Market in Major Downtrend, but Short Term Bounce May be Underway

The market rallied hard out of the gate this morning and kept in line with the "bullish Mondays" behavior of the past several months. However, after the first surge in the first hour or so of trading, the market had little follow through until the last 5 minutes of the trading day, suggesting not too many folks are stampeding in to buy stocks so far. Also of note, the Nasdaqs and Russell lagged the rally today, suggesting risk appettite is still subdued. But oddly enough the VIX dropped a whopping 8% today, suggesting fear was sucked out of the market. Despite all the glaring warning signs out there, the VIX is telling us that investors are still incredibly complacent, and that this market has a long way to go on the downside before fear, and any meaningful bottom, enters the market.

As I showed over the weekend, some indices and sectors sport 5 wave drops, which means at any time we can be in for a sharp bounce. However, the trend is so strongly down at this point, I only want to be in a position to add to my short positions on signficant rallies, not play the long side. Any surprises should result in declines. With that said, looking at the S&P 5min chart, it shows a clear 3 wave drop to a new low Friday which was confirmed today when the index rallied above 1088. With 3 waves down, it means that it was countertrend, and that the current short term trend is now up. This makes it highly probable that at least 1096 will be broken before a top forms and we see more heavy selling to new lows. But I just want to emphasize that suggesting further rallying is just a guess at this point and to mentally prepare myself for further upside right now. I'm not changing any of my short positions at all at this point.

The bottom line is that the market is in a heavy downtrend and my only change in strategy would be on a sharp rally where I'd just add to my short positions. The short term structure leaves the possibility that a short term rally above at least 1096 in the S&P might be underway right now so I'm mentally prepared for that and further upside.

No change in my GBP/USD position. My stop remains at 1.6185.

PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.