Traders took every piece of good news today as an excuse to hit the sell button, with the red ink going into the close run on increasing volume, marking today the second distribution day out of the last three (a couple shy of the four or five needed to trigger a sell signal from the very important confirming indicator, the accumulation/distribution profile.)
Officially, the Dow Industrials fell 1.1% on NYSE volume of 5.5 billion shares, while the NASDAQ dropped 1.3% on 2.4 billion. The leadership profile remains positive, with 275 stocks making new highs versus 47 making new lows.
The short term momentum oscillators have turned negative, non-confirming the bullish stance of the AlphaKing Trading Indicator. We have a new trade below to exit one of our stocks about to trigger a sell signal.
The market remains on the cusp on a massive decision, with last Friday pointing to a bear win, while yesterday pointed to a bull victory, while today sets up a potential killer blow victory for the bears.
Once again the trend/momentum dilemma is held hostage to the presence or absence of a follow through to today’s set up sell-off, as all major stock indexes closed smack on critically important support, and there is nothing between here and the long way down there. The reaction to news is what matters in regards to the future trend, rather than the news itself, and every piece of good news over the past couple of days has seen a negative reaction. Intel and IBM both posted great numbers, only to see their stocks fall hard. Then today the market sold off in the face of a very significant win for the Massachusetts senate seat by the republicans that should have been great news for the stock market (as it loves gridlock,) yet the stock market sold off. That suggests that traders are using any excuse to sell, and a stock market that cannot rally in the face of good news is seriously in danger of landing in out-right sell mode.
Please note the trend has not changed yet. The bulls and bears are simply pushing this way and that trying to pull off a breakout or breakdown, with the market essentially going sideways till the victor is declared. The potential for a big move is huge, and risk of a harsh trend reversal remains extreme, and to add to all this worry we have China threatening to nix its investment and economic bubbles by raising interest rates and by pulling back credit. Gold and silver have moved into the crash position, while the US dollar looks like it wants to repeat what the stock indexes did last March - go melt-up to crush the shorts.
The US stock indexes find themselves sitting on critically important trend lines drawn from the March, 2009, lows, and that is what led to the late day rebound rally attempt today. If those trend lines get taken out then expect a big and fast downside follow through. And such a follow through would likely lead to a very rapid retest of the 200 day moving averages (purple lines in the charts below,) and potentially open the door to a resumption of the bear market.
The bulls must hold current levels to keep the uptrend intact, and any success there by the bulls that leads to new highs for the rally off the March low would put Dow 12,000 very much back on the investment table. Follow through is the name of the technical game, and any two or three day run would confirm the direction of the next 20% move, and we expect that target to be hit very quickly once the breakout or breakdown lands for real.
So buckle up, lads, as the next few days are going to be very interesting, and truly scary for those destined to be caught on the wrong side. We will wait for our trend indicators to turn negative before acting. Once they turn, we will be aggressive traders on the short side. So for now cautiously ½ long/½ cash is the way to go as we await a bull/bear victor to be declared.
401K investors should have ½ of their portfolio invested in a stock index, or aggressive growth, mutual fund, with the other ½ remaining in a money market fund.
The Index portfolio is ½ invested in QQQQ with the other ½ remaining in cash.
Kevin Wilde, Chief Trading Strategist AlphaKing.com.
