Though we remain mired in a low-volume summer environment, in recent sessions the US Equity Markets (as well as most stock markets globally) have had the first significant directional move in several weeks. The short-term momentum in the these markets has now shifted to the downside, and the first bounce should be an opportunity to add to short positions. Everything we have written over the past week stands. We are watching the sectors that led the most recent rally (Basic Materials, Industrials and Financials) for weakness to confirm any further selloff.
Though probabilities do favour lower prices in the near future, it is important to realise that we do not have a clear setup for a large directional move. It is equally likely that we could spend more time in an expanded trading range while the market tries to find some direction. This will be an extremely difficult trading
environment for most market participants—in these types of markets success often depends more on what you do not do than on what you do. Shorter-term traders should trade with smaller size and be quick to exit trades at the first sign the trade might not be working. Longer-term investors should remain focused on recent market leaders. One of the most bullish signs possible would be to see these leaders make new highs and show strength while the broad market is trading in a choppy range. If, on the other hand, these leaders drop support levels and melt down, we will give much more weight to near-term bearish scenarios.
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