Well, it appears we are getting our pullback as we had expected would happen.  We are certainly grateful that we were generously hedged as indicated in last week’s blog.  This may have taken others as a surprise but we were ready for it.  Our positions are now bearishly delta.  The task is now to determine likely targets for the move.  It is difficult to accurately determine the magnitude and duration of a move such as this.  The place to start is to find levels of confluence of indicators.  These are areas where several data points line up to tell us a similar story.  That does not mean that the market is going to co-operate.  However, many times it does. 

It is healthy that we have a pullback.  We are longer term bullish, but this retracement is needed.  We will simply follow it and make money.  I am reminded of the analogy that the market goes up like an escalator and down like an elevator.  The last three trading days certainly support that truism. 

As the market approaches target levels, we will begin to take close note of how it reacts at those key levels.  Typically, you will see the indexes put in narrower range trading days with less volume at support.  Don’t be fooled.  The market can do this several times on the way down.  Look for the market to begin to stall and trade sideways.  It is at times like this when you may be tempted to remove your hedge only to be whipsawed.  The safest approach is to wait for upside confirmation before determining that the market has found a bottom.  You may miss the exact turn, but who cares.  Do not underestimate the market’s ability to follow through.  Momentum can be a freight train and you don’t want to step in front of it.  Just hop on board and ride it to the end of the line.

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