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When a running back in American football tries to score a touchdown, there are a few “layers” of defense to conquer–First, the linemen, then the linebackers, and finally the fast defensive backs as the last layer of defense. In a similar vein, when the market corrects after a prior uptrend there are quite a few layers of support below. The initial short-term levels hold in the early stages of the trend, in the form of quick dips being aggressively bought. As the uptrend matures though, the defense (dip-buyer) grows tired and the running back (sellers) breaks through to the next layer. Over the course of a longer-term uptrend, all layers of the defense are tested but have a tendency to make a dramatic game-saving tackle to avoid a major bear market.
The current market has broken some initial support levels, which is not all that unexpected in an actual price correction. The issue now is whether some of the more important levels are going to hold. On the S&P 500, 1340 is the next logical level that needs to hold. And it is a big one, indeed. There are various scenarios that can happen here, including a shakeout below the 1340’s just to scare the daylights out of everyone. Regarding the Nasdaq, 3,000 is a fairly important level to observe, while 2,900 is the primetime level that must hold. The Dow Jones Transportation Average also must hold above 5,000, in my view.
Beyond that, it is still concerning to me to see some of the extended and obvious leaders remain stubbornly high. I know that sounds paradoxical, since their strength should normally be a feather in the bulls’ cap. However, within the context of a broad market price correction, the crowded trades usually need to come at least somewhat undone first before we can bottom. The idea that any momentum stock is being viewed and discussed as a safe haven should, in and of itself, be concerning to you.
From my vantage point, the best case scenario for bulls is the much-anticpated rotation into the materials complex. The Alcoa earnings’ reaction is a good start, but corrective markets during bull runs have a knack for being much more ominous to traders’ account balances than they would seem given the relatively benign percentages the indices pull off the highs. We saw plenty of bearish marubozu candles printed today, which usually means that even if we bottom soon there is likely to be some more grinding and churning in order to exhaust the sellers.
At any rate, I am still not looking to become giddy over a relief bounce form these levels. In cash, and ready for anything, fits my trading style for bull market corrections.
That looks like the same road I traveled late last night with exception to dirt surface and many more trees(no snow..pheew).
In the middle of nowhere..peacefully eery. I had to dodge a few leaping deer along the way..no shitskies!
Nice post, Chess.
Much ‘Thanks’ for market re~caps, as always.