Squawk Evening Update: A Dangerous Time to Short

Today saw broad weakness in equities and risk currencies.  While we have been anticipating a down day, it would have been hard to see the near vertical rise and not expect some form of pullback.  The greatest risk to being short right now is that we’re not going to see more than a pullback.

There is reason to be wary of this move down even though it meets our expectations.  The primary cause for caution is that both the DJIA and the Euro are showing only three waves down.  So even though we believe that more downside is the most likely outcome, now a particularly dangerous time to add short positions.  If we do get five waves down we would expect a larger retracement upward to follow.  That means that any profit one might gain from being short now will be limited to what one can get in a fifth wave, unless one is willing to wait out a second wave correction upward.  Second waves are notorious for being deep and shaking confidence.  So this is not a great plan.  So reward from a entering a short position now might be limited.  The risk is high, too.  With only three waves down, it remains possible that the entire recent weakness is a correction.  If so, three waves down is a plausible place for it to end.

As painful as it might be to watch prices fall, we would prefer to wait until we see five waves down and then a retracement.  A similar opportunity presented itself last Friday when the DJIA bounced to the 1932 FibGrid snow line.  That was a time to get short, on a measured retracement following five waves down.

We’ve already covered the most important aspects of the action today: we continued weaker but failed to extend to five waves.  The market did what it needed to in order to maintain the possibility of further declines.  However it didn’t eliminate the possibility of more upside.  We were able to tick one more item off of the confirmation list we published in last Friday’s briefing: we put in an hourly EWO reading below -54.  This reading bolster’s the argument that current weakness should continue, either in a larger correction or in a turn.

The Euro traded pretty much sideways all day long.  The lows of the day had already been struck before our morning briefing was published.  So we don’t have much more to say about it tonight; perhaps we’ll know more by morning.

The futures picture in the morning might lend some clarity to the direction of cash indices, so expect a full briefing in the morning.