After looking poised to suffer a major breakdown on Monday, stocks have spent the last couple sessions trading in a manner best characterized as being somewhere between irrational terror and inexplicable euphoria. At this point all the bulls and bears can seem to agree on is that the market seems just a little crazy.
When the world of finance starts speaking in the language of self-help it's time to tune out your emotions and study the charts. National treasure and friend of Breakout Louise Yamada of LY Advisors is here to tell us what the technicals are saying about the market's mental health.
“4,000 for the Nasdaq (^IXIC) is critical because that was the February low,” explains Yamada in the attached video. “If you really go below that on a sustainable basis you’ve been in a lower floor for the first time in this progression.”
She’s referring to the entire five-year rally since the famous lows made in March of 2009. Obviously such a dramatic trend break would be troubling to bulls.
Things are slightly better for the S&P500 (^GSPC), if only because the pullback has been relatively shallow so far.
The S&P 500 is still well above its own February lows of around 1,750 and has some degree of support at 1,800. More encouragingly still for chartists the S&P’s uptrend from 2009 doesn’t come into play unless or until the index declines to the mid 1,600s. A decline of that size would mark a 13% correction; more than enough to wring out feelings of excess but not so much as to destroy the trend since the lows of the Great Recession.
In terms of how you should play it now, as always it comes down to your personal goals and pain threshold. Yamada is in the camp of traders coalescing around the idea that the 2014 is going to be, at best, a year of consolidation. For active traders that means rallies are to be sold and weakness bought. For long-term investors it’s probably a good idea to simply take off any extra risk you have on hand and buckle up for a rough few months.
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