Here's When You Go "All In" on the Short Side

Here's When You Go "All In" on the Short Side
By Jeff Clark
September 08, 2009

It looked as though it was finally payday for the bears.

Last Tuesday, the Dow Jones Industrial Average dropped 189 points. It happened on big volume, which had been noticeably absent during every other decline over the past five months. And it happened with the Volatility Index (VIX) breaking out to the upside of its bullish falling-wedge pattern.

That was undeniably bearish action, and it should have kicked off the correction I and many other bearish prognosticators have been arguing is long overdue. But it wasn't meant to be.

The market bounced a little on Thursday. It bounced a lot on Friday, and it's all set to bounce this morning as well. All of a sudden, last Tuesday's decline is a non-event. It was a brief interruption of the bullish trend – a mere pit stop on the race track to stock market riches.

Despite my overwhelmingly bearish disposition, I wasn't ready to get aggressively short stocks after last Tuesday's drubbing. Perhaps it has something to do with not wanting to chase stocks lower. Or perhaps I've grown tired of warning investors of the storm clouds on the horizon... and seeing sunshine every morning.

Actually, it has something to do with this chart...

This is a daily chart of the S&P 500. It is forming a bearish rising-wedge pattern. This pattern occurs when the index forms a series of higher highs and higher lows, which is normally bullish, but the range between the highs and lows grows narrower. It's a major warning sign of a sudden reversal. But it doesn't become outright bearish until the index decisively takes out its rising support line – which, by my calculations, means a break of the August lows around 975.

I'm not willing to go "all in" on the short side until that happens. Yes, that's 45 points lower than where the S&P will open today. So I'll miss the exact top of the market. But there will be plenty of profit potential for short sellers on the next leg down for the market.

The vast majority of the time, these patterns break to the downside and they erase nearly all the gains from the beginning of the wedge. In other words, if the S&P 500 breaks below 975, then there's a very good chance stocks will be revisiting the lows of March.

Of course, I know that sounds ridiculous. After all, stocks have just experienced the most amazing five-month rally in decades. And virtually no one is calling for a retest of the lows.

My Two Favorite Options Strategies Right Now

The Great Economic Recovery of 2009 Is a Fraud

Think about where we've come from, though. Back in March, we had just experienced one of the worst six-month periods in the history of the stock market, and virtually no one was calling for a rally.

Today, we have the exact opposite situation. And my view is completely opposite of what I was looking for back in late February and early March.

Go ahead and be bullish, if that's your inclination. As long as stocks stay within the wedge, the bull remains in charge of the market.

But if the S&P 500 breaks below 975, then look out below. It's going to get ugly real fast.

Best regards and good trading,

Jeff Clark

China dumping U.S. dollar for what could be the next world currency
Becomes the first country to ever buy this asset...

Leading technical analyst: Precious metals stocks headed higher
... And these 4 stocks may rise the most.

11 dumb ways to get in debt
Easy ways to avoid spending too much.

•	Gold mining ETF GDX rockets 12%... gold jumps over $1,000 an ounce.
•	Teen retailers Gap and Aeropostale hit new highs... Abercrombie drops 12% last week.
•	Semiconductor makers extend gains... Silicon Labs, Advanced Semi, and others reach 52-week highs.
•	Earnings today... Pep Boys.

	Last	Change	52-Wk
S&P 500	994.75	-0.33%	-22.14%
Oil (USO)	35.18	-0.26%	-60.56%
Gold (GLD)	96.19	+2.44%	+21.45%
Silver (SLV)	15.22	+3.12%	+17.62%
U.S. Dollar	77.97	+0.49%	+4.96%
Euro	1.43	+0.87%	-1.01%
VIX	28.90	-0.86%	+31.42%
HUI	383.66	+9.31%	+18.10%
10-Year Yield	3.30%	-0.08	-0.40

Advertisement

Company	Sym	Industry
NetGear	NTGR	network equip
Jaguar Mining	JAG	gold mining
Celestica	CLS	circuit boards
Metavante	MV	credit services
Kinross Gold	KGC	gold mining
Gold Resource	GORO	gold mining
Micromet	MITI	biotech
Northgate Minerals	NXG	gold mining
Highveld Steel	HGVLY	steel
Del Monte Foods	DLM	canned foods
Red Hat	RHT	systems software
Kyocera	KYO	electronics
Spectrum Pharma	SPPI	pharma
Allied Nevada	ANV	gold mining
Silvercorp Metals	SVM	silver mining
TriQuint	TQNT	semiconductors
Aeropostale	ARO	clothing stores
Lubrizol	LZ	chemicals
Charlotte Russe	CHIC	clothing stores
WorldGate	WGAT	telecom
Rubicon Minerals	RBY	mining
Alamos Gold	AGIGF	gold mining
Pacific Rubiales	PEGFF	oil & gas drilling
Advanced Semi	ASX	semiconductors
Goldcorp	GG	gold mining
Intl Royalty Corp	ROY	mining
Minefinders	MFN	mining
Golden Star	GSS	gold mining
Centamin Egypt	CELTF	gold mining
DreamWorks	DWA	movie production
IAMGOLD	IAG	gold mining
Petro Andina	PETRF	oil & gas drilling
Semafo	SEMFF	gold mining
CommVault	CVLT	security software
Emergency Medical	EMS	medical services
Broadridge	BR	business services
LG Display	LPL	hi def displays
CGA Mining	CGAFF	gold mining
ArcSight	ARST	business software
Jos A Bank	JOSB	clothing stores
Silicon Labs	SLAB	semiconductors
Silver Wheaton	SLW	silver mining
Gap	GPS	clothing stores

Company	Sym	Industry
First Merchants	FRME	banks
Nobel Learning	NLCI	for-profit ed
Energy Conversion	ENER	semiconductors
TranS1	TSON	medical devices
First Commonwealth	FCF	banks

Labor Day - Markets Closed
September 7, 2009

Weekend Edition: It could be too late for Americans
September 5, 2009

A Quick 20% on the World's Biggest Panic Attack
September 4, 2009

It's Time to Buy the Buck
September 3, 2009

Commodity Q&A: Gold Could Erupt at Any Moment
September 2, 2009