Market Crash Update - Market Lab Report - Premarket Pulse 8/24/15

Published : August 24 2015 at 8:20 ET
We have discussed deteriorating market conditions over the past few weeks as markets have been unable to stage any meaningful rally this year despite full bore quantitative easing, thus have been showing signs of exhaustion. As we have said, markets are forward looking by typically 4 to 6 months thus seem to be telegraphing a rate hike within the next 6 months or sooner. Markets have historically corrected by 10% or more, sometimes into outright bear markets of 20%+ months ahead of the first rate hike.

We have also discussed how commodities including oil, since late 2014, have continued to plummet, having had the fastest fall in nearly 40 years, second only to the plunge from July to September 2008, just before the great crash. This recent plunge in commodities has accelerated over the last two months. 

Gil has also covered the short side of the market in great detail during the webinars over the past month, and the time to get aggressively short was back then. Even TSLA at 260 on Tuesday, about which we sent out a Short Sale Set-Up report to all members that morning before the open, was right in position to short for quick downside gains from that point. Thus members, and in particular webinar members, who have been privy to a number of stocks Gil has been working on the short side throughout August, should have been short stocks long before things got this ugly. As we get further and further extended to the downside, the odds of a very sharp and brutal (at least for shorts) snapback rally grows. This is the primary reason that selling into large breaks is prudent, and in fact, on the basis of Friday's extreme sell-off, we both went to cash over the weekend after an outstanding short-sale "expedition" last week on both stocks and volatility-based ETFs. That said, we will be launching a beta version of the much awaited volatility model shortly. 

Market conditions only worsened over the weekend, with China's Shanghai Composite closing down -8.5%, sending futures down -3.4% on the S&P 500 and near limit down at -4.97% on the NASDAQ at the time of this writing. 

Our thinking here is that any huge gap-down at today's open might be an indication of short-term capitulation. Further, from a contrarian standpoint, the put-call spike and the scant number of bulls make for a possible bounce at this juncture. Therefore, it makes sense to allow for such a bounce, or even a short bearish consolidation, where short-sale target stocks have a chance to do the same and in the process bring themselves into lower-risk short-sale points within their patterns. Right now so many of these stocks are deep, deep down in their patterns as anything and everything Gil has discussed during the webinars as a short-sale target over the past month has been torn to shreds. 

Thus the sloppy, sideways, trendless markets that started in late 2014 finally came to an abrupt end on Friday. Then, last night, China's markets got crushed, falling 8.5% on the Shanghai Composite, placing it now 38% off its peak which wipes out its gains for 2015. Deepening concerns about China's weakening economy are at the forefront as about 30% of all growth globally came from China in 2013 and 2014. 

Our view is that one can handle things one of two ways. If you think you're going to chase the market down on the short side, you had better have a nice profit cushion behind you from having already been short for most of the past week and/or month, and you intend to keep your stops on any new entries ridiculously tight. If you have short positions still on over the weekend, and stand to benefit handsomely from a big gap-down open today, then think seriously about using a capitulation selling wave as an opportunity to cover and put your profits in the bank. If not, then set trailing stops at the 10-day or 20-day moving averages on any existing short positions because we are likely getting closer to a potential snapback rally.
If you're doing very well on the short side over the past month, and this past week has become even more "orgasmic," make sure you keep your emotions in check. It's easy to be fat and happy here, and you should feel good if you've done well on the short side recently, but make sure you keep your greed in check!

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