Cautiously Short

I exited my remaining index long positions this morning and entered some partial index short positions. While the upward correction could be over, I think this pattern needs more time to work itself over to the declining upper channel line so that the time of wave 4 is closer to that of wave 2. That doesn't have to be the case, but it would align this wave count with my cycle analysis.

So far during the last 3 1/2 weeks I have only been stopped out of one short stock position. I credit this accomplishment to using Marketclub's 3 week rule and some discretion. Using long index positions to hedge my short stock positions, I experienced only a modest drawdown while waiting for the resumption of the downtrend. When the opportunity presented itself along the way I took partial profits on short positions. I will be fully short the indexes once we get a clear signal that the downtrend is underway, which may take a few more days.

I don't expect this 5th wave thrust to last very long. There are too many cyclical and seasonal pressures building that should lead to another sharp rally in December and possibly into January. Unless I have a large cushion, I will probably exit any remaining short positions at the conclusion of this next leg down and look to re-enter after the new year as the year-end rally should be the largest since March 08.

One thing to keep in mind about 5th waves. The end usually comes unexpectedly. If you are not already short, or not comfortable with discretionary exits from short term positions, you should probably keep it light on the short side on this 5th wave as most trend following rules will have you give back all of your profits or leave you with a loss before you know what's happened in this market condition.