How To Best Play An Oversold Market
On Monday, the Nasdaq opened lower and continued lower
throughout the morning. It then consolidated throughout mid-day but resumed its
sell off in late afternoon trading. This action has it closing poorly and has it
closing at multi-month lows. Once again, the 200-day
moving average, circa 1850, could be the next
stop here.
The S&P put in a somewhat similar performance.
This action has it closing poorly and also has it closing
at multi-month lows. Once again, the 200-day moving average could be the next stop
here too.
So what do we do? What can I say? I think
the market speaks for itself. The lack of follow through from Friday’s bounce
suggests how really vulnerable this market is. In fact, out of the 239 groups
that I track, only a handful finished higher–and not by much. This leaves us
with a dilemma–a severely oversold market. If you try buy it, oversold will
become even more oversold. And of course, if you try to short stocks, it’ll
bounce. As far as setups, unfortunately, with just one day of bounce followed by
a sharp sell off, there aren’t many meaningful shorts setting up (remember, my
methodology requires a pullback). On the long side, there aren’t that many
stocks that are still in uptrends. About all I could find were selected gaming,
restaurants, and the homebuilders–certainly nothing to write home about.
Considering the above, probably the best course of action is to sit on your
hands. If the market bounces from oversold, we could see numerous shorts setting
up, especially in technology. For the aggressive daytraders, you might look to
play a bounce in the indices shares should they gap sharply lower on the open
then show signs of breaking out of their early morning range.
Looking to potential setups, Standard Pacific
(
SPF |
Quote |
Chart |
News |
PowerRating),
mentioned last Thursday and in the strong homebuilders, “faked out” on
Monday but still looks like it has the potential to resume its up thrust out of
a pullback.
Best of luck with your trading on Tuesday!
Dave Landry
P.S. Reminder: Protective stops on every trade!
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