A Short Term Short
Context is Everything
“Honey, is that Jim? Why is he stumbling down the street? He looks drunk. Pull over, let’s check on him.”
“Hey Jim, are you okay?” Sally asked.
“I’m good, Sally. We’re just filming a skit for our theater class,” Jim said, pointing to the drone camera overhead.
“Oh… great! I thought you might be in trouble for a minute.” Sally replied
Context is everything. Imagine if Sally hadn’t stopped to ask Jim what he was doing and just assumed he was drunk, stumbling down the street. Not only would she be a lousy friend, but she’d also be completely misreading the situation because she didn’t have the full context.
So, for context: it’s a Bull Market, and I’m net long in my primary account. In bull markets, long ideas generally outperform short ones, but sometimes a short setup with a well-defined risk/reward profile is worth taking a swing at.
3 Reasons The Rally Looks Over
The Nasdaq 100 experienced ~16% drawdown over 18 days from late July into early August—classic “escalator up, elevator down” action. Since then, we’ve seen a constructive rebound. But when I dive into the details of price, momentum, and breadth, I’m seeing a pretty compelling setup to get short.
1.) Price – The rally off the August lows is impressive, but in the short term, there are some indecisive candles forming below the July 17th gap down. If I wanted to add long exposure, it wouldn’t be below this overhead supply.
2.) RSI (Momentum) – Since the July high, RSI has failed to climb back above 60 to reassert bullish control. Currently, it’s curling lower before reaching 60, the same level it failed at during the previous rally.
3.) % Above a 50 Day Moving Average (Breadth) – The bottom panel shows the percentage of Nasdaq 100 components trading above their 50-day moving average. It’s been a reliable signal of exhaustion when this percentage breaks above then drops back below 70%.
The Short Term Short
The Nasdaq 100 presents an intriguing tactical short opportunity against the July 17th gap down around $495. It checks all the boxes I mentioned earlier—price, momentum, breadth—and most importantly, it offers well-defined risk. Sprinkle in some seasonal headwinds and the inevitable election chaos, and you’ve got a pretty solid poker hand.
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Cheers,
Larry
