Last week’s “whopping” 1.8% selloff on Wednesday shocked market players but was also blown way out of proportion.  The selloff also presented a nice little set-up to possibly scalp a few bucks out of the market over the next week or two.

Was Wednesday’s price action a precursor to some further weakness?  Or was it a one-inch pothole in the continued advance of this bull?

You choose the trade.  For you children of the 80’s, remember these books?  Hours of time wasted flipping back and forth as the protagonist.  The book reference is a good metaphor for the current state of the US stock markets.

As I see it, the price action is saying we’re in for another little move downward.  I suspect no more than 5% down to around 2,260 on the S&P 500.  In the chart below, I’ve circled and described what I think can happen.

The recovery on Thursday and Friday are just small snapback moves for the real players and market makers to close out certain positions with a more positive effect on P&Ls.  Then the rug get’s pulled out from the crowd in a panic-inducing 5% “real” selloff.

This is just what the price action is telling me.  I’ve arbitrarily assigned a probability and bet (regional banks) and hedged (volatility) accordingly based on nothing but my hunch.

Incidentally, my old friend in the credit department thinks there’s room for a little further downside in the larger market.  Below is the chart of the action of what the credit-friend thinks.  Notice the tight correlation between the S&P 500 and my credit-friend.  It’s only over 90% positive, so maybe it’s nothing.

Besides my friend in credit, there is the alarming increase in vol shorts.  Or maybe the crowd is right.

To scalp or not to scalp?  You choose your own trading adventure the next couple of weeks.