Watch out for more downside follow through

We got the stab higher this morning as my gut suspected but it didn't last very long. While watching the action today I noticed the VIX had just about touched the 20 level when the market was in the green and at this point the VIX was hitting extreme oversold as per the RSI indicator. I was going to dedicate a post talking about this and how it signaled an immanent pullback for the market but Mr. Market was 1 step ahead me and we saw quite a reversal into the close. I had mentioned recently that the collapsing VIX along with the low put/call ratio readings observed recently was something the bears had in their favor and to be on guard for this. I also mentioned before that the 1100-1120 range was were I believe a ST inflection point could be as nervous longs and the technically inclined type traders had their finger on the trigger just waiting for an excuse to sell. Well, we got an excuse but it was a rather lame one. Apparently the reason for the big reversal into the close was because of the downgrade of Wells Fargo by famed bank analyst Dick Bove. Look, it doesn't matter what the excuse was...I believe traders were looking for any excuse to sell and we would have done so eventually. I remember at the low last November news came out late in the trading day that Tim Geithner was going to be appointed as the new Treasury Secretary and this sparked a massive upside reversal. This news wasn't even a surprise as most people expecting him to get appointed but it didn't matter what the news was because markets were massively oversold and shorts, like longs now, had itchy trigger fingers because they were sitting on gains.

If things play out like they have been playing out since the March lows, we should see fear rapidly make its way back into the market on just modest downside (2-3%). This would set up for a rally that powers us right to the end of the year. Look for a spiking VIX to confirm fear is rapidly returning. If instead we see the VIX remain subdued on any downside that would be a warning that the downside could be significant.

As a result of today's drop, ST momentum indicators have now clearly rolled over and are not yet oversold which makes room for further downside which I believe is likely. 1060-1070 on the SPX looks quite doable now.

This morning I got rid of any long positions I had which were dragging ass and no longer performing to my expectations. This also includes the position I had in GAS. GAS had made a nice breakout but failed to follow through which was a bit disappointing. As I had mentioned before, I had a tight leash on this puppy and my stop got hit. No regrets though...I caught a nice little pop there in a very short period of time. In addition natural gas inventories get released tomorrow morning at 10:30 which has the potential to be a big market mover one way or the other and I don't want be gambling on that...bad news could easily send GAS down big-time especially if there's a generally weak environment for equities and if I got round tripped as a result I would be very pissed at myself for not following my game plan and rolling the dice on some report I had no idea would reveal.

I'm eyeing some double short etfs here but I'm not going to be overzealous about the short side for more than a trade and I won't chase the market down either. ..and if something doesn’t feel right I’ll error on the side of caution and step aside. No fucking way I’m become one of the many bear bag holders out there.

I'll make a quick post tomorrow morning.