Sunday, February 24, 2013

First Heavy Selling of 2013 - What Does It Mean Going Forward? Top or Pause?

Wall Street saw some significant selling this week - by far the strongest of the year - which has put the current rally in question.  Will the bulls bounce back quickly like they did in March of 2012 during a similar two-day selloff, or is this time different?  That's what traders have to try and figure out for the trading week ahead. 

In my last few posts, I have discussed how this rally has been a little weird in that there haven't been a high number of strong breakouts and therefore it has actually be a rather underwhelming rally underneath the surface.  That low number of breakouts might not be as big a deal if there is also a low number of breakdowns, and up until Wednesday that was the case.   However, on Wednesday, it became a big deal.

We saw by far the highest number of 4% or higher breakdowns on Wednesday with 351.  In fact, it was the highest since November 14, 2012.   When a market goes up weakly and then has a sudden breakdown like that, it is something you want to pay attention to closely.  There was some follow-through selling on Thursday as well.   The bounce we saw on Friday came on much weaker breadth than the previous two sessions of selling, which is also not good.

This selling, along with several other factors, has put my market timing model to a sell at -3 (-6 is lowest possible score).  I have to respect that and have been in cash except for a day trade since Wednesday. 
$BPYNA Indicator Turned Down

Looking at the indices, the Nasdaq had the biggest technical breakdown, but that is to be expected as it has been the lagging index this year.   Back in March of 2012, the Nasdaq had a similar two-day breakdown through its two short-term moving averages (shown below).

Nasdaq 2012

Comparing that situation to the current one (shown below), this one looks worse in my opinion.   If you look at 3/12, you'll notice that both of those sessions had a little bit of a bounce that took them off of their lows for the sessions.  We saw none of that on Wednesday and only a slight bounce off the lows on Thursday.  Volume was also much higher to the downside this week than it appears to be in 3/12.  The one similarity (at least after one day) is that in March, the bounce back came on low volume, but it didn't matter as the market kept going higher.  Because of this, perhaps Friday's weak volume on the bounce isn't a big deal. 

Current Nasdaq

The S&P had a breakdown this week as well but looking at the chart, the bounce seen on Friday looks more impressive than the one on the Nasdaq.   It almost completely took back its 9 day EMA and if the bulls follow-through on Monday, the sell-off may be very brief indeed like it was in 2012.

Charts from TC2000, Courtesy of Worden Brothers, Inc.

Overall, I think it is too early to know if we are topping out or have just hit a little bump in the road. My guess is that we will chop around here for a week or two in this area before the market decides what it wants to do.  Obviously, if the market moves right back up from here, taking back the losses from Wednesday and Thursday with ease, you have to go with it.  The selling we did see was heavy, however, and for now, I am playing cautious and remain in cash, although I am OK with taking some long setups if they trigger.

I was surprised that I found a good number of long setups in my scans this weekend and perhaps that bodes well going forward.  Maybe the bulls can pull off a similar fast recovery to March 2012.  I am keeping my list short however because I still think the selling on Wednesday and Thursday was significant and will take a little time to overcome.   Here are the names I will concentrate on this week.  I did NOT check earnings dates on these so please do your own due diligence.

Charts from TC2000, Courtesy of Worden Brothers, Inc.

For what it's worth, I saw very few if any short setups in my scans so I don't plan on looking at that side of the market yet.  If we are putting in some sort of a top here, it will likely take a few weeks to play out and there will be chances to get short.  I just don't see many right here. 

Good luck going forward.  It could be a tricky week with lots of fakeouts, so be careful.

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