With the Nikkei (Japan Market) finally rebounding tonight, the bulls are breathing a sigh of relief before Wednesday’s open. Tuesday saw us break more support levels all the way down to the 100-day SMA before the dip-buyers went to work. After hitting the support level and looking very oversold, we bounced all the way up towards the highs of the day. 1275 was a key support level in the S&P 500 (SPX) that turned into resistance and we were able to close above that, giving some optimism to those who have been holding full positions during this downtrend. If you had been holding full positions the past few weeks, you have likely lost at least a little sleep these past few nights.
With the Nikkei showing some strength tonight, I would expect our markets to show some upside movement. Instead of buying in this, I will be looking to flip some positions into strength rather than build longer-term trades/positions. I’m well aware that QE provides additional support, but we are coming to the final 3 months of it with little reason for Bernanke to justify QE3 right away. Keeping that in the back of our minds while we watch the markets break key support levels sends enough warning signals that we need to be more cautious with preventing losses than trying to hit a homerun in this situation. Options expiration further clouds this week, but clarity will show itself soon enough and then we can confidently adjust our strategy towards making money. Minimizing losses is the utmost concern right now. Review the chart for further analysis on key levels to watch.
Outside of biotechnology, I have reduced positions in the early phases of this downtrend and have not rushed to reload any of them. Biotech continues to be a safe haven for me and I continue to like the risk/reward scenario for Exelixis (EXEL) with about 15% upside potential before a possible breakout for more gains and about a 5% downside risk before a stop loss is enacted. Due to QE, I have found it increasingly hard to short this market with any index shorts such as Ultrashort S&P 500 ETF (SDS). I’m a bull at heart and I am awaiting confirmation that the party is not over.
While the action has me sitting mostly on the sidelines and bored, we must keep our eyes peeled for opportunities. The cloudy path will clear up soon and we’ll know which path is the path of least resistance. Expect sector rotation, so we will have to be extra selective on what we buy.
CLICK HERE TO DISCUSS THE EXEL TRADE ON OUR BRAND NEW STOCK MARKET FORUM
As always, do your own homework to see if you agree. Good luck out there.
Mike
At the time of publication, Kudrna was Long EXEL but positions may change at any time.
