Tuesday, May 24, 2005

Drum Roll, Please!

The month of May have not been at all merry for bears. In fact, it's been a fairly relentless upward push.

I have been focusing on the $MID (the mid-cap S&P 400 index) for a number of reasons. First, it's technically the cleanest. It has a very solid break of a multi-year upward trendline, which is obviously bearish. Second, it has the furthest to fall; something like the NASDAQ was so bloodied from 2000 to 2002 that it's hard to imagine it falling dramatically. The $MID, on the other hand, is near lifetime highs. The ETF for this index, the MDY, tends to move a bit more sporadically than more popular ETFs such as SPY, QQQQ, and DIA, but it isn't bad, and the volume is reasonable.

Anyway, the drum roll I'm talking about has to do with the fact that the index has pushed right up against the lower part of its trendline. In other words, this is absolutely the safest place to short it. My hope, obviously, is that it eases away from this level and doesn't see it again for - - well, for years. On the other hand, if it pushes above the trendline, my case of a slam-dunk short sort of falls apart.

A major economic report is coming out before the opening on Thursday, May 26th, and that will pretty much make or break my hypothesis. If the market embraces the report and markets shoot higher, and the trendline is violated by the price, the entire case for bearishness has cold water splashed on it. I'm hoping for the opposite, of course, but we'll just have to wait and see!

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