Yesterday I was encouraged by the market's fall and my portfolio's substantial increase in value, but I was very skeptical. As I've mentioned repeatedly, the giant bag of cash that enters and exits my account is far too well worn. Today it managed to stay, because the odds are increasingly tilting in the favor of the bears. Not only did the bag stay, but a second one showed up.
The economic news that was released this morning revealed that (a) inflation is starting to surge, currently at an annualized rate of 12%; (b) the housing market – – – in spite of all the liars in government and industry that would try to convince you otherwise – – – is nowhere near a bottom. Markets do occasionally get rational, and so the Dow had another triple-digit drop today. The price didn't just sneak a little beneath its trendline. It is now no-questions-asked below the trendline, in addition to being plainly beneath its critically important Fibonacci level.
I had substantial put positions on IWM and NDX, and I closed them both. I didn't do this because I think the indexes are going to soar – – – on the contrary, I think the odds of a substantial downturn unfolding in the coming weeks has gone up substantially. I did this out of a combination of (a) paranoia about the aforementioned disappearing money bag; (b) the fact that a lot of key ETFs and indexes were hitting Fibonacci retracements or other support levels. Looking at the IWM, prices were approaching areas of substantial congestion in the $72 level. If we get some market strength from our darling friends the bulls, IWM will probably push back to about the $74 level.
The $MSH has a more convincing support level, represented by the support line. I think the odds of it breaking this line are quite good, and doing so would only amplify the advantages the cerebral traders (e.g. the bears) have in this market.
Even more compelling than IWM is the actual index, the $RUT, which has nicely touched a very important Fibonacci level. This was the same level that got violated in late May and early June (much to my chagrin). Make no mistake, we are on the bulls' side of this level. We need to push beneath it to add more evidence to the bear case. This isn't a slam dunk; the bulls could take the baton away.
The S&P 500 performed well today for the bears too. One the bearish side, the trendline since July 15th is absolutely broken. On the bullish side, we are resting directly on the important level at 1270. A close beneath the lows of today and August 8th (that is, 1261) is a requirement. End of story.
You can see this more plainly with a closer view.
I have a hybrid portfolio at this point, because I have acquired a substantial quantity of calls related to energy and gold. I am counting on a rise in EUR/USD, gold, and oil.
Just as Tuesday morning was chock full of economic indicators, Wednesday is wholly devoid of it. There's no doubt it will be an interesting day, but even if the bulls push things higher, it will not undo the damage done in the week so far.
