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Dow to Drop 1000 Points!

The indexes have been on a fantastic run this week and for the most part, I enjoyed riding IWM up, getting long at 113.49. I did get stopped out before the Fed announcement, but that was because my stop was very tight. I am not a big fan of holding either side when something allows the algo's to wipe out both sides before making the real move.

Yesterday I started on the short side of IWM at5 115.43 and will use strength to build a position using 1/3 positions. Once filled I will manage the trade. Most of the time though, I never have a full position running. If I do, it means I was wrong on my directional thinking.

Why am I looking short? Well the first reason is, the small caps (IWM is all I trade using options) has been the weakest index. The SPX and Dow have been the leaders and the Dow is in a very bearish pattern, which is looking for a 1000+ drop to start in the coming days.

Dow Daily Chart
Larger Image

If the leader of the current rally (the Dow) is in a very bearish pattern, I doubt we will see the weakest index (Russell 2000) break away and suddenly become strong. My thinking and reasoning for shorting the Russell 2000 (IWM) if the strongest indexes roll over like I expect them to, downside momentum will pick up steam for the small caps.

Woody Dorsey of Sentimenttiming.com has been looking at 09/18-09/24 as a turn date for the indexes. Being it appears we are heading higher into these turn dates, a reversal to the downside would be expected. He bases his turn dates off of behavioral trading and investor sentiment.

So even with the indexes pretty strong this week, I am expecting a reversal to the downside that could start as soon as Friday 09/19/14 (the Dow was +80 when I started typing this) My separate sentiment data is looking for at the least, a $1-$3 drop on IWM. We are currently short (10) put contracts using the Week 1 October 115 puts

Have a great weekend and let's see what plays out-but be careful, complacency is very high right now.

 

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