The Bull Case

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This is just a heads up that there is significant risk to bearish positions at the moment. There is a positive divergence on the average NYSE 14 day RSI now which is a big red flag for bearish breadth. Add to that the fact that 10% down (considered healthy in a bull market) from the SPX top of 1422.38 is 1280.14pts. We broke that on Friday (along with the 200MA) with a huge exhaustive-looking candle followed by a large hammer-like candle Monday and the market seems to be having trouble gaining any downside momentum today (Tuesday). Additionally, the index charts appear to be in falling wedge formations now calling for upside breaks.

Indices - June 5, 2012

The sellers have already sold in my opinion and I think we have to be highly trusting of downtrend line breaks at this point. The odds are increasingly bullish even if just from a mean regression standpoint. Most of the indices also made marginal new lows during the exhaustive flush. If we can close the week positive, it will be a good sign. Declining resistance is currently at 1315.

The soonest indication should be a higher intraday high above 1320 for the conservative. After all, we are still making lower lows and lower highs, we just need to be aware that the upside risk is now elevated. I closed my IYT puts for 78% this morning and half of my SPY puts for 36%.  Still exposed short, but I only have 32% of my previous positional exposure at this point.  Good luck carefully calculated probabilities to all.