The Correction Confirms

As we mentioned on our companion site this past Tuesday, the ugly price and volume action in the market that day confirmed the correction that we had been anticipating was underway.

Yesterday in further confirmation the markets were unable to reclaim even a small portion of their losses as volume dried up. This action indicates that the markets are digesting the move lower before moving even lower later this week or next. While a near term bounce could be in the works it is likely to be limited in nature.

There is no way of telling how deep or long the correction will be. Given the severe correction in the Shanghai Composite, which has led the rally, and given the sharp gains off the March bottom at least an intermediate term correction would not surprise. The entire rally could be over as well, although we have no indication of that and are still in the camp that we should see another leg higher later in the year.

In the meantime the gold trade we recommended on our companion site last week triggered yesterday. A successful long in this commodity should not surprise us given that market corrections often spur capital to seek safety and gold has long been seen as a refuge.

We entered one equity short as well and will be looking for further short side opportunities, especially on a small market bounce.