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I'm starting to hear more chatter (from perennial bulls) of a coming "Retest" as if it's a good thing.  Just like when I heard "Healthy Correction" which didn't feel that way for bulls when it was in progress.  Considering how we saw massive ETF outflows with the recent correction (quick trigger fingers) I continue to expect lower lows with the back drop of weaker sentiment.  Let's review a little...

In December bullish sentiment for the S&P was extreme with >80% bulls and I had recommended for a few months to have ~25% cash especially considering the S&P and every index had an unusually calm (no pullbacks) and strong year of performance.  In mid January, bullish sentiment hit record highs (96% bulls), momentum indicators on every time frame were at record highs (RSI's day, week, month, quarter, year >80%) and all we heard was a constant FOMO.  I dipped my toes in the water on the short side with a 5% AUM size with some OTM April puts with the SPY, QQQ, and IWM.  As a clarification, I size everything at inception of a trade at 2.5% or 5% of my total AUM.  It's a sizing formula that works for me and if I'm right it works out fine and if stopped out, my month doesn't get blown up.  And second note, I set stops when I do the trade at reasonable levels usually 5% away from the entry.  Sometimes tighter and occasionally wider depending on what I'm trading.  My job is not to be a hero but to maintain a discipline so I can make hay when the sun shines, survive storms and deliver on my performance goals.  On today's note, I am increasing short exposure and posting charts of 20+ S&P 500 stocks that are short candidates.  Each one will have a no questions asked stop out level and I would advise using your own risk tolerances which includes minimal sizing for each.  

On 2/8 and 2/9 at the lows on this recent correction, I laid out sufficient evidence that a bounce was likely and I sold those puts for a 4x gain.  More than I expected and I felt lucky.  My call was that the bounce would be a lower high (wave 2/B) bounce with the belief a lower low (from 2/9) was a probability.  One of the reasons was bullish sentiment dropped from 96% to 9% within a couple weeks and even Jake Bernstein (who runs the Daily Sentiment Index) told me he's seen it before but it's rare. My call was it would go back to the mid point at 50% (it hit 52%) and fade.  Earlier this week I said to ring the register on some recent gains off the lows.  I believe the bounce is likely complete at least for a majority of stocks.  

Just because sentiment gets oversold it doesn't equate to a buy signal as it can stay low for a period of time.  In August-September 2015 the market was hit hard and sentiment hit 5% but the S&P dropped another 200 handles with the low sentiment readings.  In January 2016 bullish sentiment hit 7% and finally bottomed 5 weeks later.  I pointed out how it was very likely a period of more than a week was likely for a bottom to develop.  Even when the market was dropping hard recently and with volatility was spiking, the fear wasn't really there.  A week later, CNBC was back to "What to buy now."   I know if you have a long term time horizon buying markets at the top is rewarded overtime and buying good companies at the top is rewarded most of the time.  But I'm different.  Back in Q3 2007 there was a thing Jim Cramer came up with called the "Four Horseman of Tech" Apple, Amazon, Google and Blackberry (for old timers - Research in Motion).  You were rewarded if you held 3/4 of them but you had to suffer through a +50% pullback on all of them.   50%... When that happens, to get back to even they have to go up 100%.  100%...   If you work at a hedge fund that has a risk management bone in their body, you can't and won't let anything drop more than 10%.  You're out of the game with many firms if you loose 5%.  I believe we are in a period where having the flexibility and discipline to trade both long and short (with tight stops and proper sizing) as well to have a larger cash percentage will be prudent.  

Lastly, I am watching for support the VWAP levels calculated from 2/9 3:30pm lows.  SPY 268.78, QQQ 162.45, IWM 150.60, DIA 248.55. Breaking these levels could see an acceleration in selling.  

Notable:

• The most important index charts I'm watching today and US sentiment
  
• Short Candidates from within the S&P 500
  
• Crude Update
  
• Lumber - Extreme sentiment combined with upside exhaustion
  
• DeMark Screens
  

SPX bullish sentiment is at 25%.  It hit 96% in January (a record), then dropped to 9% in February, bounced to 52% and now is at 25%.  THIS is why it is so vital to look at this everyday

Nasdaq bullish sentiment is at 31%

German DAX also lost the upside green Setup and has a price flip down

UK FTSE also lost the upside Setup and has a  price flip down

Italy too

And the Euro Stoxx 600

On all of these short candidates, there are several attributes of the screening process.  Some have already dropped into a downside wave pattern and some have recent upside exhaustion signals.  There are couple that should move a little higher to achieve an upside exhaustion too.

