Gimme Shelter
This week, all the major averages
(S&P 500, Nasdaq, Dow Jones)
traded beneath their respective May 7 lows. Why does this matter? The
May 7 lows represent the last price level at which any appreciable buying
interest has been seen since February. We
have to go all the way back to September of last year in order to find the
next major support levels in the S&P 500
(
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As I submit this article on Friday morning, the market is
digesting negative Intel/Biogen
news and the May employment report. I see the CNBC ticker flashing Dow 9490.
In the Dow
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PowerRating), there are a couple of possible support levels
to watch before we get down to the September 2001 lows. These
would be the 50% retracement of the September to March rally, or approximately
9400, and the 61.8% retracement, which comes in around 9150 and
corresponds roughly to the late October 2001 low in the Dow. Calculations are basis the closing price of the index rather than the
intraday highs and lows.
This week the VIX started climbing again, hinting that
fear is finally starting to creep into the market, and is a positive development
for those looking for a bottom. Down-volume has swamped up-volume on most days this past week, another sign of
nervousness and negative sentiment. The
Arms Trading Index has reached levels that are suggestive of a selling climax. These are the kinds of indications you might expect to see in a market
that is nearing capitulation. But
they are not sure signs of a bottom. Not
yet.
In the best-case scenario, we find a bottom quickly,
before reaching the September 2001 support levels. In the worst-case scenario, the market fails to hold the September 2001
lows. You might want to review my May
17 column for a look at some of the major the topping
patterns in the market. Downside
targets for these patterns are a less-than-pleasant subject.
How do you make money in this environment? Be patient. Pick your
spots carefully. Adhere to strict
stops. Oversold conditions can
persist for longer than anyone expects. Just
as the monolithic bull market punished the short sellers for years, the bear
market is capable of doing the same thing to the longs. One good idea is to limit your risk in what is an exceedingly risky
environment (accounting scandals, nuclear threats, etc.). May I humbly suggest that you eliminate company-specific risk, by
trading in the Exchange Traded Funds (ETFs) rather than in individual stocks? Don Miller and I are of the same mind when it comes to this subject. So, you want to bottom fish the
biotechs? Trade the BBH. You want to
short the mid-caps or the small-caps? Trade
the MDY or the IWM. You get the
idea.
Have a good weekend.
Dan