Shorting the Dow 30

This is a bear-market rally and I’d like to tell you why I feel it’s worth shorting the Dow Industrials. In my opinion, this is a big fat sucker’s rally. Going long in this market, at this point in time requires balls of steel and a declaration of insanity. There’s just too many red flags in the charts. Take a look at this first chart. Pay close attention to the PPO fast-line which has recently crossed over to the underside of the slow line. This is the first warning sign.  The slow line also looks like it is turning south and if that’s the case we have a nice leg down ahead of us.

The second thing that makes me want to short the Dow 30 is the rounding-top style chart pattern that is starting to unfold before our eyes. The rally is starting to get overextended and is equivalent to the effects of gravity on a rocket losing thrust. Third on the list is the Money Flow. I don’t think the money will continue to pour into the market much longer since stocks are quite overbought as a whole.

If you think about it, most stocks have seen astronomical gains in the last 2 months, and the overall fundamentally craptastic story hasn’t changed. The criminal bankers falsified their earnings recently and quite frankly, I’m surprised there weren’t riots over the kind of theft in broad daylight that we saw. The situation today is no better than it was in February before the rally. Markets are still dislocated, liquidity is dried up across the board. To me, this rally is irrational.

 

I would also like to include another chart in my analysis. This chart is focused more for the long term, but it gives a nice picture of exactly where we stand in the grand scheme of things. This is the chart that scares me.

 

This, my hope-indulgent friends, is a point-and-figure chart. These charts are all about price. No fancypants technical indicators here, no voodoo black-magic oscillators there. Just good old fashioned price patterns.

Let’s start at ‘09…right about the time Obama came into power. The dow tanks from 9000 => 8000 in a glorious freefall. People stopped, thought about the nonsense for a bit, then tanked it some more…all the way down to 7000 by the beginning of March. The absolute bottom (as we currently know of it) rests at about 6450 on the Dow.

This brings us to the present, and the discussion of “where are we going?” We’ve made progress. We’ve retraced 50% of our losses from the bottom. Fibonacci patterns are in full effect. The market is at an inflection point and it can really go either way, but the market usually follows the path of least resistance, and last time I checked, gravity doesn’t make us float, does it? Say we make a recovery, where are we going? Probably up to around 8450 or so.

Now, let’s just say we don’t make a recovery any time soon (I think this is a much more likely scenario). Where could the Dow go? Stockcharts says 7400 and I say that’s plausible. It’s slightly above the 50% retracement level and also it’s roughly at support on that major market U-turn. Worst case scenario is that we go to lower…much lower, but then again, the market can only go to zero before we have nowhere to go! In all seriousness, however, I believe we could easily see 7600 without much hesitation. All it takes is a few bankruptcies (GM anyone?) and the liquidation of some assets to depress prices.

One more thing that concerns me in the P&F chart is the volume. Look at the buy volume (it’s black) and pay attention to how it is decreasing. Sell in May anyone? Also, look at the sell volume (in red) throughout this whole rally. It has been rock-solid and consistent. People have been selling into this rally and they’ve been doing it with strength and with consistency. Tread carefully and trade cautiously. The market will eat you alive if you’re not paying close attention.