Ok, just to be fair, let me play devil’s advocate a moment regarding the health of this market, even on the shortest time frame.  The market is now back above a rising, if ever so slightly, five day moving average for the first time in over three weeks.  On the 10 minute chart, we’ve got what looks to be an inverse head and shoulders pattern that was put in over the past two weeks.  On Friday, a retest of said inverse head and shoulders pattern neckline was successful producing an strong intra day bounce (the neckline is found and $SPY 109).  We are still oversold on just about every oscillator, the MACD looks like it’s about to produce a short term bullish cross, the RSI is very low and now rising, as well as the stochastics.  I’m seeing a few stocks which have shown relative strength through this downturn start to break out, although gingerly.

These are all reasons to be cautiously bullish on a short term time frame, to trade from the long side for a bounce here.  I think it’s entirely possible that we are headed back up towards the 112.50 area.

And now the bearish argument, which as you are about to see, has just a little more ammo.  The market was rejected by a retest of the 200 day moving average on Friday afternoon.  We’ve now filled the gap produced on the open of the May 20th.  This bounce is coming on progressively lighter and lighter volume.  The bounce is beginning to look like yet another rising wedge, a bearish pattern.  The market has not been able to string two good up days together in, well what seems like forever.  We are below a falling 20 and 50 day moving average.  Volatility is still quite elevated, the $VIX is trading above 32.  The bounce in crude seems like it’s running out of steam and the drillers and oil service names will continue to get punished until they plug that damn hole in the gulf.  Breakouts from momentum and relative strength names are few and far between, and those which have broken out have done so on light volume and begrudgingly.

So where does that leave me?  Well, I’ve still got about 10% of my book tied up in short positions in $STD and $XRT.  Given that there could be a short term bounce brewing here, I don’t think it’s time to be piling on new short positions, but for the momentum strategy I run, getting involved on the long side right now is like picking up pennies in front of a bulldoze, it’s just not worth it.  I would rather preserve my confidence for when this market shows far more signs of being healthy than try and trade in and out of breakouts looking for a few cents.  I’ve effectively been out of the market save a few short positions for six weeks now.  In that time I’ve picked up an amazing amount of alpha, and even some absolute return with my well placed shorts.  But more importantly, I’ve been able to take some time away from this market, step back and survey the damage, have a clear head.  By not being involved on the long side I’ve been able to see this market without bias, as much as one can.  I just don’t feel it’s time to get involved yet, although I’m starting to feel that itch.  I don’t mind sitting out for another month or two, you’ve got to take what the market gives you, and right now it’s just not my time.  If we set up on the short side again here in the coming week or two, I will most likely take a bit more exposure on that side.  The intermediate term trend is down for sure, and quick money can be made given the volatility.  Stocks take the stairs up, but the elevator down, an old saying on Wall Street.

For the week the momentum book gained 20 basis points of absolute return but lost 5 basis points of alpha.  I didn’t trade at all last week.

Nothing that I say or show on this blog should ever be considered investment advice or a recommendation to buy or sell any security.  The performance numbers that I post in the momentum book should never be regarded as representative of any specific client account managed by Surfview Capital, it is there solely for educational purposes and should be treated as such.