It’s a great market. Hanging tough day after day. Give credit to the sustainability of this beast. However, you have to start recognizing when things are far more risky and dangerous. This is that time.
This does not mean the S&P 500 can not grind up another 1-2%, but the risk of a strong correction is upon us, with sentiment issues being such as they are, along with overbought daily, and especially weekly, index charts. We are slowly starting to see some signs. Some leading high pole stocks such as Verizon Communications Inc. (VZ) and AT&T, Inc. (T) along with Polaris Industries, Inc. (PII), AutoZone Inc. (AZO) and O’Reilly Automotive Inc. (ORLY) have had their nasty corrections begin ahead of the general market. If you look at just these five stocks you’ll see how fast things can start, and once it has, how fast they can fall. These stocks are full and so is the market.
The market quietly started to pull back yesterday, but as normal behavior would provide, the gap at 1257-1262 stopped the initial move lower. We will have to lose 1257 for the heavier selling to kick in. That will take time. You can’t time it. You only know the risk is high. The major point here being we can grind up, but that’s about it. Being heavily involved to the up side with new plays doesn’t make too much sense, so be prepared for that. The big picture market is still very bullish. Don’t mistake a correction for the end of the bull market. It’s just that for a while here. Things won’t be easy on the long side, but the market is NOT going to fall apart. Weakness can be bought.
What makes a correction more imminent now is the reality of those weekly charts. They have now confirmed the daily charts in to the world of 70 RSI overbought conditions. Once the daily and weekly charts confirm each other the correction is more likely to begin shortly. Historically it’s never different, and thus, it’s not likely to be so this time. The RSI’s, once at 70 on the weekly charts, never hold up too much longer. They have gotten as high as the upper 70’s once, but normally it’s anywhere from 69-73 when it gets started, and that’s about where we are now. It can get higher, like I just said, and thus, the reason for the possibility of moving a bit higher from here, but it’s unlikely to be a rocket-ride higher.
Now, I can’t say with 100% certainty about anything in this crazy game, thus it’s always possible the weekly charts will need 80 RSI readings before the bigger correction begins. That said, it’s extremely unlikely that will be the case since historically that basically never takes place. No matter how you look at it, the market is flashing the big red flag here folks within a bigger picture bull market. Respect what history tells us should take place shortly.
How does one deal with this market?
Your job is not to short if that’s your goal, until you see the market lose the gap, back test it, and fail. Because this is only a correction and not a true sell signal, if you do short, you want to keep it very light and without high risk beta plays. The whipsaw within a correction can play on you mentally. Just keep it light on the short side and wait for a huge buying opportunity, or simply keep shorts in the low beta territory.
The market has three positions. Short, long and cash. Nothing wrong with short spells of being in cash and holding on to your recent gains. Patience is a key to this game if you want to survive it longer-term. If you lose patience you’ll likely lose your wealth along the way. It’s a mental game as much as anything else, thus, you have to learn to know when to reign it in some, and this is definitely one of those times. Just be appropriate until a stronger buy signal is given again down the road.
The bears have their work cut out for them as they try to bring this market lower in the weeks ahead. There are some great support levels bunched up close together for the bulls to help keep things from getting ridiculous. First of all, like I said earlier, there’s the gap at 1257 (bottom) to 1262 (top). The bears failed there yesterday, which is normal on the first big try. If, and when, they get through it they have to deal with trend line support at 1240. Below that you have the November high at 1227 and the 50-day exponential moving average at 1226. A strong confluence of support. As the correction begins, the best the bears can hope for over time is the 1240 trend line down to 1227. The bull market in place will keep things from getting out of hand to the down side.
The best thing for us to do is play things as they move along slow and easy. There can be longs that set up and some small shorts as well, but keep it light for the time being.
Peace,
Jack
