How To Survive This Pull Back
The market grinded
lower yesterday, but most of the descent took place in the opening five
minutes. Then the market moved laterally on noticeably smaller volume for
the remainder of the session. Energy was rocked again, even as oil prices
held near previous highs. Thus far the week is going about as planned -
nothing is happening. We came into the week expecting the indices to move
back and forth until 1301 or 1335 could break.
The trading range we're watching is less than 3%, which is not a
lot. Yet the SPX has traded in that range for over two weeks. Also, the
index started out in the middle of that trading range this week. So it
only had to move 1.5% in either direction to break out and it
hasn't.
It is my belief that the longer the indices keep support in
tact, the more likely an upside break out becomes. Although as I've
mentioned before, even though 1301 is near term support, 1250 is the
bulls must hold price. That's another 4% lower, and it may be
tested.
SPX is trading right at channel support. It can either find support
on the channel and rally to a new high or break down and rush towards
1250. As long as 1250 holds, I would expect the index to rally higher to
a marginal higher high. If it stays in the channel, higher highs are
expected, but the rate of the climb will likely be slower.
As we can see below, the bullish trend is firmly in tact, but it's
losing its momentum. I think we see one more rally high, but it could
take a few weeks.
If the channel breaks and 1250 holds, the index should rally to a new high and peak in the first/second week of April
I should have taken my own advice
two weeks ago and went into cash. This is a stressful market to
trade, and honestly one most people should stay away from. At least until
a better rally develops.
On a short term basis we should be short the market. But I really don't
see much downside and you are also fighting a strong long term trend. So
you risk fighting a long term bull trend to make 6-7% on the
downside.
Alternatively, the upside is closer to 10%, but in the near term, all
long positions will likely trade lower. So the probability of being
stopped out of a long is high if the market pulls back over the upcoming
week.
I think the best approach is to stay long focused,
but on stocks that have 20% or more upside. Additionally, you must be
aware that any trade you make has a low probability (25%) of being
correct to the long side.
*rule of thumb is 3 of 4 stocks take direction of the
market
