What felt like the early sparring portion of a championship bout is now turning in favor of the bears once again on the cards. Investors seemed indecisive in the morning about whether to start piecing back into the market or perhaps waiting for a deeper correction, but as the morning wore on and no bounce came, sellers took control once again. The digestive action early was not surprising after yesterday’s steep decline, and active traders will surely now wait for a deeper correction to start piecing back into this market. The lack of a bounce today is certainly a bearish tell.
Although the market has not been under sustained pressure basically at all since the start of the recent rally in September, that doesn’t mean it can’t happen. As important as it is not to fight the tape, it is equally important not to develop a sense of hubris in regards to trading the market. The market can go down two days in a row, believe it or not. The way the market shrugged off the Egypt unrest was a sign of its strength, but now with protests threatening stability in the entire oil-rich region, investors are rightly exercising a degree of caution.
The area to look to start buying back into this market aggressively is at the 50-day moving average, says Scott Redler of T3Live.com, which currently sits at around 1286 on the S&P. A drop to that level would give us a solid 4% correction to work off the oversold condition of this market. These type of 3-5% corrections are very attractive to active traders looking to get involved at lower prices and lower levels of risk. One thing to keep an eye on, though, is the situation in the Middle East. Dissidents in Oil-rich Saudi Arabia have reportedly organized protests over the next couple of weeks, and escalating conflicts there would seemingly shake the market further.
This bearish action is shaking the tree, and we will be standing on the ground to grab the easy pickings at the right time. You don’t have to be first to the party to have a good time, you just need to be there for when it really gets going. If you try to get there too early, you might not have the stomach to stick around and be at your best for the good part. If you’re looking to hold longs, perhaps hedge by shorting an index ETF or buying some VXX calls. If you’re an active trader, identify weak stocks to short for now with one eye on the strong ones to buy later.
One sector that we will keep a close eye on, as always, is the agricultural sector. Ag stocks continue to be weak today after being dumped on heavy volume over the last couple days. The one we will be watching closest is PotashCorp./Saskatchewan (POT). The buy area on POT is at the 50-day moving average around $165 (and are getting the flush right now).
Gold continues to edge back toward previous highs, while silver is stronger, once again making new highs.
*DISCLOSURE: Scott Redler is long GLD; Short SPY.
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