I try to avoid "The Obvious" when it comes to shorting and that includes some with crowded shorts or those that attract shorts whenever there is a down move.  However on occasion I will break the "obvious" rule when there is a stock that I can live with some of the volatility knowing you just have to be there.  There are no obvious shorts in this list.

AAPL had several upside exhaustion signals last quarter and has broken down.  The bounce is likely complete as there is a downside red Countdown on day 4 of 13 and take a look at the last 3 days bars - they closed well off the highs and on the lows suggesting supply is entering.  182 stop

ADBE has been a monster stock but also one that has seen good inflection after upside exhaustion signals.  211 stop

GOOGL has some recent upside exhaustion signals with a gap down after earnings.  There is a downside wave 3 price objective of 896.  With wave price objectives, they are calculated by taking the difference between the top and the bottom of the first wave down multiplied by 1.618 and subtracted from the top.  They serve as a guide and may or may not be achieved.  The bigger issue is the wave pattern.  1190 stop

CSCO just had a good earnings report gapped up with an upside exhaustion (catching shorts off sides where they likely covered).  This could fill the gap to the downside.  46.00 stop

LMT moved quickly off the February lows and had another upside exhaustion.  It's extended now.  375 stop

MMM had a steep drop, bounced and failed at the 50 day moving average.  There is a downside wave 3 price objective of 200.80.  253 stop

CAT also had a steep drop, bounced and looks to be failing at the 50 day.  There is also besides the recent upside daily exhaustion signals (which finally worked) a weekly AND monthly upside signals too.  170 stop

X US Steel spiked and had a new upside exhaustion signal and now is off the highs.  Just as a note the recent high in January was the top of wave 5 and the drop in February was the first down wave BUT with the new high the wave 5 to the upside continues and the downside wave is null.  

LH bounced and had an upside exhaustion and there is a downside wave pattern potentially in play.  182 stop - a little tighter

GRMN  had a nice upside exhaustion followed by a gap lower.  This has support between 58-60 and if this can break, there is an air pocket to 50.  68 stop

ORLY has a downside wave 3 target at 226.38 and has a lot of support at 240.  If that breaks then this could go all the way back to 200.  265 stop

DIS had upside exhaustion in December (right when Star Wars came out) and fell in February.  The bounce has found resistance under the 50 day (blue line) and there's a downside red Countdown but also a green Setup in play.  111 stop.  

JPM is all about threading the needle.  This is on day 12/13 but has to move just a little higher (above the 8th red bar - yes I know it's hidden) for the exhaustion 13.  If a new high happens the 2/B reverts to the continuation of 5th wave which had a price objective of 110.02.  120 stop

C Citi has actually been one that I have liked on the long side for a while but feel the downside wave pattern could be stronger.  82 stop

BRK/B This weekend is when Berkshire's Buffett releases his yearly letter and people will be reading it for all sorts of value investing wisdom.  Enjoy it.  I like this short with the wave pattern as well all of the recent upside exhaustion signals.  212 stop

MS also has bounced very strong like some of the others.  59 stop

MA is a beast of a stock but there's a recent upside exhaustion that I believe could see this back at the 50 day moving average or lower.  (red line)  180 stop

MCO has a cluster of some upside exhaustion - pink Combo, red Sequential and green Setup.  174 stop

COF had some upside clustering exhaustion signals at the recent highs, dropped and bounced to under the 50 day.  There is a downside wave 3 price objective of 83.20.  106 stop

Crude bullish sentiment is at 52% and could be making a lower high after the recent drop and bounce.  Crude seasonality is good in February-June but I've found that when it's run up in Q4 historically not good seasonality, the spring disappoints the bulls. Lastly remember speculators are positioned very bullish and that's not a great sign either.

WTI Crude futures had a nice upside exhaustion that worked better than the last one, dropped, bounced to the 50 day and now has a downside Countdown on day 3 of 13 but there's an upside green Setup on day 5 of 9 so I'll be monitoring this close.

Lumber bullish sentiment is at 95% for the 3rd day in a row.  It's been strong no doubt

Lumber futures had an upside exhaustion yesterday and combined with the extreme bullish sentiment I would be a seller

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