NEW YORK (Real Money -- Yesterday's selloff was enough to get some traders' attention, but we are right back in the green this morning, despite some disappointing economic data. That's not to say that today is already in the books as a day for the bulls. The ISM and construction spending numbers were enough to knock equities off the high of the day, so there is still an opportunity for bears if they can get the market into the red today.
In order to get more aggressive on the short side, I am watching for a few technical indicators. We haven't seen them yet on the SPDR S&P 500 (SPY), although the technical picture for small-caps is not nearly as pretty as for large-caps.
On the daily chart of the SPY, first and foremost, I want to see it close beneath the 13-day simple moving average for two days in a row. We have dipped below the average several times intraday but haven't closed beneath it since the middle of December. That speaks to the strength of the bulls and resiliency of the market.
Next, I would like to see the relative strength index (RSI) close beneath the very long uptrend line that I have added to the chart. Finally, I'd like to see a stochastics pattern like the one I have created in the box on this chart. The dotted lines are lines I drew in, so that is not what happened back in February. It's what I would want to see happen now: a dip below 80, with a recovery back above 80, only to see a second dip. Ideally, it would occur in a shorter time frame than what we see in the box, but nothing is ever ideal in this market. The one thing already starting to take shape is a potential bearish crossover in the TRIX. Now I want to see the black line fall a bit sharper and separate from the red line.
I know this all may be a lot to ask. However, any attempts to short more than an intraday or two-day swing since mid-December would have resulted in losses for two and a half months now. Shorts have the right to be stingy here and wait for the setup. From a bullish perspective, this can be of use as a tool to implement hedges or cut exposure. I'd probably be a little more conservative from the bullish side and act quicker than I would from a short side. I would find it easier to buy back in if I were to sell a little pre-maturely rather than sit on short positions that are continually getting bashed day after day.
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