I have never been a fan of shorting breakdowns on any of the major indices. By nature indices are mean reverting vehicles, when they get stretched in either direction they tend to slow down or snap back in the opposite direction especially when it is stretched to the downside. Normally when the indices get stretched to downside they can also become oversold and that can lead to a dead cat bounce which gives the shorts a better risk reward entry if they are inclined to short.
The SP500 has now bounced from stretched/oversold levels, to a level that should offer some resistance. Normally the first pullback you see after a strong trend or the first pullback after big breakdown is actionable and one can assume continuation. In this case the SP500 has bounced, its up 3 days in a row, to a declining 10 day moving average and the underside of the 200 day moving average. This level offers a much better risk reward ratio on the short side than last week when the social stream was full of bears.
One difference that I do see in this most recent pullback/bounce is that I’m not seeing any decent swing set ups which is something that we saw in all the previous pullbacks as I remember them.
Rule #3 Of How To Properly Short Technically; Do not short a stock that is down multiple days in a row, wait for the bounce (3-5 days) then short preferably with some of the moving averages above the price of the stock.
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