The Long and the Short of It

Since I have been short-biased for the past couple of weeks in anticipation that the market would reverse, I thought it important to express my current market sentiment.

Since rallying back from the sell-off on the 28th of January and breaking out of last week's consolidation above the 1306-1310 resistance (ES), long trades have taken back the reigns of being the trade of popular consent. I currently favor buying the dips now as well. That being said, when trading markets like the S&P 500, I have no interest in holding long positions for any extended period of time. In this type of over-bought yet still bullish market, I prefer to take profits sooner rather than later. I won't hesitate to take 5 and 10 point gains off the table. If ever I hold a long position over night (when I can't monitor the trade), I will use a trailing stop at the very least (One of the nice things about trading e-mini futures over the Spyders, is that you can hold positions overnight and still use stops).

Since I am in favor of buying the dips, have I shied away from shorts entries?

No.

There are plenty of opportunities to enter short. The key is that shorts should be intra-day trades right now, not swing trades (though, there is nothing wrong with holding a short that is already in the money with momentum to the downside). Based on current price action, it would be unwise to try and speculate where the highs will be put in ahead of a pending reversal. I had reasons for believing the short-term highs would be put in two weeks ago (S&P was approaching key resistance, cycles research indicated an inflection point was likely, we had turmoil in the Middle East, not to mention numerous technical signals suggesting a reversal). The markets did sell, but showed their resolve and rallied through that adversity. At this point, it is better to wait for the market to show and confirm weakness before considering short entries of the swing variety.

To re-establish my short bias, I will need to see one or more of the following (on the ES):
- Consecutive daily closes lower through prior support.
- A breakout to new highs that is quickly met and rejected by subsequent selling (this type of action will typically manifest itself in the form of a topping tail). Lower lows must follow.
- A daily close below 1306 followed by a failed move back up above 1310

Until then I am biased to the long side, but I recognize that a correction remains a possibility at any point in time. I remain leery...

Levels to Watch this Morning

Futures showing some weakness this morning following modest declines in Asia and European markets. Asian markets were open for first time since China announced a rate hike of another 1/4 percent. In reaction, the Heng Seng is down the most at over 1.3%. Its noteworthy to mention more political unrest between North and South Korea as military talks have apparently broken down between the two sides. No major economic news until Jobless claims tomorrow at 8:30am EST, though Ben Bernanke speaks at 10:00am EST this morning.

I'm more or less neutral this morning. I wouldn't be surprised to see some continued selling come in, though ES should find support above 1313.

Levels to watch today on the ES:

Resistance above at: 1320-1322, 1324-1325, 1328
Support below at: 1313-1314, 1305-1306, 1299-1301