In my opinion the market lost its headband today and unfortunately I don’t think it will come with same kindness and fortune as it was for Lebron. My biggest concern this morning at exactly 6:19 am was a gap and go situation. A gap and go is when an index gaps below what many (not all) consider an important level and just continues to sell off without respecting that level (in this case the 50day ma), which is exactly what the $DIA , $SPY and the $QQQ did today.
As a swing trader the 50 day moving average is important to me because long trades tend to be smoother when we are above the 50 day, and I believe that a different approach needs to be taken when we are below. If you are not convinced then all you have to is take any of the major indices and overlay the 50 day moving average on a daily chart or the 10 week ma on a weekly chart and you will notice the difference.
With that being said, then what needs to be done you might be asking. I can’t answer that specifically for you, but what it means to me is to raise cash and keep the long swing trades to a minimum until we overtake the 50 day or break the pattern of lower highs and lower lows that has taken place since the middle of May. This is just an easy way to keep it as simple as possible, if we are above the 50 day then you must give the benefit of the doubt to the bulls no matter what, and if we are not then you don’t.
What strategy might work under a corrective type of environment? I believe a tactical one that takes advantage of oversold and overbought levels on the indices where one can take advantage by buying the ETF’S on major indices or sectors when they are stretched too far in one direction.
Should you go out and sell everything tomorrow and declare the bull market over? No, hopefully you were stopped out of a majority of your positions today and over the last couple of days like I was. With Telechart’s McClellan Oscillator closing at -315 a bounce 9 out 10 times is imminent, the only concern is that this is the 3rd time in 8 days in which it has closed at -300. I certainly don’t like to see that because it tells me that the selling is serious. And while I never bet on bearish outlier / Black Swan events they tend to do happen when the market is really oversold.
At minimum I believe this market needs time to find a level where if feels comfortable with all the uncertainties that it has been hit with over the last couple of days. No one really know what that level is but it will become apparent when the indices stop selling off every time the uncertainty is brought up, in this case the uncertainty could be QE Tapering. Shibor, or whatever…..