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Don't Chase Extremes in This Erratic Market

John Darsie

March Madness is starting a little early as volatility picks up into the new month. This morning, futures are down 7-8 handles, capping off what has been by far the most erratic week of 2013. Weak data out of Europe and Asia this morning is partially to blame, and then there is the sequester, which goes into effect today. Aside from the obvious headlines, I still feel like the market, after the technical damage we saw on Monday, still just wasn't ready to take out the 1530 highs.

Thursday brought a little bit of rest after Monday's big sell-off, which followed by a two-day snapback. Some traders out there were cursing themselves for missing the dip-buying opportunity, but as Scott Redler eloquently said on yesterday's Morning Call, now is not the time to make revenge trades because you missed a move. When you get technical damage like we saw on Monday, and increased volatility and ranges overall near highs, it should be viewed as a red flag. We could see a range or wedge developing, so don't chase the extremes of this range.

Right now is a time to have a very stock specific approach, because it doesn't feel like there is much edge trading the index ETF's. Stay nimble and flexible in this area. If the S&P 500 doesn't hold the $1504-1507 area, or closes below it, then it could head right back down to its recent lows. Support under that level is $1494 and then $1485. The 50-day moving average is around $1482. For the SPDR S&P 500 ETF (SPY) the support levels are $150.40-$150.75, then the next support is $149.76 and the pivot low is $148.73.

Tech stocks are a mixed bag.

It often feels somewhat taboo to look at Apple (AAPL) from the short-side because of its former market leadership, but this isn't your father's AAPL. The stock has seen a precipitous fall from grace and now looks like a dead short. Early in February it failed at a minor resistance level of around $480, and now could trigger further selling if it breaks below $440. If the stock rises above $453 it could be a bu on a break of the downtrend, but its lackluster shareholder meeting did nothing to suggest CEO Tim Cook plans to divvy up any of that cash. The next support level is down around $420, which represents a gap fill from January 2012.

Google (GOOG) bounced back from its 52-week highs of $808.97 and is set to test its 8-day moving average of around $795. While AAPL watches its iPhone and iPad market share and margins shrink, Google is pushing the envelope with new innovations like Google glasses. I think GOOG has great diversity in its business that gives it more staying power.

Baidu (BIDU) is one you could potentially look to short if it breaks down out of its lower level flag. The stock has been unable to bounce since earnings and now sits precariously above a key pivot area around $88 that was tested in early December. Momentum traders will probably look at this one today, but only look to play it if it breaks down out of that flag.

LinkedIn (LNKD) is holding near highs and showing leadership. It could continue higher but in my opinion this is not a spot to initiate new swing longs.

Netflix (NFLX) was a good cash flow trade as it popped above its 8-day yesterday. If it can hold above $186, then there could be a good momentum trade back to highs.

Research in Motion (BBRY) is another high-beta stock to keep an eye on, as there's good action for active traders and it is getting tight between $13-14.

In retail, Lululemon Athletica (LULU) not only makes high-quality clothes, but it's been a big momentum darling over the last few years. However, the stock looks like it could be set for a bigger correction. It tried to break a key support level around $67 on Tuesday, but rebounded with the market on Wednesday. The stock has been tumbling since December and momentum traders are watching to see if LULU could test its lower support levels of $62 and then potentially $55.

The Financial Select Sector SPDR (XLF) and other bank stocks appear to be resting following Monday's sell-off, but one of the weaker ones in the bunch, Bank of America (BAC), could become a short set-up as it sits below its 8-, 21- and 50-day moving averages. It's testing a support level of around $11, and the next support levels are around $10.50 or even the prior $10 breakout area. This is still a ways off, but if BAC did re-test that previous $10 breakout level, it would not be game over for the stock.

Volatility is bringing opportunities for short-term traders and there is so far no major concerns for long-term traders. Hopefully Washington can reach a compromise to end the media obsession over the sequester. Some people may take advantage of "sequester panic" to buy dips, but overall it seems the S&P needs a little rest after some rocky days.

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*DISCLOSURES: No relevant positions