Since we hit the 2013 highs of 1530 , the market has had a subsequent sell-off of about 3% and closed yesterday (2/25) at 1487. If you have also been following our work here at Schaeffer’s, then you may know that we have measured the historical significance of round number levels, specifically the 14,000 level on the Dow, which is where the mega-cap index closed this past Friday, 2/22.
Yesterday’s price action may have showed that the bears are in control for the time being. The gap up higher in the morning was quickly met with selling pressure before noon. This, I believe, was one of several warning signs out there in the market. Last week I observed what I would call a “change in character” in the market. It seems that nearly every day this year we have had the bulls come in and take control in the last hour or so of trading. This was not the case with several days last week. Furthermore, sector rotation beneath the surface has been in favor of the “safer” names. The lower-risk Consumer Staples, Healthcare, and Utilities sectors showed relative strength while Energy and Financials took hits. Take a look at the data below, courtesy of stockcharts.com.
One final point thing I’d like to point out before I conclude with some charts and some potential short set-ups I am eyeing. Volume is always a good indicator of either accumulation (buying) or distribution (selling), and where we may be headed. The SPDR S&P 500 Index ETF (SPY), featured below, shows the decline in volume on the up days leading to the 1530 level, which was met with big selling volume in this recent sell-off. My interpretation of this pattern is that it is clearly a sign of distribution, most likely via institutional selling.
I think the best course of action is to stay patient and maintain awareness for the “big events” (i.e. the “sequestration” and Bernanke speech today), continue to study the price action, and finally to always “expect the unexpected”. The market has a funny way of doing something that is unanticipated by most. Whether that means we bounce back to new highs or have a 10% correction, I really do not know what exactly is going to happen. I do know that I am observing a change in character in this market (at least for now). Hope these charts below help with some ideas.
Technology firm Tibco (TIBX). Looking for continued weakness–trading right under YTD breakeven.
Ford (F). Consumer Discretionary sector taking a big hit recently. Down over 5% in 2013.
Baidu.com (BIDU). Chinese search engine. Big gap down on earnings earlier this year. Still could show continued signs of weakness.
GameStop (GME). Like this idea for a longer-term short. Concern may be that it is very highly shorted (SI/Float is 32%).