The Easy Trade

There are generally three phases to a short term decline. The first phase is the initial thrust lower. We saw that initial thrust lower with the 60 point drop in the S&P 500 that ended last Friday. The second phase is a reprieve, where the market bounces back somewhat. We had a reprieve from Monday morning through most of the day yesterday, although I was expecting a little more. The third phase is the final capitulation lower, which we have not seen yet.

Except for the decline in June, none of the declines we have seen since the March low have met this textbook definition. The current decline looks like a textbook decline thus far. If the market capitulates into the end of the week we should see a very playable rally start from there. In addition, if the market went down into the end of the week the market would be maximum oversold. That would offer a very high probability long side trade.

While I believe that the intermediate term trend is lower, we are getting late in this down leg. If the market starts to break down I plan on legging into longs through the end of the week. When a rally finally arrives, I expect that any further losses that the market suffers will be recaptured.

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