Yesterday was a reversal day and I am now greater than 20% short in the financials and small caps. I put equal weight on reversal candles, moving averages, trends/channels, support/resistance, and price/volume action to determine whether I scale-in more positions.
We had the rare gravestone doji yesterday and various shooting stars, that have either formed right at the 20- or 30-day MA's and have also hit resistance, with most indices at the November low retracement. The COMP has shown a divergence and it has formed a quasi evening star reversal.
The obvious question is, 'Will this be a normal pullback or is this the start of a breakdown?'. The answer is, 'I probably wouldn't get any signals until Wed'. Why? Because typically, a upside reversal candle such as doji or hammers precede the continuation of a rally. In a downside breakdown pattern, you'll see solid red candles with larger volume on the sell-off. The key here is the volume. Low volume should accompany pullbacks and the opposite is true for sell-offs (higher volume).
A great way to confirm any short-side thinking is to look at the inverse ETFs, 2x and 3x, and see if they exhibit reversal candles on support levels or moving averages and are accompanied by higher than average volume. For example, if I wanted to short financials, I would look at FAS, FAZ, UYG, SKF, XLF, and their top main components to see what the odds would be if I decided to short. In most cases, there won't be any divergences, but if there are, then I have to consider why.
I am looking to swing the shorts and then the market determines what action I take next. Below are 40-day and 5-month charts for the SPX, DJIA, COMP, and RUT.
Monday, March 16, 2009
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