How do we short this market

csw2002

If you are like me and believe that this is a bear market rally, then you obviously would want to short this market given how overbought it is. As many of you would have found out (and me included), we have trouble identifying the exact top of this bear market rally. We really need to get a confirmed downtrend before attempting shorting again. The problem then becomes how do we know there is a confirmed downtrend.

I will take a leaf out of what I did last May and lay it out for the current bear market rally. Notice that last May, the market made a double top. I drew a neck line across the 1373. We could have shorted anywhere from Apr 21 and one would have been frustrated and stopped out a great many times. However, if one had waited for the confirmation when ES dipped below 1373, then one could take it as a confirmation that the leg down had started. Now instead of chasing lower, I believe the best strategy would be to wait for a retest of the neck line. This did occur on 3 instances (June 8th, 16th and 17th) (BTW, I entered on 8th). While I missed the gain from shorting right from the top, I still captured the vast majority of the trend, and possibly saved my mental sanity attempting to guess the top. I was more cautious last May as I wasn't sure we were really in a bear market and hence waited for confirmation. This time around, had I adopted this strategy, I believe it would have saved me a lot of mental anguish.

Right now, I believe the neck line is around 875. I drew out what I think the ES's trajectory would be over the next couple of weeks. I think for our sanity, we should wait for the dip below 875, and enter short on a retest.

Happy trading