Well whaddya know? Big old bear went long the market. Actually the second time now in a week. We went long into the lows last week, then short Monday, but then bought the carnage this morning & last night based on the trade plan we had outlined.

Why the change of heart after so many scary short charts? Not really a change of heart, but the short term risk/reward was shifting and one has to respect the data. I could cite all kinds of sentiment examples including renowned bulls getting bearish on twitter, but that’s just theater.

Rather it’s a few factoids that grabbed our attention. One is the weekly $NYSI chart that simply makes it very much prohibitive to be a seller of this market at this particular moment in time:

When has it ever paid to short a market with the combination of the $NYSI dropping below 300 with its stochastic being at -700? The answer in the past 5 years: Never, or at least be mindful of a sizable bounce first.

Yet Monday’s trade plan had us anticipate a retest of last week’s lows and the question was simply: Would sellers force a new low or not:

In a way it was semantics as the $NYSI chart already told us we wanted to be buyers here.

Yesterday we also saw the participation index drop to -69 another signal that we were getting close a short term bottoming process:

But most importantly I always pay great attention to my partner here at NorthmanTrader, resident bull chick Mella_TA and queen of the big $VIX calls who had already advised us as to the $VIX sell zone which was confirmed today:

And promptly we longed it all and shorted volatility:

Now the crowded trade tells us another low may be in store for the Thursday before monthly OPEX. Maybe. A lot will depend on whether this double bottom holds or not. If it does it could lead to a very bullish OPEX next week. The flip side is a break of the double bottom which brings us likely into an 1870-1903 $SPX risk zone.

But ask yourself: Is this really the best place on the chart to push the short side?

A better time may have been when I was shouting from the rooftops back in July that the $RUT was looking ready to drop hard:

Russell Unraveling?

Now how will it play out? Big bounce from here or further big drop? Can’t tell, but we got nice entries with stops in place and are riding a very nice bounce today and we like the risk/reward. For a trade. 😉

For more information about our trade philosophy please visit the About and Trading Process pages.