Sunday, October 21, 2012

Could Bounce A Bit, But Certainly Defense is Name of the Game For Now

So much for that "push" from the bulls, huh?   Last week I was cautiously bullish because I saw some good signs but any hope that the bulls had was quickly nixed based on Thursday and Friday's awful sessions.  Thursday saw the Nasdaq break below its fifty day moving average on much heavier volume and Friday brought a nasty selloff of over 2% on the heaviest downside volume since May 18th (which likely was an options expiration day anyway).   The Nasdaq is now up to six or seven distribution days in the last twenty sessions depending on what you count as distribution, but either number is very bad and typically leads to further correction.  That looks like what is coming.

Nasdaq

The Russell 2000 looks just slightly better than the Nasdaq but that's like saying Roseanne Barr is slightly more attractive than Rosie O'Donnell.   Both are still very ugly and so are the charts of the two most important indexes in my opinion when looking for furture market strength. 

Russell 2000

The S&P is holding up better than the other two because of relative strength in financials, homebuilders, and some commodity areas (namely coal).   It is still holding the breakout area of 1422 from early September but if that breaks, watch out.

S&P 500

I made a mistake getting away from my shorts early in the week because in hindsight, the breadth numbers I follow never went anywhere near bullish.   In fact, they've been bearish since September 26 and it will take several 1-2% positive sessions on heavier volume for this breadth ratio to push higher.   I didn't end up getting hurt terribly with my few longs but my account is off about 4% from highs in early October.   Right now I am in cash and will likely stay there for perhaps a while.


Looking ahead, I am kind of expecting a bounce early in the week simply because everyone now seems to be fully expecting a correction.  It's hard not to with the action we saw late last week, but the market always likes to screw with traders so a bounce that could set up a bear flag is a good possibility in my mind early this week.  I don't plan on shorting until a bounce comes but don't feel real comfortable about swinging some longs here, so like I said above, cash it likely is.

My main watchlist has been almost wiped out over the past week but there are a few remaining pockets of strength in this market.  Homebuilders remain very strong and were barely hit on Friday all things considered.   This is an area to watch going forward for both strength and weakness.  When they start coming for the last of the leaders, it is a sign that a true, meaningful correction is taking place.

Silver stood out to me as a sector to watch here because I saw several silver names that seemed to be holding up better than the commodity.   Just something to keep an eye on going forward.

Financials also continue to act well overall with BAC being the leader.  If this gets hit...well, another big warning sign going forward.

BAC
Charts from TC2000, Courtesy of Worden Brothers, Inc.

Going forward this week, the market certainly flashed some major warning signs the past and you must respect them.  Although I think we will see a relief bounce attempt early in the week, defense is the name of the game until the market proves it's ready to move higher.  You have to look for several heavier volume up sessions - if they don't come, continue to play defense.   Oh yeah - we still have lots of earnings this week so that can always thrown a wrench into things (see GOOG, Thursday, 12:00 ish).   Good luck - looks like we all need some right now.



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