As we believe a top has been reached in the rally since March 2009 (the top was achieved in late April), any bounce from today's deeply oversold environment will invite further shorting opportunities. The weekly charts in the major indices have started to break rising uptrend support. We suspect any bounce will be tepid.
Weak market breadth and high volatility support a short-term bounce. VIX has widened the gap from its EMA 34 (extreme gaps in the past have preceded market turns). The Put/Call ratio closed at its highest since November 2009 (while the equity markets were in the throes of capitulation), and its EMA 13 closed above 1.0 (again not seen since November 2009).
The dollar, which has been moving inversely to equities, appears to be forming a short-term top, another potentially bullish sign for stocks.
We plan to go short-term long with tight stops in preparation for a continuation of the downtrend, reversing to short for the intermediate-term when the expected bounce is exhausted.
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