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Long or Short Stocks?

NEW YORK ( TheGoldAndOilGuy.com) -- Stocks managed their third session higher as of Thursday and it's too late to jump onto that move. Major indexes and leading stocks have rebounded into resistance along with a few key moving averages.

The next one to three days favor a pause or pullback at the least simply because of the selling momentum and multiple resistance levels being tested. It is only natural for traders and investors to pull some money off the table or short at these levels.

Stepping back seven days and looking at the overall stock market we have seen a substantial drop in prices across the board. A ton of stocks have formed their first impulse thrust to the downside, which is typically what happens when a stock market is in a topping process (Stage 3 Distribution). The type of damage we had cannot be fixed overnight. This will be a process if it is to resolve to the upside and price action will remain wild (volatile).

The odds from a technical analysis stand point using price, momentum, cycles, volume and moving averages point to lower prices still to come. Actually, they point to another 5% drop from the current level.

Major Points:

  1. 20 simple moving average is crossing below the 50 simple moving average. Last time this took place it triggered a 5% drop in the S&P 500.
  2. Price has bounced for three consecutive days. This typically puts the odds in favor for a pullback.
  3. Price bounced and hit it's head on the 20 and 50 moving averages on Thursday (resistance).
  4. Market time cycles are in a decline phase -- meaning there will be a negative bias and seller will be actively pulling price lower on bounces.
  5. Major long-term chart looks favorable for a bear market to start, which may last 12 months. If so, this is just the beginning of some scary yet highly profitable potential trades in the coming year. Stocks fall three to seven times faster than they rise.

Daily S&P 500 Trend & Analysis Chart:

Long-Term S&P 500 Trend Chart:

Bearish S&P 500 Price & Volume -- 60-Minute Intraday Chart:

Looking at these charts from a long-term, intermediate- and short-term basis, the odds are favoring lower prices. Being short stocks or buying inverse ETFs is the current play for the market.

But analysis and trends are subject to change depending on price and volume action each week. Do not get your heart set on the big picture outlook of a year-long selloff. That could prove to be dangerous.

We take this market one bar or candlestick at a time and trade based on current short-term analysis.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Chris Vermeulen is founder of the popular trading sites www.thegoldandoilguy.com and www.ActiveTradingPartners.com. There he shares his highly successful, low-risk trading method. Since 2001, Chris has been a leader in teaching others to skillfully trade in gold, silver, oil and stocks in both bull and bear markets.

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