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A Bear Flag? Use It as a Selling Opportunity

The Real Deal

Could it be?  Did investors begin hoisting the real Bear Flag last Friday with the S&P 500’s 1.5% one-day rise to 1,088? 


Considering the overall sharp decline of the trading month thus far with strong volume on the down days and then the fact that Friday’s up day volume was on a mere 5.4 billion shares to Thursday’s down day of 8.3 billion shares, I’d say there’s a decent shot.  If so, the S&P 500 will start to trade sideways with an upward bias on less volume for a number of days from last Friday’s relief rally.  We saw that type of action with today's 1.3% decline.  Then, the index will resume its downward action and decline at least as much as last week’s plunge on even greater volume.  This leaves us with a technical target of about 965.

Should this be the case, those same investors, unless they were on the selling side, had better take caution for as I wrote last Wednesday, “When the S&P 500 does go through its 200-day, 1,057 is the next sort-of support in there and then we’re looking at 880 with a few mini-supports in there at 1,036, 1,030, 995, and 980.” 

I am pressed to see all of those little supports in there standing up to panic selling and that’s what we’ll have with a definitive break through 1,057. 


Speaking of 1,057

Traders went quickly for jugular support on Friday morning by taking the index down to 1,056.51 or through the S&P 500’s only real support between “here” and “there”.  “Here” is any level above 1,056.74, or the jugular support, and below the 200-day, or currently 1,102.89, while “there” is 880 and then 677 with the later being the ultimate “there” until the next bear market low is found. 


This 0.23 test of support was even less than last Wednesday’s 0.60 “kiss” through the 200-day.  Today's 1.3% decline brings us within 17 points of that support at 1,057 while also supporting the Bear Flag formation theory. 

This Is a Selling Opportunity

I keep reading about how the official correction is a buying opportunity or a chance to become long the market at more reasonable valuation levels.  I respectfully disagree. 


While I am less enthusiastic about the veracity of the economic recovery than others due to housing and jobs, I will agree that there is an economic recovery of some sort in place.  I will agree outright that corporations are very well positioned with cash and all of the “fat” gone due to quarters and quarters of cost cutting. 


This being said, I take us back to housing.  Would you rather buy a beautiful house on a really bad block or a fixer-upper on a great block? 


Now this is more applicable to individual stocks relative to their sectors, but I think it can be applied here in a broad way.  Right now, there are no great blocks.  The global neighborhood stinks.  It is filthy dirty, if you will, from dubious debt, and none of the blocks are going to look good until it is cleaned up. 


In other words, the negative macro-picture and uncertainty far outweigh any positive micro-factors.  As such, in my opinion, we’re looking at a selling opportunity right now.




Disclosure: No Positions mentioned