I’ve fielded a few questions recently inquiring as to when I plan to cover my shorts or start hedging for a meaningful reversal in the broad market. I’ve repeatedly stated, including in this update a few weeks ago, that the broad market short entry back on Sept 25, based on the partial rise into the broadening top pattern, would likely be a short-term catalyst for a longer-term sell signal, as the breakdown of that 60 minute pattern would likely trigger the much more important breakdown below the daily & weekly primary uptrend lines on the major US stock indexes as well as the likelihood of triggering death-crosses on the 20/50-day ema pairs.
With all of the those larger, more powerful sell signals above now clearly in the rear-view mirror, my focused has turned to the downside targets on the daily charts (which were all updated over the weekend). When managing my portfolio positioning (i.e.- net long or net short) based on the technicals of the broad markets, I will typically begin to reduce my market exposure (i.e.- close positions and/or hedge) when the first of the major US indices (e.g.- $SPX, $NDX, $COMPQ, etc…) look poised for a reversal. In other words, although my downside targets for the $SPX, $NDX, & $COMP (daily time frame) are roughly aligned, I will usually position for a reversal as the first of these targets is reached. When the markets become this near-term oversold (keep in mind that the weekly charts are FAR from oversold), the odds for a very sharp reversal starts to climb at a very rapid rate with each tick lower. Most often in sell-offs like this we get a final thrust down, blow-off move, typically at support and often just briefly overshooting that support (due to the powerful downward momentum). However, at times these sell-off end with the relatively muted thump vs. a quick BANG!
Therefore, I find it best to start gradually reducing short exposure as we start to approach the first downside target, which at this time, will likely be T1 (the 4000 level) on my $COMPQ chart, which is about another 3% below current levels. As always, trade (or stand aside) according to your trading plan & risk tolerance. Also remember that the markets (and therefore the charts) are dynamic, not static, and therefore, my plan today may or may not be my plan tomorrow or even 30 minutes from now. The SPY did tag a decent horizontal support level that comes in around 181.65 and has so far reversed off that level so there is the possibility that we get some short-covering & dip buying to fuel a quick snap-back rally here. However, other than some 15-minute bullish divergences and very oversold near-term readings, including a recent $TICK extreme, I don’t see any reason to cover any shorts other than those that have reached a preferred or final price target.