Stock Market Downtrend in Full Effect

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Nothing much has changed in the market. The Nasdaq Composite first started to show signs of distribution, or institutional selling, in late September. The tech index remains under distribution, and the market's technical picture continues to worsen. Oversold? Perhaps, but people were saying Apple was oversold at $650 and look where it is now.

A weak market eventually takes everything down with hit. Michael Kors (KORS) had been showing relative price strength but shares cratered 7.2% Thursday in big volume, giving up its 50-day simple moving average. Women's retailer Chico's FAS (CHS) had also been holding well, but it did the same thing, dropping 3.9% in fast trade. They may go on to form proper bases from here and eventually stage technical breakouts. What I know right now is that they are risky buys in the current unsettled market.

I am currently long Proshares Short QQQ (PSQ) with my Ultimate Growth Stocks model portfolio. I plan on staying in the position until the market gives me a signal that its trend might be ready to turn upward. Keep in mind, though, that significant technical damage has been done to the market. It will take time for new setups take shape.

At this point, I'm simply looking for the first day of a new rally attempt for the major averages. The percentage gain doesn't matter nor does the volume -- just an up day for the market. I won't pay much attention to what happens on the second or third day of the rally attempt, but on the fourth day and beyond, I'll look for a significant percentage gain (at least 1.5%) in the indices in higher volume. This would be a signal to start wading back into the market.

I learned to recognize a follow-through day during my years at Investor's Business Daily. They don't work all the time, but they have a pretty good success rate. At the very least, it's important to know when one occurs, because it's around the time when new leadership starts to make its presence felt.

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Read more trading ideas here.

[Editor's note: Shreve provides live market analysis every day on the TFNN radio network, hosting a daily call-in talk show -- Breakout Investing -- from 3-4 ET. You can listen live.]

3 Comments

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AndrewThrasher: Good point about waiting for confirmation on any rally attempt. It's also important (in my opinion) to recognize who is leading any advance we get (whenever it occurs), whether it's the more defensive sectors like health care or the higher beta sectors like technology in order to determine if the move has much potential of regaining what had been lost.
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Visitor - Ken Shreve: Open to the possibility of a tradable rally between now and the end of the year but outside of that, very cloudy. Bull mkt is 3+ years old so more and with indices only about 7% to 9% off recent highs, more selling is a distinct possibility.Will continue to favor cash and look for isolated shorting opportunies if selling persists. A lot of big winners out there that could still be in the early stages of downdrafts.
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KiraBrecht: Great analysis Ken. It sounds like you might be optimistic that the sell-off could be short-lived? Do you see potential that this turning point and top could mark the end of the cyclical bull market that began back in March 2009? If we are entering a new cyclical bear, how will you position your portfolio for that?
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About the Author

Ken Shreve got his start in the financial markets with Investor’s Business Daily (IBD). He spent over 10 years as an editor and columnist for IBD and its Web site Investors.com.  He also acted as the Investors.com "Market Wrap" anchor and presented IBD investing workshops and seminars nationwide. Shreve continues to provide market commentary on national radio and has appeared on CNBC.

He now writes Ultimate Growth Stocks, a weekly newsletter at TFNN and hosts Breakout Investing, Monday through Friday from 3-4 PT. Learn more at www.kenshreve.com.

Ken has also contributed to TheStreet, Realmoney.com and Realmoneypro.com and has been a regular contributor to Jim Cramer’s “Off the Charts” segment on Mad Money.

For more information about his growth stock newsletter and model portfolio, e-mail him at ken.shreve@yahoo.com

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