Market action continues to warn of a correction with the NADSAQ and Emerging Markets sectors once again lagging. Yet other "doji" candle was put in today. The last time I noted 2 back to back doji candles was back in late July and I was very suspicious of the bearish implications they had and correctly warned of a bear trap. This time around I'm not as suspicious but I admittedly I still have doubts.
I'm having nagging doubts as to whether the bears are going to take control right here at this moment. Part of it has to do with the continued relentless stubbornness of a group of loser traders I've been watching who have been trying to pick the top for several weeks. They're STILL going at it without any fear it seems. I suppose eventually they have to get it right even though it may be temporary like in mid June. And yes, I know, these guys aren't necessarily representative of the consensus but you gotta go with what works...and fading losers works.
Another reason why I'm not gun-ho to play the short side just yet is the behavior of the VIX. It stubbornly refuses to make a lower low and drop into the low 20s even though the market has made new highs. The VIX will often signal an excellent confirmation of a top when the market makes a lower high or double top and the VIX makes a lower low signaling complacency...it's not doing that right now. It's seems to go down only grudgingly but is very quick to spike on weakness like what happened last Monday...that’s supportive of the market because it indicates wall of worry behavior.
A couple of stocks I have in mind to buy puts on are POT and CYOU. They are showing significant relative weakness which means that it's likely they will drop more than the market when the market corrects. I'm not an expert in these stocks but what I do know is that POT is sensitive to corn prices which have been very weak for months while CYOU is a Chinese gaming stock which IPOed this year. IPOs tend to have a pump and dump effect during the first year once insiders are able to unload locked up shares. I have no idea if that's the case with CYOU...all I do know is that it's acting very weak relative to the market when previously it was acting very strong. Therefore, the potential underlying company specific weakness of these stocks is being counteracted by the strong markets in general i.e. a strong market lifts all boats. Once the support of the strong market is gone these stocks could see a significant drop.
Bottom line: It's still dangerous to go long here in the ST because the market leaders are no longer leading but I'm just not quite ready to play the short side for a multi-day hold...intraday yes, I'm open to it. I might take a partial put position in CYOU and POT but I really want to have the wind of the market at my back.
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