Forced Selling As The Market Appears To Be Finally Cracking

It took three torturous months for the market to finally get hit across the board. Its about time! I was going crazy with this reversion to the mean, going nowhere buzz saw market. The incremental S&P 500 highs that occurred while the mostly NASDAQ momentum leaders were getting slaughtered was too much for most traders including me to handle. Now it looks like the supply demand equation has finally changed. For two way traders like me that brings hope that some real money can be made, albeit in shorting the market. For investors, there is no free lunch forever, so stay in cash until this storm blows over.

For the first time this year, all the major averages look like they are reversing down. As a consequence, since last Thursday, I have been short. I can not say that I was not shaken from some positions a few times, including on Friday morning's wild ride. But once the averages took out Friday morning's lows, it was apparent that the dyke was broken. I therefore added to my core QQQ short and this time feel confident (famous last words) the market will follow through to the down side.  I do not know how far down this move will go, but I do know that there is money to be made on the short side. And I again caution that this is not a market to invest in or bottom fish in.

A major but little discussed component of the decline is forced selling via mutual fund and hedge fund redemptions plus, drum rill please, the margin clerks. That is one reason that I believe that this sell off has further to go. The margin clerks are selling out hedge fund portfolios indiscriminately. They strike at different hours of the trading day and just dump whatever shares they must sell on the market, not caring at what price or what effect the selling has on the tape. Naturally this is a short seller's dream that takes on a life of its own as the selling feeds upon itself.

$VIX

To make matters worse, the market is not oversold enough to call a bottom. Sure certain groups like biotechs may be extremely oversold and may spike up soon, but by every indication the entire market is not. Furthermore, complacency still exists. For instance the put call ratio gave a big warning signal last week. The $VIX - above - is still at extreme lows even after Friday's sell off. And the S&P Oscillator is no where. Therefore, if this is the bear phase that I think it is, the market is just beginning to fall.

Market Sentiment:

Whether the fall is for 5% or 25% is irrelevant as long as the red light is on. As I have stated all year, this is not a market to invest in. And the market will tempt us all. It almost tempted me into buying  some swing trades as I stated in my last post. thank goodness, that nothing tempted me to nibble or I might have been whipsawed down.  

The point is that this will not be easy. I expect many sharp oversold bounces that may tear my head off. The temptation to buy oversold downside whooshes will be there. I will probably be fast enough to cover some shorts into the whooshes, but am reluctant to wear two hats and buy into them for quick long side scalps. I don't think that I can wear two hats at the same time while keeping my thinking clear. From my perch, the old expression just changed to short the rips and cover the dips.   

Lets take a look at three of the major indexes

NASDAQ Composite is now testing a long term trend line. It broke some support and has another level of support to test - indicated on chart below.

NASDAQ 100 is similar to the NASDAQ. Here is a shorter term chart that zooms in on the broken support and the next level of support below. My only question is will the NASDAQ 100 bounce off the support or break through right now:

S&P 500 made another new high and then got zapped with an in your face reversal on Friday. I think that the major indexes may now catch up with the NASDAQ 100 and Momentum stocks that have been broken for quite some time. Topping is a process in which large institutions try to disguise their moves by hiding their money in the so called safer large cap stocks.

  
The Dow Jones Industrials look similar to the S&P 500.

Doug Kass humorously called this sell off "the revenge of the algos." We all know that the HTF guys are out there and I am sure that they are going to give the tape extreme volatility as karma for the entire HTF debate that was in our conscience last week.

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