Not much love on Wall Street this Valentine's Day, and not a good way to follow up a follow-through day either, as the markets started flat but quickly began to sell off and stayed lower throughout the rest of the day. It is not that big a deal in my opinion that we went down today – the big issue is with the volume. If today’s loss was on lower volume than yesterday, I would have no problem. You have to remember that we were pretty much straight up for the last five days, so a pullback is to be expected. However, big up days on low volume followed by a down day on higher volume is the exact opposite of what you want to see if you are bullish. A rally attempt that is already questionable to start with does not need a distribution day immediately after it starts. I am reminded of a passage from William O’Neil’s book in which he discusses follow-through days, and says basically, it just takes one or two distribution days after a follow-through day for it to fail, and now we already have one.
I am willing to give this rally attempt a few more days to prove itself. Even if the market does pull back more, I will remain open to going long as long as volume is lower. It would actually be better for long entries to pullback a bit. But if we get any more heavy-volume selling like today, I will be looking to put shorts back on, some of which I almost took today. I am still open to either side of the market right now, but the next few days should tilt me more to one side than the other. If this turns out to indeed be a failed, faulty follow-through day, then it is also an optimum point for entering shorts. I am looking at several - SGR and SCHN are at the top of my list - and may start positions tomorrow depending on how we open. The downtrend line is still intact on the Dow and S&P, and the Naz spent a total of one day above its downtrend line before falling back under today. Be careful out there and pay close attention the next day or so. I believe it will tell us a lot. Good luck.