The market suffered its sharpest drop of 2013 on Monday amid political uncertainty in Europe, with the Dow closing back below 14,000 and the S&P closing below its 8-day moving average for the first time this year. We like to follow the 8- and 21-day moving averages as a gauge of short-term market composure, and a close below the 8-day could signal a micro complexion change. Overall, though, after the steady grind higher we saw in January, it is not surprising or unhealthy to see a modest pull-back. The Nasdaq fell the hardest, shedding 1.5%, which the S&P and Dow dropped 1.2% and 0.9% respectively.
Even the most raging of bulls welcome a pullback at these levels. The market has been melting up this year to the delight of swing traders and investors, but short-term traders have found it hard to get excited about initiating new long positions. Reports this weekend of a sweeping political corruption scandal in Spain pushed borrowing costs higher and are being pointed to as a catalyst for today's sell-off, but the overbought market, in all honesty, may have just need the slightest excuse to take a rest.
The level I would get most excited about buying, if we get there, is the prior breakout level on the S&P of 1474. A pull-in to that level would work off our overbought reading and allow us to identify relative strength on the way down. We like to use corrections as a sort of "try-out" for stocks to see how well they hold up in less ideal market conditions.
The Nasdaq's relative weakness continued today (QQQ), thanks in large part to Apple's (AAPL) now-persistent struggles. The stock has seen minimal interest from dip buyers since it gapped down following earnings, and dropped another 2.5% today. At this point it feels like the stock could want to fill its gap from last January down at the $425 area, but we will be watching it closely for any potential catalyst that could trigger a complexion change.
Research in Motion (BBRY) proved that, in fact, a rose by another name may in fact smell sweeter. The company, is a move designed to give its brand a fresh start, changed its ticker symbol from RIMM to BBRY to coincide with the release of its Blackberry 10. The company's new handset is similar to the other large touch-screen models that have taken a stranglehold on the smartphone market. Today, Bernstein Research put out a bullish note on the stock, placing a $22 price target on its head on better than expected BB10 demand. The stock rallied 15% on its first day as BBRY.
Herbalife (HLF) remains the subject of a high-stakes soap opera as bull Carl Icahn and bear Bill Ackman battle over the merits of the company. Ackman claims the company is a pyramid scheme and the stock will eventually go to $0, while Icahn believes the stock is poised for one of the "biggest short squeezes of all-time." Today an apparently erroneous report came out saying HLF was not under investigation by regulators, which prompted a large gap down, but the company denied any such report and the stock rallied ferociously to get back into positive territory. Who knows what the next bombshell to drop in this saga will be, but there is certainly the volatility in HLF that short-term traders crave.
Netflix (NFLX), despite being up more than 70% since earnings, looks like one of the most constructive actionable patterns out there right now. The stock has held above its massive earnings gap, and has no formed a tight upper-level flag. With a large short-float in the stock, you could see another leg higher in this momentum name. The stock finished the day up 6% after we listed it last week on Off the Charts.
Overall, today is not a reason to sound any major alarms, but simply a day for shorter-term players to take a step back and evaluate their holdings. A break and close below the 8-day moving average does not always lead to a deeper correction, but it's evidence that short-term upside momentum is waning. Be on your toes this week to see what today's sell-off leads to, and as always we will be checking the temperature regularly in the Virtual Trading Floor(R).
*DISCLOSURES: Scott Redler is long GLD, SLV, FXY, SLV calls, BAC, DBC, TBT, GE. Long LNKD call spread. Short SPY.
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