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Stock Market Trends: The Smell of Transition is in the Air

By: ETF Stocks
Posted: 4/16/2013 10:21:00 AM
Referenced Stocks: PSQ

Stocks got cracked to start the week on fears that the global economy is cooling, yet again. Wall Street raced lower as the clock ticked towards the closing bell as bombs went off in Boston. ETF Stocks’s thoughts and prayers are with the people who are suffering from the terrorist attack.

Every single sector was underwater to start the week. Trying to determine what’s next in a Ping-Pong environment where stocks jump from the top of their trading range to the bottom and back within a trading day or two.

From our experience, these wild swings of indecision tend to mark times of transition. Now, all was not bad on Wall Street on Monday as support did manage to hold. The Dow, NASDAQ, and S&P 500 closed on their trend-lines connecting previous pivot-bottoms dating back to November of 2012.

Closing on support is a double-edged sword; especially if all the leading indexes crash through support, which would have to be interpreted as a short-term sell signal: three-for-three is confirmation.

So, what should investors do now? The first thing is to wait and see if the indexes close lower than Monday’s final count by about 1-2%. A minor violation is not necessarily cause for jumping the gun. However, if the bottom channel of support gives way on strong volume and a confident move wouldn’t be a good sign.

If the worst happens, investors can use an inverse exchange-traded fund like ProShares Short QQQ(PSQ), which goes up when the NASDAQ 100 goes down. If an ETF such as PSQ becomes a part of your portfolio as a sort of insurance policy against a strong correction, then the breakdown line at 3,200ish becomes the new line of resistance for the NASDAQ.

In the last three years, stocks have turned south in March or April. In 2010 and 2011, the corrections were deep and swift, dropping at least 19% both times. In 2012, the fall was closer to 10%. ETF Stocks hopes the pattern doesn’t continue in 2013, but investors must be prepared for all possibilities.

Right now, caution is the absolute best course of action. ETF Stocks would suggest that investors put it on pause until the indexes declare which direction they are going to take. It shouldn’t take much longer as the NASDAQ, Dow, and the S&P are right on the “don’t cross this line” spot in their respective charts.

If support fails, then an inverse ETF like we mentioned above could prove to be a portfolio life jacket. On the other hand, a bounce off of support could be used to take some profits and build up some cash. Remember, when Wall Street becomes indecisive, especially after a long bull run, it tends mean a reversal is coming. It’s just a matter of when.