Composure and Speed of Rally Could Change After Sell-Off

Scott Redler
September 25, 2012

The market took a tumble Tuesday after Philadelphia Fed Governor Charles Plosser slammed QE3, opining in a prepared statement: "We are unlikely to see much benefit to growth or to employment from further asset purchases." The apparent dissension among the Fed spooked investors, with the Nasdaq getting hit the hardest. The tech-heavy index fell 1.36%, while the Dow held up best, shedding only 0.75%.

Choppy action after a breakout can be seen in one of two ways: 1) digestion that will ultimately lead to higher prices, or 2) indecision that is sign of exhaustion and will lead to a short-term top. Either way, after a big move higher its prudent to take some profits and wait for stocks to work off overbought conditions. After weeks of resilient and constructive action, the market finally saw its most potent intraday sell-off in more than a month.

A big reason why the Nasdaq under-performed was major weakness from its biggest component, Apple (AAPL). The world's most valuable company gapped down yesterday after news of weaker than expected (5 million) weekend iPhone 5 sales, however it showed resilience and didn't sell off further. Today, AAPL got downside momentum intraday, tumbling through its 21-day MA, showing a composure change in the stock. If it doesn't reclaim the 21-day in the next couple sessions, it's likely to see further downside.

Google (GOOG) finished flat on the day, showing relative strength, but put in a major topping tail that could lead to further downside. The stock has enjoyed a monster run to new all-time highs, and it was not prudent to chase longs at that point. GOOG is still extended far from its 8 and 21-day MA's, so it has plenty of room to correct. In our Active Trading Course, we talk about the need to let short-term moving averages to play catch-up after a breakout.

*DISCLOSURES: Scott Redler is short SPY.