World markets reacted overnight to the major reversal in US
markets yesterday and are down big this morning. Japan is getting
hit the hardest, down around 7%, although it was up more than 50%
for the year so far. The negative feedback loop also circled back
to US futures, with the S&P e-minis down 15-18 handles this
morning. Yesterday our firm noted the significance of yesterday's
outside reversal, and topping tail candle, and now its validity is
being confirmed by the sharp drop in the futures.
Yesterday we had a perfect storm scenario to finally trigger the
long-awaited 2013 pullback. The market was very extended from its
short-term moving averages and outside its Bollinger Bands, with
(INDEXSP:.INX) up 18% in less than five months to start the year.
Then, you had Fed Chairman Ben Bernanke testifying in front of
Congress followed by the Fed minutes. Many investors, I think, were
wary of those two events given the recent rhetoric about QE
tapering, and it appears big institutional players elected to take
some profits before and during those events yesterday.
If you had been carrying multiple long positions, it was prudent to
book some profits at levels we saw yesterday morning. In fact, many
prudent active traders may have already cleaned up many of their
long positions given how far the market and individual stocks had
Now, the question is: How far will we pullback? Will we be reminded
that we operate in a "stairs up, elevator down" market, and quickly
give back much of the gains from May? We will first be watching the
21-day and 50-day moving averages in stocks and indices to see
whether those levels can hold, and if they can't we will start
looking deeper down the chart.
With the tempest set to hit the markets today, new data likely
won't play a huge role in driving the action, but be aware that we
have jobless claims at 8.30 a.m. ET and new home sales at 10 a.m.
Pullbacks should be welcomed by bulls and bears alike. We like to
see pullbacks as part of a healthy market cycle, because it gives
us an opportunity to identify relative weakness. In today's
session, keep a close eye on which sectors hold up best and bounce
Financial Sector ETF
(NYSEARCA:XLF) saw a push-through failure at $20.14 yesterday and
touched its 8-day moving average at $19.75. The ETF put in a big
engulfing bar as the banks showed some signs of exhaustion. The
21-day comes into play at $19.31. I will be very interested to see
how the banks react, because they could very possibly show relative
) is one stock that I think could show weakness within the sector
) is also worth watching, as it can often lead the market up and
then lead it down soon after.
(NYSEARCA:XLI) saw a push-through failure at $44.55 in the morning
then the selling intensified in the afternoon and sent the stock
all the way down to its 8-day MA. XLI had gave back the previous
three sessions' gains. Could we see lower prices? The 21-day is
curling up at $42.95.
Russell 2000 ETF
(NYSEARCA:IWM) also saw a push-through failure at $99.60 and has
dipped below its 8-day after shedding 1.5% yesterday. The Russell
2000 ETF bounced back a little into the close, and put in a new
pivot level at $97.11. Would the damage be contained at this level
or will we see lower prices? The 21-day is standing at $96.35.
Small-caps are often the first to get sold off when the market
turns South, and the IWM has shown relative weakness during some of
the shallow 2013 pullbacks. Watch to see if it shows relative
Retail Sector ETF
(NYSEARCA:RTH) didn't see a big engulfing bar like other sectors
but also touched its 8-day moving average. RTH has been climbing
this key short-term moving average up. A break and close below this
at $52.56 would take it to the 21-day at $51.76. Given the relative
strength in this group, perhaps look for some of the strongest
stocks within it for bounce plays.
) is one that has been extremely strong this year and could be a
worthy dip buy.
Stocks within the high beta tech group have diverged from each
other considerably of late, so take a stock specific approach with
) was the only stock on my usual high beta tech list that finished
in positive territory, continuing its recent inclination to trade
inverse to the market. AAPL registered gains of 0.4% yesterday
after seeing a nice push into the close. Yesterday's low of $438.22
gave us a new point of reference to watch. Below this we have the
50-day at $435.65. It's hard to know what to expect from AAPL given
its recent erratic nature, but it's worth watching after
yesterday's show of relative strength.
) gave the first warning signal when it saw a push-through failure
at $916 last Thursday. Then yesterday the stock filled the gap from
the prior Wednesday to the downside with a 2% loss. See if GOOG can
hold onto the 21-day at around $868.81.
(AMZN) gapped down at the open yesterday and couldn't fill the gap
as the stock headed lower by more than 2%. The stock already dipped
below the 38.2% Fibonacci retracement level of the recent rally.
For it to stay out of trouble, it needs to hold the 50% level at
$258. AMZN may not be strongest enough to hold up in today's market
(LNKD) retraced 4% yesterday and broke below some key moving
averages, including the 50-day yesterday. This one has shown
relative weakness since its most recent earnings report, which was
a rare disappointment for a company that had made a habit of
beating Wall Street expectations. The positive results had made the
stock a momentum darling, but I think the narrative has now
changed. The $165 level is the last line of defense to keep it out
of trouble, but I think if you are looking to add some shorts on
today's down open -- which could be tricky -- this is one of the
best short set-ups out there.
(NFLX) has been showing some signs of exhaustion. The stock saw a
big down move yesterday as it retraced 3.6% and broke below its
8-day moving averages. The 21-day is standing at $220.50. Watch to
see how far we retrace in NFLX, as it could be another to see some
air come out.
When a frothy market finally succumbs to weakness, often times the
frothiest sector and stocks are the first to get pummeled.
Yesterday we saw that with the solar sector and some of those "high
short interest stocks" getting hit hardest. Let's see how that
group reacts today.
(SCTY) got hit hard during the market's pullback yesterday. The
stock did open higher yesterday, though, so similar to the market,
the percentage loss on the day does not tell the whole story about
the extreme intraday selling. I think because of the Elon Musk
effect, this stock got a bit overheated, and we could see a deeper
pullback. After a parabolic move, it gave back almost 50% of the
recent gains within two days. If it doesn't hold the 8-day at
around $40.54, we could see some more sellers stepping in. Other
stocks in the solar sector like
(SPWR) got hit hard yesterday, too, and should be on the radar
today. If they pull in too far, they could also present buying
opportunities, so be flexible and obey price action.
Gold (NYSEARCA:GLD) continued its erratic price action yesterday,
gapping up but failing to hold its overnight gains. The ETF put in
a potent red bar like the market and macro composure remains very
bearish. GLD is up around 2% this morning, though, as panic hits
global markets, so keep an eye on it.
Overall, on volatile days like this it is best to narrow your focus
to a smaller number of stocks and focus more on the indices. In
general, I don't think traders have a huge edge when trading broad
indices, but today could be a day where you focus more on the
SPDR S&P 500 ETF Trust
(NYSEARCA:SPY) and a select number of stocks in key sectors you are
watching. Cash is also a position, so if you are not comfortable
stepping in during extreme volatility, wait for things to settle