The scenario I had depicted on Monday happened to be the right one: Monday's mini rally was enough to dig out the market's from their oversold position in order to allow another drop on Tuesday (I shared this point of view with Mike from the Sovereign Speculator). Incidentally, that drop happened overnight and the markets opened markedly lower this Tuesday, and dropped nicely to a position were they were extremely oversold.
Today's lows were first crossed in August 2009. Can you believe it? During the month of May-2010 alone, the S&P 500 erased almost 10 months worth of gains. I like this expression Mike taught me: "bears are quicker than old bulls".
I was expecting a bounce so I started closing some shorts before the market opened, and about the bottom during US market hours. At which point I loaded up on a bunch calls on the Russell 2000 (which was down about 4% at that time!) and bought more euros.
Why did I do this instead of just closing my shorts? Because you can never now when and where the bottom is going to be, and that if a short term market bounce was to materialize, a bunch calls would be the perfect instrument for that: if there's no bounce and the markets drop even more, you make a lot of money, if the markets rally strongly, you don't lose any money, and if the market stays around the same levels, well, you have paid 1-2% insurance premium. Pretty good deal to me. Unfortunately, buying at this bottom meant that I paid a very high price for volatility, but hey, what do you expect?
Moreover, I took the opportunity given by the market to load up some more cheap Euros, and thought that if the markets were to rebound, the Euro would lead that bounce, which it did nicely:
I hope to have more time to post about interesting things instead of the markets ;-)