SSS - Reflections on the Short Side of the Market Following an MDM Buy Signal

Published : December 12 2012 at 10:11 ET

The market's rally off the lows of over three weeks ago appeared to be gaining some momentum yesterday, and this triggered a buy signal in the Market Direction Model. So far, the MDM's buy signal is underwater as it was triggered right near the intra-day peak of yesterday's price action. This is actually consistent with the fact that we have observed the MDM to act more like an oscillator than a directional pointer over recent months, and this necessitates caution for those who would go long index ETFs on this most recent signal.

From the perspective of a short-seller there remains a number of former leading stocks that are still within the confines of their previously broken-down chart patterns, and so the market's rally has only resulted in these stocks rallying up to logical areas of resistance, such as Google (GOOG) coming up to its 50-day moving average. This put the question to the would-be short-seller who might consider shgortin the stock at around the 700 price level, despite yesterday's pocket pivot volume signature type action. From a risk/reward standpoint, anywhere between 690 and 700 may serve as a short-selling "zone," with the quick upside stop being set at the 700 level or 1-3% higher, depending on one's tolerance for risk and risk preferences.

Apple (AAPL), was again turned back yesterday as it approached the lower end of the 550-560 resistance "zone" we talked about in yesterday's Pre-Market Pulse. The stock is now in the red as of this writing, and our belief is that the stock still has potential to move lower, likely below the $500 price level. The situation remains in flux as the stock could, we emphasis "could," still reflex-rally back up near the 50-day moving average, currently around 591.48, or the move back into the zone of resistance in the 550-560 level. So far it has not been able to penetrate that level, and as more late money perceives the stock as "cheap" and piles into the stock, the less the stock is able to rally the more this creates a phenomenon of "trapped longs" that add to the selling pressure. Our view is that AAPL remains a short here until further evidence proves otherwise. For disclosure purposes, we have been in and out of AAPL on the short side throughout its break off of the recent price highs, and currently have a short position in the stock as of this writing. That could change very quickly, however, depending on the volatile action of the stock and the general market's reaction to the Fed policy announcement later today.

The market could continue to rally, but we think the situation remains extremely fluid, both for the MDM and the market on a stock-by-stock basis.

- Gil Morales

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