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Short Term Stock Market Trend Update

|Includes: ProShares UltraShort S&P 500 ETF (SDS)

 Here's an update on the short term trend of the stock market.  When this recent rally kicked off on May 27th, we took a shot at a short-term price target for the S&P 500:

For my calculations, I’m saying that this decline began at 1173 on the S&P, and ended at the intra-day low of 1040:

The magical retracement range you always hear about is approximately 38-62% of the previous move.  This would put us somewhere in between 1091 and 1123.

Today, the S&P 500 closed at 1102.  And thus far, the rally has been on relatively lower volume - strengthening our belief that this is a countertrend rally in a larger bear market trend.

S&P 500 Volume June 2010

Not a lot of conviction being displayed by buyers these days. (Source:StockCharts.com)

Since the S&P has rallied into our target range, this could be it.  On the otherhand, the A-B-C formation that we discussed on May 26th might not be done yet, as the final "C" leg looks like it has farther to go:

Countertrend moves have a tendency to move in an A-B-C type of pattern, rather than a straight line.  So it’s possible that today’s (May 26) drawback was the “B”, or pullback, part of this retracement.  Which would infer that when completed, we’ll see another leg up – constituting the final “C” portion of the pattern.

I'm planning to stay on the sidelines to see what transpires from here.  A continuation of this rally would be fantastic in my book, as it'd give us a great entry point to short this market.  We'll start licking our lips if the S&P rallies again above 1120, and we'll be absolutely salivating if we approach the 1130 mark.

ETF short traders may want to keep their fingers primed and poised on the SDS trigger!



Disclosure: Long SDS in longer term positions only