In yesterday's blog on the broad stock market I wrote:
"...it is still possible for these indices to make a short-term bottom this week or next followed by a brief but sharp rally. A bullish divergence signal [i.e. one or two, but not all three indices breaking below their Feb. 9 low(s)] would be a sign this is happening."
At the close of yesterday's market the DOW had broken below its Feb. 9 low while the S&P 500 and NASDAQ had not, giving us our bullish divergence signal. Not surprisingly, the market rallied today, but because of the highly volatile trading environment we are in, I am not convinced the bottom is in with yesterday's lows (although it could be) so I am holding my short position today. If the market rallies strongly tomorrow, we will consider covering this position. Our stop loss can be set on a break above last Tuesday's high (March 27) which is when we entered our short position. That would give us very little or no loss if breached.
If yesterday's lows were a sub-cycle bottom, we will likely see this market rise into next week's reversal zone (a strong one) for another top to sell short. The alternative scenario would see equities continuing down and the S&P 500 and NASDAQ breaking below their Feb. 9 lows. If that happens, we should see a bottom in next week's reversal zone rather than a top, and it would be a good place to take profits in our short position.