There was some gossip from floor traders today to the effect that yesterday’s rally had as much to do with short-covering as anything else. Volume was quite low this morning, but it picked right up during the afternoon selloff. Crude only fell 41 cents today, so that particular rally excuse wasn’t available. Financials reaffirmed their doghouse status (XLF and BKX were both down over 5%). So in all likelihood the story is that if yesterday was about short-covering, today was about short-reloading. Markets gave up yesterday’s gains, and without some kind of game-changing positive news event, it’s hard to see where a sustained rally will come from. GE reports on Friday and many traders will be watching them.
We wouldn’t be that surprised to see indexes 5-8% higher by this time next month, but even if we form a short-term bottom here, it seems pretty safe to say that any rallies should be received as opportunities to take profits and to reload short positions.
We exited our July newsletter positions yesterday (just in time!), and entered an August trade today with a pronounced bearish bias.
We’ve put a hold on those RSI Reversal Readings until further notice, as they’re a fairly sensitive instrument, and are of basically no use when you’re dealing with a market that makes such thudding and unrefined movements as this one.