The problem with yesterday's reversal

Ok, the market did the reversal I was looking out for. So is the bottom in? Well, I'm not so sure. The problem with the reversal was that the VIX dropped far too much. I always consider it a bearish sign when the VIX closes down significantly when the market is in the red (like Monday) or flat (yesterday).


What this may indicate is that too many traders are eager in picking the bottom. Also notice how we gapped up today to start this bounce and the VIX has collapsed back to 30 so easily. Not a good sign of a sustainable move and is more indicative of a dead cat bounce just like what happened after the flash crash.

Now, we are so oversold that there could be some follow through today and perhaps longer but I'm not so convinced we are out of the woods just yet....we're close but not quite there IMO. What also makes me suspicious of this reversal is how we conveniently bounced off of "support". I think a true bottom will be less obvious which would require another test or even break of the 1050 level first.

Perhaps I'm getting too picky and asking for too much and we did in fact bottom. It won't be the first time I've done this. That's OK, I have no qualms buying on the way up even if that means missing the bottom. However, I think unlike with the February bottom I don't think we're going to hit a bottom and go straight up making new 52 week highs shortly after. I think there will be some consolidation for the next month or 2 as all this shit in Europe blows over. These sorts of "contangions" tend to take several months to fully play out although the market will bottom ahead of its end when it senses the worst is over and enough steps have been taken to stem the crisis. It seems to me with the recent problems in Spanish banks that there could be more shoes to drop and signs of credit stress like rising LIBOR are starting to appear. That is reminiscent of 2008 isn't it? I doubt it will get as bad but rising credit stress is not a good thing.

Bottom line: We're much oversold and entitled to a bounce...perhaps even a big one. But it seems as if too many traders realize this and are too eager to bottom pick which makes me leery that we've seen the worst. Meanwhile, there appears to be more shoes dropping in Europe with no clear cut resolution to the crisis. The big $1 trillion bailout is good but it seems as if not everyone in Europe is not on the same page and the market might want even more steps to be taken like debt restructuring and a rate cut. Once again, the best thing to do is nothing IMO unless you trade in the very ST (which I typically don't).

I might end up doing nothing until after the World Cup. I want to watch it in peace!