How much more downside from here?

Weakening PMI!

Italian-Bund spreads are blowing out!

Equity markets have been selling off, first on debt ceiling concerns, then worries over a weakening US economy and renewed financial pressures in Europe. For traders, the question has to be is it too late to get short?


Markets are very oversold
Despite these concerns, the markets are very oversold. My favorite overbought/oversold indicator is showing an oversold reading.

From past experience, a rally of this indicator over the 0.50 level after showing an oversold reading is good for an oversold bounce of 1-3 weeks. At the same time, the SPX is now at the bottom of a trading range, with the RSI showing an oversold reading.

Over at ZorTrades, his facetiously titled post We are crashing tomorrow confirms the oversold conditions that I also see and he is tactically calling for a short-term bounce:

We are 25% invested right now in $UDOW and $TNA- 75% CASH. We are not looking for new highs, or betting that QE3, 4, 5, or 6 is going to happen. We are looking for a dead cat bounce, one that could rally the indices 3-5%. This is just a trade, not a macro, micro, whatever call. Just a trade.

My inner trader is waiting for the signs of a rally before jumping on board the bull trade and he believes that, tactically speaking, downside risk is likely to be limited at these levels. My inner investor, on the other hand, has become very defensive and is wondering whether he should sell more of his holdings into strength and perhaps even short the market should it move to higher levels.