Short Covering Rally In Index Futures Coming to an End?

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Bears Maul Stock Index Futures Bulls, But Will It Last?
By Carley Garner
June 13, 2011

Thursday's short covering rally appeared to be the beginning of the end of the correction, but that theory proved to be inaccurate. After what has been one of the longest (but not the deepest) corrections in the last decade, the market was unable to stay in the green for longer than a session.

To the bears, this looks like absolute despair...and they are likely licking their chops. However, as a contrarian I have to say that although this move has been a bit deeper than I had originally anticipated I still feel like (at some point) the risk could be to the upside and not the down.

When stocks are rallying, all we read and hear about investing is to "wait for a pullback to get long" but when the market finally pulls back, it seems all we hear is "run for the hills". When equities slide it can be nearly impossible to pick a bottom, and it almost always goes further than "most" are anticipating...if it didn't there wouldn't be a challenge and the markets wouldn't work. Remember, for every winner there is a loser and unfortunately, we can't all win.

Now that a majority of the technical oscillators are "embedded", it becomes much more difficult to predict where the turn might occur. It seems the chatter is looking for about 1250 in the cash market S&P, which means we'll probably find a low moderately above that price or moderately below (simply because anything else would be "too easy"). Unfortunately, we won't know which (if either) until after the fact.

Thursday, we mentioned the possibility of a retest of the lows, but we weren't expecting a blow out of the lows. However, this is what we have to work with. Although it was on our radar to sell puts in the S&P, the premium offered by the market simply wasn't worth the risk and we are pleased that we didn't force a trade. On the other hand, we are growing anxious to get in on the action. It looks like the September S&P could be headed for the mid to low 1250's (which puts the cash index about 6 handles higher) and possibly as low as 1235ish to 1240. Should the market decline to such levels we will be tempted to begin taking action on the long side of the market.

If you are holding bearish positions and sitting on large profits, we congratulate you but encourage you to hedge your bets, lighten up or simply lock in your profit and turn the computer off. Oversold markets can turn suddenly and violently, so why torture yourself by letting a great trade slip through your fingers?

Calls are cheap! 1310 is not out of the question in the next 30 days, we were just there last week!

In the meantime, support lies at 1313 and then again just under 1300 (we aren't counting on the later being seen, but if so it could be a great time to buy).