We came into the seasonally strongest three weeks of the year, starting two weeks ago, with the market stretched after rallying for months on end. Sentiment was excessively bullish as one would expect after such a long rally. Most times when the market is extended and we enter very strong seasonal periods we see the market become even more extended and a correction waits until after the seasonally strong period is over.
I came into this seasonally strong period long but with put spreads for protection as I recognized how extended the market was. My plan was to try and benefit from this seasonally strong period and flip short once it was over. The market laughed at my plans as troubles in Europe started to emerge. At that point I tightened up my hedges with straight shorts, although still net long. As the market fell further and was becoming oversold I started to remove hedges and even added to longs. When we bounced on Thursday I started hedging again, still remaining net long. After which the market nosedived again on Friday and here we stand.
In the intermediate term the market and sentiment are still stretched. However, in the short term the market is becoming oversold and the coming week is very seasonally strong. As such I believe that a drop early in the week is buyable for another bounce. After this week the market becomes a lot more tricky.