The market is at ‘make or break levels,’ so here’s my plan

Monday’s bullish consolidation failed
to follow through to the upside, as stocks sold
off across the board on higher volume. After beginning the day with an opening
gap down, the major indices drifted lower throughout the morning session. With
two hours remaining before the close, the major indices suddenly surged to new
intraday highs and attempted to reverse, but stocks came back down as quickly as
they went up. Both the S&P 500 and Dow Jones Industrial Average
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0.8% and closed at their intraday lows. A small 0.2% gain in the Semiconductor
Index
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strength, but the index still dropped 0.5%. Conversely, the Russell 2000
Smallcap Index
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S&P 400 Midcap Index
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Turnover in the Nasdaq increased by 3% yesterday, while total
volume in the NYSE was similarly 2% higher than the previous day’s level. The
broad market’s losses on higher volume caused both the S&P and Nasdaq to
register a bearish "distribution day," the first since the bullish
follow-through day of September 6. Given that the broad market has also had a
few "accumulation days" within the past two weeks, it’s not unusual to also have
an occasional day of institutional selling as well. However, given the technical
overhead resistance in the major indices right now, the uptrend that began on
August 31 could easily unravel if the markets see another few days of heavy
selling.

For the past several days, we have been pointing out
resistance of the 1,245 resistance level in the S&P 500. Based on yesterday’s
"distribution day" that occurred a few points below that level, it is clear that
traders are indeed nervous about the S&P’s test of that prior high. As such,
caution is definitely warranted on the long side of the market unless the index
closes and holds firmly above the August high for more than a day or two.
Conversely, it may be tricky to sell short SPY because it still has support of
its prior downtrend line from the August high, as well as both the 20 and 50-day
moving averages just below that. It seems likely the index is more likely to
trade in a sideways range for a while as opposed to collapsing from here. The
same can be said for the Dow, as it now has a similar daily chart pattern. The
Nasdaq Composite has more overhead supply than the S&P because it has only
retraced about two-thirds of its August losses.

We feel the markets are at a critical "make it or break it"
juncture that is likely to determine the overall bias for the next several
months. It is wise to be positioned on both sides of the market by shorting the
sectors with the most relative weakness and buying those with the most relative
strength to the broad market. Doing so will reduce your risk if the market
suddenly makes a dramatic move. Further, you are less likely to get "chopped up"
trading the sector-specific ETFs as opposed to those that track the major
indices. On the long side, we like
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has begun to show relative strength. On the short side,
(
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OIH (discussed
Tuesday) look interesting. We will take a look at some new charts of the
broad market when the technical picture changes from our last analysis.

Open ETF positions: