Markets have been following two trends since the October 4th lows of 2011. Since that low we've see about a 30% move higher. This year we made a similar type of low on June 4th, and have developed a more intermediate trend for traders since then. Since the June 4th low most of the time we've been riding the 8- and 21-day moving averages, which makes it easier to traders to hold multiple swing positions.
The first quarter was a great time for that. Also recently from August through Sept 14th was another great time period to use that Portfolio Approach. On October 9th- when the Nasdaq ETF (QQQ started to lead us lower and broke its 50-day moving averages, that's when I went to tactical approach --more trading, less holding. That's when the corrective process started to take place. Three days later the S&P followed lower down into its 50-day moving average along with some other sectors. Last week when you saw IBM fail at its 100- and 200-day MA with additional pressure on Apple (AAPL), Intel (INTC) and Microsoft (MSFT) you had another clue to sell on Thursday while the S&P was still 1455 (or at least put on some hedges).
Now the question is??? Where do we hold and what levels should we measure to buy the dip. S&P's are only 4% off the highs and still up double digits for the year. Lots of Bears are saying 20%-25% correction, I am NOT IN THAT CAMP. I do think we can see lower prices, but if we do get more downside I will be looking to re-enter tactically.
I will measure levels on the S&P and the QQQ using Fibonacci Retracement levels. In the S&P we broke was the 25% Fibonacci retracement level, meaning we lost extreme upside momentum. The 1395 area is the 38%2 Fibonacci retracement, which also coordinates with the August support and the 100-day MA. Markets are still considered strong if they hold this area. The 1370ish level is the 50% retracement level, which is a very important area. If we breach this zone then there could be more macro damage done.
QQQ's are already at the 50% retracement level ($65.32), still showing relative weakness. The last line of defense for any macro confidence is the 61.8% retracement level, which stands at $64.07, On a constructive note Financials and Homebuilders are still showing relative strength. They need to show commitment, but we need technology to start acting stronger. Apple (AAPL) on Thursday will be important.
Markets tried to price in and get ready for a soft 3rd quarter earnings season but revenues have still been light and 4th Quarter guidance is not encouraging. There is also talk that Ben Bernanke WON'T accept a third term no matter who is President, a thought that would put more pressure on the markets near term.
Short term the longer this market stays below 1425-1435 the higher the probability we see some those lower levels to buy. Right now we are trying to work off some pretty oversold conditions.
I am in the camp for S&P 1700 by 2015, not the bearish camp of 1000. However, entries and exits matter if you want to capture alpha, so does knowing your time frame. Equities, in my opinion, are far from dead.
*DISCLOSURES: Scott Redler has no positions
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