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The Case For Getting ShortKarl Denninger Ok, I think there's an argument for it here - getting short, that is. Here's the general setup:
That's three channels, each at a higher slope. This is the marker of a parabolic blow-off top. There is the time factor - about two months since the bottom at 666, roughly the maximum expected for a bear market rally. There is the fact that in general, new bull markets don't start with a parabolic blow-off after the initial reflex move off the bottom, and yet we got one here - the original move off the bottom, but again here. Those are characteristics of a blow-off parabolic top - or a bear rally, as people are sucked into being forced to cover as the market rises and the Margin Monster comes knocking. The setup is not quite complete tho - here's the one-hour:
Notice that we're sitting right on the second (less parabolic) channel top. That must fall, and the danger is that it does, you short, and the trendline you're using for a stop runs away from you. So the gambit here is to do it on the break downward but be prepared to stop out at whatever your predetermined pain threshold is, enter that as a mechanical stop in case you're wrong and do not move it. You have to accept the risk of a pip, because you might get one. You also have to watch the bottom of the final parabolic channel and then the second level one under it. Either could hold, and if it does, you want out. In the first case you probably get a big fat nothing out of the short position by the time you react. In the second, however, you get a decent profit. If the second channel goes down then the odds are good we're haded back into the mid 800s near the confluence of that diagonal down around 860. That's a damn nice trade and you can reassess there. Daily stochastics are supportive of this if the break comes; trying to front-run it is dangerous as the market can (and sometimes does!) stay overbought or oversold for an insane amount of time, so being "early" can be very expensive.
Disclosure: Short small the /ES futures; if we get cranking I will likely add. May 7, 2009 Karl Denninger's Market
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