Yesterday’s reversal is bringing out the negative sentiment in commentators and traders. Everything I’ve read and everyone I’ve talked to this morning has commented on the market’s negative reversal yesterday and its bearish implications.
However, I think there are several things to keep in mind before you jump out the window with everyone else.
First, we’re in options expiration week. A extremely weak day during the expiration week has been par for the course for the past four or five expirations. While volatility isn’t pleasant, it could be meaningless in the big scheme of the market.
Second, April 15th, tax day, is upon us. The market seems to make unusual swings during the week before taxes are due. I have never been able find an exact correlation but the market seems to make a low near or around tax day as investors sell stock to pay Uncle Sam.
Finally, sentiment is already negative. Both the put/call ratio and other sentiment surveys show that investors are already pessimistic. While that’s no guarantee of a bottom, its a good sign that you should start looking for one. The one caveat is that the market could be entering a new bear market phase. In that case, sentiment will become even more extreme to the negative side before you can bet on an advance.
Overall, I’ve been leaning towards the bearish side and I think many of the draconian scenarios I’ve posted are still in play. The market is coiled and ready to make a big move one way or another. Unfortunately, at this very moment, I think it could still go either way. The best plays are either to 1) step aside, 2) make a bet one way or the other but use well defined stops to get you out in case you are wrong, or 3) buy straddles (buy a put and a call to bet on a big move one way or another).
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