Catch a Wave

It’s time to catch a wave, surf not Elliott. It appears there will be some fine swing shorting opportunities in the near future but the set ups will likely need some time to mature. In the meantime an August trip to the beach isn’t a bad idea.

Tuesday’s action across the indices augers for further weakness after a corrective bounce runs its course. The indices didn’t recoup even half their Monday losses. Worse, trading volume was pitiful. The translation is elementary: there was no conviction behind Tuesday’s buying.

After two shallow and brief corrections of the March rally in May and June we are now likely headed for a significant correction at the very least. The weakness in the Shanghai Composite that we previously discussed and the hard gap down on Monday point us in that direction. While we believe the uptrend will endure we fully expect the indices to test their 200 MA’s before all is said and done. A correction of this magnitude can last a couple months. That would take us to the end of October, which is a time of year that has been quite favorable for market rallies over the decades.

But we are getting ahead of ourselves and putting our own expectations on the market, which can lead to a lack of flexibility, the last thing a successful trader can afford.

Our first order of business is to focus on stocks that have had the biggest runs since the March bottom. As they rally back on soft volume they are likely to provide solid short setups over the coming week or so.

But for now patience is a virtue. Down is the inevitable course, but stocks can bounce a lot more than you think when the change of direction becomes so clear to the crowd.