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By Greg Guenthner
March 2, 2011
Dear Penny Sleuther,
I’m sure the past week might be likened to a roller coaster — except for one major difference. When riding a roller coaster, you’re afforded the gift of foresight. If you’re brave enough to open your eyes during the descent, you have a clear view of where the track bottoms and begins to turn upward.
In this respect, the markets leave us blind. We can only look back for clues to discern where we might be headed. In this case, we can look toward recent support for some answers. Thursday afternoon, The S&P 500, NASDAQ and Russell 2000 all bounced higher off critical support levels.
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It was the kind of action one should expect in a bull market. The averages fade to support levels, prepping for yet another run to new highs. We've seen it for months — every dip has been been a buying opportunity.
However, this week has been an entirely different story. The market fell hard again yesterday. And over the the past 5 trading days, the NASDAQ has fallen nearly 3.5%, while the S&P 500 has dropped 2.75%. It's enough to make any trader — or investor, for that matter — wary of what might come next.
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Luckily, the market offers us some important clues as to what might happen next. And while none of the following indicators are right 100% of the time, the signals are convincing enough to persuade many traders to the sidelines for the time being...
- Down days are active days — For the past 6 trading days, the S&P 500 ended up in the red 4 times. That's not what concerns me. What's important during these down days is volume. Each day the market has been in the red, volume has handily surpassed the days when the market recovered. In a stronger market, the opposite volume pattern would hold true.
- Microcaps are feeling the pain — The Russell 2000, a preferred benchmark for small-caps, has reacted similarly to the market at large. Yet while the index remains above its 50-day moving average, many individual microcaps in my investing universe are beginning to falter. These are the smallest of the small stocks that are not represented in the index. Most investors consider these small stocks to be the riskiest on the market— and the recent downturn might have convinced some to take their money to safe haven investments.
- An excuse to worry — Oil prices are surging and the geopolitical climate is heating up with demonstrations from the Middle East to the Midwest. I don't think its fair to say that strife in Egypt and Libya have a stranglehold on our stock market, but it is important to note that a major political shift could shake up the world enough to pause the overall market trend — especially since energy prices are in play.
It's important for me to note here that as of early this morning (before the market opens) the market has not given us a clear-cut sell signal. What I have detailed above are simply observations that could lead to a more decisive move to the downside sometime in the near future. The best we can do as traders is to watch our critical indicators and act on any new developments.
Sincerely,
Greg Guenthner
P.S.: If you are interested in more information about the indicators I use to make trades, check out Bulletin Board Elite. Within this subscription, I walk you through the process of entering and exiting each trade… click here for more information.
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3 Reasons to Hold Off on Buying Stock This Week is featured at Penny Sleuth.
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