Equity markets are incredibly unstable at the moment, so it won’t take very much to see them cascading down again.
The stock market rally of the past few days is simply a short squeeze (where short sellers buy back stock to cover their position) in a strong intermediate downtrend. These sorts of rallies usually last between 3-5 days before rolling over again if the downtrend is going to continue.
The S+P 500 has rallied for 3 days now, so I suspect that we’ll see a short term top in the next few days and then the selling will return.
It’s the next phase of the downtrend that can be the most vicious.
That’s because the 200-day moving average has already been broken and we’re currently trying to rally back above it. If we fall again and take out the recent lows then that would be the stock market’s signal to hit the sell button.
You can see quite clearly from the above chart that the 200 day MA is usually great support in an uptrend, but if it doesn’t hold then watch out below.
The more the central bankers pump up our stock market with funny money the more unstable it becomes and the quicker it will fall when the music stops.
Since the lows of the 2009 crash we’ve seen two very steep sell-offs over a matter of days. The first was the flash crash from May 2010 and the second was the August 2011 bashing that saw the S+P 500 fall 20% in two weeks. Do you really think we won’t see any more volatility like that going forward?
If I said that the stock market could be 10% lower in the next two to four weeks most mainstream investors would roll their eyes and laugh. But the fact is the technical set up now is the most compelling that I have seen for a very long time.
This short squeeze in the S+P 500 could take us all the way to 1400-1430 but I would be a major seller there. The next leg down will be the big one, and if you haven’t either lightened the portfolio or sold the stock market short you will be panicking out of your positions like the rest of the market.
Murray Dawes
Slipstream Trader
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