Recovery possible

Yesterday, in a post entitled "Not looking good for tomorrow", I wrote

"I am definitely reaching for my short hat."

Well the short hat fit quite nicely today, although you certainly didn't need to be Carnac to see this one coming. Today's ugly 178 point dump in the Dow was a market forecaster's lollypop. And while painful, it was probably a good thing as it helped let a bit of air out of the balloon that was pumping up a bit too fast. It makes absolutely no sense for the Dow to be up seven percent after just 35 sessions this year. That sort of gain is obviously unsustainable.

So where next? Today, I bring you the daily chart not of the Dow, but of the YM futures, because I think they hold the key to tomorrow. Since it's already 1 AM, the rightmost candle is Wednesday's. It looks to me like we're replaying the action of January 28th, the last big drop we had in the Dow. And the next day we were up. That looks to be getting ready to happen again. Right now, all three futures are up by about a third of a percent.

I think today's decline was really overblown, driven more by angry mobs in Libya than any real economic basis. Indeed, the two pieces of economic news that came out today were better than expected, but the market was having none of it. I'm guessing that tomorrow, cooler heads will prevail.

I also want to show you this picture of the daily VIX, since I was just talking about it yesterday, and also because this chart is so dramatic:It's not often you see the VIX gap up in a big way from the center of its Bollinger band range, actually opening at the upper BB and then closing even higher. Looking back through the history, it appears that every time that happens (and it isn't often), the next day the VIX goes lower. And that of course means the market turns higher.

So if we do go lower tomorrow, I'll have to start a new descending RTC and put up the red swing trend arrow. Otherwise, I'm taking my short hat off and reaching for my long hat now.

Trades

No trades today. I'm kicking myself for once again failing to capitalize on the short side, but the carnage was mostly over in the first two minutes of trading right out of the gate, and that's just not my style. So I just had to take the heat and wait for things to improve, which there is no doubt will happen. However, I think I'm going to start experimenting with taking a short position in ES the night before the next time this sort of situation presents itself.