Markets rallied over 1% last night after favorable services data and an upgrade on big banks by who else but Goldman Sachs (Of course! Conspiracy theorists come out in full force!) For me, the development that really moved the market today was the weaker US dollar. The 50-day Moving Average and falling channel trendline proved formidable support for the S&P 500. Check out my previous post on other support levels on the index. For the model portfolio, I put in a half-size short position on JWN going into Thursday's retail numbers, and I also bought some GOL. I also took a small 2% loss on my EEM short position (size is 5% of fund) and decided to cover it. I didn't do too well last night (fund down 1.65%, S&P 500 up 1.49%) given I started out the fund with some SDS and US dollar calls. But I'm willing to hold my S&P 500 short and dollar long positions for the short-to-medium-term and I'll tell you why.


I don't know if you've heard about IBD base count, but on top of the bearish MACD divergence on the S&P 500, we are already at the 3rd base with regards to the index on a daily chart. This means that breakouts on the upside are less likely given that the easy money part of the rally has already gone. As a rule, I only buy 1st and 2nd bases. I could buy 3rd bases on occasion, but I would be quicker to take profits and at this point, I really wouldn't risk it given the headwinds in the economy and how far we've come from the bottom. We are more likely to experience volatility, but the bias is towards weakness in the short-term as we need a healthy correction to the run-up. If you want to read more about "base-counting", go to the article at IBD. The article talks about 20% run-up between bases, but this is for stocks. I adjusted this to 15% since its harder for an index to run that far.

I would like to stress however that my short positions are for the short-to-medium-term only, as on the weekly chart of the S&P 500 we have not even formed the second base yet. So I believe the longer-term bull market thesis is still intact.