Tuesday, July 7, 2009

It's time to hold on

Back on May 2nd I posted this chart of the S&P in the weekend report. At the time the market was still working it's way up to the final top of this counter trend rally. Many bears had tried repeatedly to short this move and gotten stopped out.

I thought at the time that we would probably see the topping process cause the bears just enough pain so that when we did get the final top the shorts would be so gun shy they would not only be unable to sell when they should but would probably be unable to hold their shorts very long. Certainly not for the full ride down into the weekly cycle bottom.

The chart shows my opinion of what most shorts would end up doing as the next leg down unfolds. I suspect most of the bears are going to make little to nothing or even lose money during this decline because they won't be able to hang on to their position. I also expect most of the bears will get comfortable on the short side right about the time we put in the low and then they will hang on too long to their positions as the next counter trend move gets underway and give back a big chunk of any profits they might make.

As I browse the Internet that's exactly what I'm seeing. The number of bears now expecting one more trip up to test the 956 high is large even though the current daily cycle has now failed. Not to mention many other signs that the decline has begun in earnest.

This is how bear markets work. They make it as hard as possible for the shorts to stay on board while at the same time almost impossible for the longs to get off.

The odds are very high that the intermediate trend has turned. That means bears should hold their positions and ignore the short term bounces. Bounces are for adding to shorts not for trying to catch short term long trades.

Remember, this is a secular bear market. That means that timing mistakes on the short side will eventually be corrected. Timing mistakes on the long side will be magnified.