Short-Term Market Directions

Looks like my prediction last monday (previous post) came true. NDX promptly bounced down from 1275 area and is now around 1225. However in my point of view the correction is far from over. The market hasn't changed a single bit and I can say with some certainty that the big banks will surprise us with a bad earnings picture (both lil' Vik and KL will jump out and say oooooops sorry when we said last month that we were going to make a profit we really meant before writedowns!!...). Then we'll see another leg down, possibly not to as low a level as in March, but a really big leg down. 

What has changed in the market since the March low? Nothing. The only reason behind the last rally is that 1)  the second derivative of economic indicators were ticking up (let's not to mention seasonality here - the investing crowd is too dumb to know), 2) the rumored M2M and uptick rule change and to a lessor degree 3) the belief that the banks were oversold. These false hopes will soon be proven, well, false and the last sucker's rally will fade, if it hasn't already. 

Let's also not forget now is the end of the quarter, and traditionally this is the happy time of tape painting by large funds. I've found an interesting article on this if anyone is interested in finding out more:

www.wallis.rochester.edu/bernhardt/mut_economicsletters.pdf

The thing with tape painting is that its effect will fade away a few days into the new quarter, with that in mind, over the next couple of days I would not be surprised to see a little bounce up tomorrow, and I bet you that the media will be out there trumpeting the new "optimism" again. And guess what the result will be after that's over. 

Remember my preference for the 50DMA as a sentiment gauge. NDX tried to close above that line 3 times since last Nov and every time the rally fails after two weeks, I don't think this one is going to be any different. 

My view is still bearish and that will only be reinforced if we see a rally tomorrow or on Wed. I have NOT entered any short positions yet but will do so after that rally fails. Alternatively we could see a few straight-down days and in that case I advise you, like I will do in that case, to play intraday trades only. With prices at the middle of the channel it does not make much sense to chase a trend, no matter it's up or down. Both NDX and SPX are on my radar this week. 

Again you could buy QID if you can't short the futures. SDS is the SPX counterpart.