Having faded Friday’s high in the index futures, we’ll be short the S&Ps when the stock market opens Monday morning.  Is The Top in?  It seems unlikely, given that the bear rally is entering its thirteenth month and acting like it’s about to get second wind. Still, it never hurts to keep trying to pick the top, especially when it’s possible to so without risking an arm and a leg. Here’s the trade recommendation exactly as it went out to Rick’s Picks subscribers Thursday night. “Let’s plan on shorting [the E-Mini S&P at] 1159.25 with a two-point stop-loss. I don’t usually favor patterns so very elongated as the one shown in the chart, but the two rally legs are sufficiently similar in appearance to beckon a modest, $100 speculation.  This being a Friday, and Mr Market being, always, a sonofabitch, we might expect the target to be hit in the final 90 seconds of the session.  My advice is to take the trade anyway, provided you are able to monitor it, and to use the stop-loss, when index futures resume trading Sunday evening.” (Incidentally, you can sample Rick’s daily touts free for a week by clicking here.)

It was our good fortune to have caught the exact top on Friday with this strategy, although our short entry occurred about an hour before the NYSE opening rather than at the end of the day. The chart above shows where we initiated the short. At that moment, news was crossing the tape that February retail sales had upticked. A negative number had been expected, and so DaBoyz used this mild surprise to do what they’ve been doing so well for the last twelve months – i.e., grabbing shorts by their cahones and squeezing with all their might. This by-now tiresome trick has worked almost without fail since last March, and it has provided enough thrust to  pop stocks through pockets of heavy supply even without much buying by bulls. We’ve often pointed out that bulls rarely acquire stocks with the kind of fervor that is necessary to catapult the broad averages from one level up to the next. In practice, only bears caught in the ringer and facing margin calls have the necessary, um, enthusiasm, to make this happen.

Fading Their Pain

On Friday, they were at pains to show their sordid stuff once again, providing us with yet one more nasty thrust to fade for better or worse.  Ordinarily, we would describe Friday’s action as a “key reversal” day:  a spike high followed by falling prices for the remainder of the session. In this case, however, the selloff reached its nadir an hour into the day, with the Dow Industrials down a measly 50 points.  At that time, via a bulletin to subscribers, we recommended covering half the short position with the E-Mini futures down around 12 points.  The $600 theoretical gain per contract allowed us to hold the short over the weekend without trepidation. At this point, we can say we shorted ‘a’ top, though not necessarily “The Top.”  We’ve recommended that subscribers hold at least one contract with a stop-loss above Friday’s highs, since the trade has home-run potential. Considering that we’re bucking the bullish tide, we’ll be happy to settle for just an extra base or two.  A cautionary note:  Trading futures is very risky, and it was probably just dumb luck that we caught the top.  Also, just because we succeeded this time does not mean we will ever succeed again.

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