The nature of Friday's sell-off, coming as it did after a morning rally and House passage of the bailout bill, indicates we have more downside before we hit bottom. At the same time, oversold conditions make it difficult to find good short entries. To review a few charts:

- IWM broke decisively below the January and March lows, although with slightly below average volume.



- QQQQ has seen a steep drop and is now very oversold.



All of the index charts tell a similar story. Given the market conditions, and lack of panic so far, we could simply continue downward until we see capitulation. However, I am expecting a rally sometimes soon, perhaps driven by some Fed action on interest rates, or even a coordinated action between central banks. My strategy here is to remain heavy in cash and to knock out some day trades until the market provides advantageous setups either long or short. I am currently holding smaller short positions in ENER, IIVI, ILMN, PTNR, and SMTS. I also see good long term shorting opportunities in airlines, homebuilders, financials, and a number of consumer sector stocks. Within these sectors, I have been gradually accumulating puts, which I intend to hold for 1-3 months, or until I see the technical signs of a bottom.

My long term thesis is that credit issues will continue, and the crisis will start to manifest itself more clearly in the broader economy. If we get a good-sized bounce prior to the bulk of quarterly earnings reports, many charts will be setup for advantageous short sales.

Should we continue lower in the near term, here are a couple of charts that still look decent on the short side:

- ENER: This one made my day on Friday, as I was adding short during the morning rally. Price rose to just under the 50 day moving average, then fell to close red on increasing volume.