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Market at a Critical Juncture
By: Sam Collins
Editor's Note: Sam Collins will return on Monday, June 28. If you are interested in continuing to receive market analysis and trading picks from Chris Johnson and Jon Lewis, you can sign up for their Winning Edge trading service here .
Stocks continued to gain directional momentum on Thursday, as mixed economic data provided little to nothing for the bulls to hold on to.
The S&P 500 ( SPX ), Dow Jones Industrial Average ( DJI ) and other major indices dropped more than 1.5% as sellers took control of the tape on increasing volume. The increase in volume is troubling as the "light volume trade" is now giving way to a consensus action as higher volume indicates that the bandwagon sellers are now hopping into the trend. Market breadth is on the decline as all 10 of the market's sectors finished the day in the red.
There's no way to mask it: The market has deteriorated from a relatively strong technical picture to a near dire situation over four trading days. The SPX closed below its much-watched 200-day moving average, inducing an increase in selling volume as the institutional investors became more engaged in the trend change.
Now, the relative strength leading Nasdaq 100 Index, represented by the PowerShares QQQ Trust (NASDAQ: QQQQ ) shares, is threatening to follow suit as its 200-day moving average is only 20 cents below Thursday's close.
The QQQQ shares will dictate the next 3%-5% move in the market today. Mixed earnings results after the close from Oracle Corporation (NASDAQ: ORCL ) and Research In Motion Limited (NASDAQ: RIMM ) won't help to provide the direction, leaving everything to the technicals. As the Nasdaq 100 has been a leading index on the rallies, short-term traders should look to cover their portfolios with additional put protection today should the QQQQ shares break below their 200-day trendline.
In a similar situation is the iShares Russell 2000 Index (NYSE: IWM ), which came to rest within a few cents of its 200-day moving average and the lower "band" of its regression channels drawn from the 2009 bottoms. What does this mean? Once again, a support level that must hold on today's trading in order to keep any sense of a tradable intermediate-term bullish trend.
We recommended that options traders buy short-term puts yesterday , a move which has already paid some returns after today's action. For now, we would recommend that you hold that put exposure UNLESS we see a strong move off of the support levels indicated on the QQQQ and IWM shares.
Failure to hold these marks will see the market spiral another 2%-5% lower over the next 3-5 trading days. Traders should also beware that any support from these technical trends may be short-lived. As tedious as it may be, a market environment like this dictates that traders and investors stay in tune with the day-to-day activity.
Equally important is the ability to remain nimble due to the fact that this market can indeed turn on a dime, something that we've witnessed in less than a week's trading. We'll keep you up with the trend and identify the next opportunity to close shorts and start adding stocks and calls to your portfolio.
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