Sunday, January 26, 2014

Friday Was Bad, But It Could Get Worse

Let's state the obvious: Friday was bad.   All you have to do is look at the chart to know that it was bad. 

In terms of breadth, there were 523 4% or higher breakdowns Friday on heavier volume.   That was the highest number we've seen since June 20, 2013, when we 628 breakdowns.  That number (528) confirms what the chart of the Nasdaq seems to show - Friday's action was likely a gamechanger. 

The bad news when looking at the numbers above is that back in June, the market was already oversold at that point and didn't have much further to fall.  It did sell off two more days following the June 20 selloff, but compared to where we are now, it was much worse when the selloff occured.  

This is strictly a guess, but I think we will likely see some more severe selling next week and will get a relief bounce only when we get to very oversold conditions.   That would include the T2106 under at least -200.   We are not near that yet, even after Friday. 

Another indicator that I created measures the percentage below the 9 day EMA an index is, and throughout 2013, 2% below or more was the magic area where relief bounces/grind ups started.   A number that might take us to those levels would be a move to around 4000 on the Nasdaq over the next two or three days.    

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

Again, that is strictly a guess but if we would get there, I would look at buying some things for one or two day swing trades.   Right now I am in cash except for one short position.   A pullback into that 4000 level would give the Nasdaq a five percent correction, which still doesn't count as an intermediate-term pullback.   Therefore, there is a good chance that further selling could come after a relief bounce.  

Going forward, I would be very careful making any trades for the next two or three days until the odds are in your favor.   If we get very oversold and to levels that worked for bounces last year, then you may start getting an edge.   Any trades I make will be very short-term going forward because I think that's the type of market we now have.   The best case scenario from here is probably a month or two of sideways chop.   The worse case is further selling that could give us a 10-15% long overdue correction.  Either one is not desirable for swing trading, so plan accordingly.

If nothing else, we should see clearly over the next week if the "QE Infinity" effect is still in play in 2014.   Good luck.

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