Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Monday, October 1, 2011 - Short Term Update

|Includes: DIA, QQQ, SPDR S&P 500 Trust ETF (SPY), VTI
Friday Recap:
"Continue to stay short, be ready to reverse soon. Most of the trading indicators are oversold or rapidly approaching that level."

Monday:
Monday's decline should be part  of the final thrust lower I was looking for the last several days. Trading indicators are now pushing to levels that are making the bullish trade interesting. The VTI is breaking the August/September lows. The Nasdaq composite has had the highest velocity decline the last several days due to the large number of weak hands that have bought tech stocks in the last several months (thanks for the hot tip on technology stocks Cramer).

Trading Indicators:
VTI / 3 Day $NYUD Advance Decline Volume

Notes: Oversold.

VTI / 3 Day $TICK

Notes: Today's close should pull the 3 day average substantially tomorrow. It may reach oversold tomorrow.

VTI / 3 Day $TRIN

Notes: the $TRIN is showing an extreme oversold condition.

Despite how negative the trading indicators are, swing indicators suggest that there is still some room for equities to move lower still. Trading indicators may get even more oversold.

Swing Indicators:


$NYMOT

Notes: Closed in oversold territory, the 5 day hints there is still some room lower.

$NYSI

Notes: the summation index is in sell mode, and indeed the directional bias the last few days has been lower. That said, there is a bullish divergence between the low in the summation index and stock prices.

Summary:
Traders:
There may be some room lower still. In a bear market, things get much more oversold than in a bull market. The "oversold" levels we are now use to from the last 2 years may need to be adjusted lower. That said, I believe we are much closer to a fairly major bottom (albeit temporary), rather than the very profitable "middle part" of a down trend. Traders can stay short the SPY, but with very small positions. This is certainly not the time to risk large amounts of capital betting on the short side. That time is over. I think the next big trade is on the long side.

Investors:
There should be a major bear market rally starting soon, possibly over +10% over the course of a few weeks or a month. I would use this as an opportunity to bail out of any left over long equity positions, and raise cash. Aggressive long term investors may even want to take small short positions or risk a small amount to buy long dated puts (once volatility settles).

Next update tomorrow, after the close.
-Bill L.