certainly had a few emails about whether it's really all that important.   To that I say yes, it's an important indicator and the fact that more people are watching it makes it even more important. However, it is just ONE indicator and a big spike in volatility isn't required for a bottom, but you do often see a major spike when panic selling kicks in, so it's something look for. 

It did spike a bit on Monday and touched 30 which is getting into an area where fear is escalated, but keep in mind that at major bottoms of the past it has surged as high as 35 - 40 and the volatility trend is still up.  In addition, I just haven't seen all out panic selling yet, so the potential for one last dramatic move lower is still there.

I'm going to play the market now the exact same way I did off the March bottom.  Begin dabbling on the pull backs with smaller positions than usual.  I will not get more aggressive until a trend of accumulation (high volume buying) and diminished selling emerges.  Considering the major indices kicked off major support levels on Monday I think we are very very close to that, but it is absolutely not the time to add a bunch of long positions.  Patience, patience, patience… there will always be plenty of time to profit and profit big.

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Comments

[jlounsbury59]

Excellent summary - exactly the way I'm thinking. If you are wrong we can apologize in unison later.