On the surface, yesterday's large percentage gains of the main stock market indexes may seem encouraging, or even impressive, to the casual observer. However, it is important to keep yesterday's bounce in perspective with the degree of the overall decline in the latter half of September and throughout the month of October. For example, PowerShares QQQ Trust ($QQQ), a popular ETF proxy for the Nasdaq 100 Index, fell 7.8% from its September high down to its October low (based on closing prices). Therefore, yesterday's 1.7% rally in QQQ means the Nasdaq 100 is still sitting within the bottom 25% of its peak to trough range over the past six weeks. Put another way, yesterday's stock market advance was technically nothing more than an overdue bounce off the lows. This, of course, does not mean yesterday's rally could not go on to be the start of an eventual upside trend reversal, but one mere day of price action, no matter how bullish or bearish, does not make a new trend.

Overall, our near-term plan remains the same as we've mentioned several times over the past week, which is to view any significant market bounce as an opportunity to initiate new short positions on the weakest ETFs as they approach new overhead resistance levels. One of the ETFs we are monitoring for an ideal short sale entry point is indeed QQQ. On the annotated daily chart of QQQ below, notice that yesterday's rally followed an "undercut" of major support of its 200–day moving average, which provided the perfect technical excuse for a bounce. Our ideal zone for selling short QQQ on a bounce (or buying an inversely correlated "short ETF") is labeled on the following chart:



Another ETF we have recently mentioned as a potential short sale candidate on a bounce is iShares Nasdaq Biotechnology ($IBB). A former ETF market leader throughout most of 2012, IBB has reversed sharply and is now showing major relative weakness to the broad market. On the chart below, notice that IBB continued selling off to new lows throughout the last three days of October, even though the Nasdaq was only trading in a sideways range during the same period. It finally bounced yesterday, but we would ideally like to see IBB rally substantially higher before selling short (or buying the associated inverse ETF) because this would provide us with a more positive reward to risk ratio on the trade:



Although the charts of QQQ and IBB show the most ideal price levels for selling short, there is obviously no way of knowing if the market will cooperate with us. Given the kind of weakness that we've seen lately, including continued relative weakness in key large-cap tech stocks like Apple ($AAPL), it would not be surprising if there is minimal upside follow-through on yesterday's bounce. But even if there are further gains to be had in the coming days, and these ETFs manage to bounce into our target area for selling short, we still will not blindly initiate new short positions the instant these ETFs first touch resistance. Rather, we then need to wait for the proper signal to sell short, such as a bearish reversal candle or a significant opening gap down that follows any bounce into resistance. In case you missed it, be sure to check out this 3-minute trading education video we posted on our trading blog yesterday, as it explains why it is crucial to have patience to wait for proper entry points when selling short.

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.