Somtimes it does not pay to short weakness!

Do not be tempted to short weakness every time the market does an ugly reversal. Chris Schumacher explain it best ....

 

Monday's trading on the Nasdaq 100 gave the bears reason to rejoice. After early congestion around 1690, the index dropped steadily for most of the day, breaking through support at 1670. This changes the landscape for the rest of the week.

The bulls can draw consolation from the fact that while there was strong price action to the down side, the volume on the trading proxy QQQQ was relatively light at about 75,000,000 million shares traded. When I see strong price declines in the index, I want to see over 100,000,000 million shares traded to indicate that there is a strong willingness to sell positions.

Therefore, from a technical standpoint, the break of 1670 shouldn't put the ball back into the hands of the bears. Typically after moves like we saw Monday, there is either a base near lows or a slight reversal back into the range. There should be a low probability of a move lower in the morning session Tuesday.

The bulls/bears scenario has obviously shifted a bit to the side of the bears, but a close back above 1670 on Tuesday would negate this and keep the bulls firmly in control of the longer-term uptrend that formed from support at 1535-40. Should the index continue to drop Tuesday and Wednesday, the next support level would be at 1635, which has provided strong resistance through most of 2005. It is likely to be the next liquidity level, much like 1690 acted as a liquidity level last week.

I would like to see the bulls step into this selling and move the index back above 1670 Tuesday. Should 1670 fail to break in the morning session, the probability of seeing the index move back into the range into the close would be lower.