It was a fitting end to a week that saw emotions pull dramatically at first to the bear side then to the bull side before the week came to end. Today, like yesterday, saw the market selloff early on only to see the bulls pull out an amazing display of confidence as indexes reversed and closed in the green on both Thursday and Friday’s trading session. The same market action that was seen on Thursday and Friday was also seen this week during the past five session.

Stocks started the week on a very weak note, sending me from 11 small longs to 5 smaller longs as some recent stocks that I went long gave me signals that they were not ready to blast off and make runs higher quickly. But there was a slight hint that the turn down might not last long. What was that hint? It was the fact that I could only generate ONE NEW short position during the first three days of this very weak week. The Nasdaq fell 5.2% but I only had ONE NEW short that setup in what I consider to be a very high reward/low risk pattern.

After these three ugly sessions, we saw the bullish reversals on Thursday and Friday, that helped confirm why we only had ONE new short and not 10 new short positions during those three days. If the market was ready to crack wide open IMMEDIATELY we probably would have had at least a new short a day. However, that isn’t going to happen when so many stocks are so far extended from their 200 day moving average.

I guess I forgot how extended stocks were on the downside until I noticed in every single one of my short scans (four of them) every single day this week showed the SAME THING. That is that every stock that still has a big previous uptrend to give back from the 02-07 rally is currently too far extended from their 200 day moving averages to be safe shorts. Most of these stocks have broken down and look ugly. But they will not be shorts until they can catch back up with their 200 day moving averages.

This means that we could have a few weeks to a few months where stocks rally. Whatever stock sets up and breaks out during that time, I will be more than happy to get long and take some profits on the way up, if we get this rally. However, I honestly believe the more prudent and profitable trade will be what follows the uptrend that we could be in store for. That will be the resulting failure of prices around either key resistance points in the index charts or their 200 day moving averages. Where the index 200 DMA’s are most stocks with excellent possible setups for future shorts are also.

Now make no mistake about my stance on the market. I am NOT a perma-bear. I only follow the market’s overall trend as that is what has proven to make the big money time-after-time. The smart investor knows that having a bearish bias is foolish because the market trends higher most of the time historically and you are never going to find a short that can produce a 2,390% gain in nine months like TASR did in 2003 for me. The best you will get with a short is 99.999%–you can not do better than this. So obviously the smart money is going to be very bullish in uptrends with volume and bullish in uptrends without volume.

Therefore, I assume we are only going to have a counter-trend rally (ie…bear market rally) that will eventually die out.