As markets around the world dropped sharply in reaction to Fed Chairman Ben Bernanke's statement many are wondering how long this pullback might last and what it means for the long-term market trend.
There was no place hide on Thursday as all ten S&P 500 sectors had sizable losses and gold dropped $90 per ounce, closing below $1300. It was clearly a rush for the exits as there was certainly some panic selling as we have seen several times since the 2009 market lows.
This was the correction I have been expecting for a couple of months, and at the end May, I recommended that you summer-proof your portfolio. If you did, you should have been better prepared to weather the current storm.
The important thing to remember is that the major trend for the stock market is still positive, which means that there will be great buying opportunities before the fall. The media is noting that this was the worst decline since November 2011 but fail to mention that the market completed its bottom just a few weeks later.
I do not expect this correction to be over that quickly. The severity and timing of the drop in the past two days was a surprise to me as there was technical improvement early in the week, which turned out to be a fake out.
The main question is what's likely to happen next? The extremely negative market internals Thursday makes a strong rebound likely by next week. This rebound however is likely to fail and the next downside targets for the S&P 500 are at 1550-1650 or $155-$156 in the Spyder Trust (SPY).
Some of the financial "talking heads" that did not believe the rally until February or March are already starting to turn bearish. This is a positive sign for the intermediate term as a higher level of fear is needed before the current correction can end.
This decline will eventually set up a good buying opportunity as the NYSE Advance/Decline did confirm the May highs, so the major trend remains positive. Let's examine the technical evidence.
- The near-term uptrend, line a, was broken with the 38.2% Fibonacci retracement support at 8757, which is 2.6% below current levels.
- This is calculated just from the November lows with the 50% support at 8464.
- The McClellan oscillator dropped down to -234 after testing the zero line.
- It is still well above the prior lows at -283 and -311.
- The NYSE A/D line was the weakest early in the week, and as it turns out, was giving a more accurate reading of the market's health.
- The A/D line support at line c, was broken in early June, and it has now resumed the downtrend after slightly surpassing its declining WMA.
- There is strong resistance now in the 9180-9300 area.
The Spyder Trust (SPY) closed just below the April high at $159.80 as the near-term uptrend, line d, was broken.
- The 38.2% support is at $155.94, which is just over 2% below Thursday's close.
- For next week, the starc- band is at $155.74 with the 50% retracement support at $151.89.
- The on-balance volume (OBV) did close below its support at line e, which had held on the last correction.
- The S&P 500 A/D line was one of the strongest early in the week as it broke its short-term downtrend and closed above initial resistance.
- The reversal in the A/D line reaffirms the break of support (line f) but the A/D line is still above its previous two lows.
- The longer-term support for the A/D line is now at line g.
- There is first resistance now at $161.30 with the monthly pivot at $163.24.
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- The 38.2% Fibonacci support is at $69.72, which also corresponds to more important chart support.
- The uptrend, line b, is at $68.85 with the 50% retracement support at $68.11.
- The A/D Line moved through its short-term downtrend, line c, before it reversed. It is now close to its recent lows and support from the September highs.
- The A/D is still well above the more important support, line d, from the late 2012 lows.
- There is initial resistance now at $72 to $72.80 with more important in the $74 area.
- The volume Thursday was heavy but did not exceed the levels seen in early June.
- IWM is now back to the March highs at $95.10 and closed just above the daily starc- band at $74.63.
- For next week, the weekly starc- band will be around $91.46 with the 38.2% support level at $91.12.
- The OBV has dropped back below its WMA and the previous lows but is still well above the daily support at line f.
- The Russell 2000 A/D line shows a similar formation as the OBV, and it has also reversed to the downside.
- There is more important support for the A/D line at the uptrend, line g.
- There is a first band of resistance now in the $97.90 to $98.32 area.
What It Means: The focus is likely to be on the downside for the next several weeks and possibly longer. For those who are still uncomfortably long stocks, the recent action reaffirms the benefits of taking partial profits on strength and having a clear game plan for your portfolio.
I would expect a good bounce from the $155-$156 area in the Spyder Trust (SPY), but it could eventually drop down to the $148 to $152 area.
With well over 80% in cash in the Charts In Play Portfolio, I did some light buying Wednesday, which was like stepping in front of a speeding train. The focus on risk and entry levels will minimize the damage on these new positions, and I will be looking at the monthly charts to find stocks that are bottoming ahead of the market.
If you sold some of your long positions in the past two days, I hope it was part of your plan and not selling based on fear. If you are uncomfortable with your current equity exposure, reduce it on the expected sharp rebound.
How to Profit: No new recommendation.
Portfolio Update: For Wal-Mart Stores Inc. (WMT), I went 50% long at $75.51 and 50% long at $75.12, which was stopped out at $73.14 for an approximate 2.9% loss.
For PowerShares QQQ Trust (QQQ), I am now 50% long at $72.84 and 50% long at $71.88, with a stop at $69.28.
For Intuit Inc. (INTU), I am now 50% long at $58.43 and 50% long at $57.78 (the low Thursday was $57.78). with a stop at $55.31.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.