At the risk of being overly dramatic, it sure seems like we are setting up for the most significant afternoon for the market in 2013, thus far. Specifically, if the bears can build on Monday’s bell-to-bell sell-off with another decisive victory today, then that would probably be a reason to look for a deeper pullback in the 3-5% range off recent highs on the indices. It is not a reason for panic, per se, but instead to look to reduce long exposure and play defense into a correcting market.
Although I had resisted the urge to fight the market all the way up, I also found it tough to become very aggressive on the long side. As a result, I am currently 70% cash inside 12631, and simply watching the action into the afternoon to see whether I should raise cash further. Regarding specific levels, 1500 and then 1495/6 are the first areas I watching for downside support. Below there, the rising 2o-day moving average is now at 1492 and climbing, which would set up an big test. And if that fails, prior multi-year highs from 2012 sit at 1474.
Trading around a strong market as it invariable shakes and bakes can be a tricky. If the bulls can pull off another come-from-behind win I suspect the trap will be set to propel the S&P to at least 1540. However, that is a big “if,” and I am closely watching the action into the afternoon session today. Whichever way it goes, it goes. No sense in fighting it here.