Carving Out a Bottom

The bond market, which has kept the stock market under pressure over recent days looks to finally be ready to provide stocks with much needed relief. Near term there may be some more backing and filling, but the bleeding has stopped and base building is underway in that market. Meanwhile, the Nasdaq has been the baby that has gotten thrown out with the bathwater over the last three days. Nasty pullbacks such as the one just experienced generally culminate with an unloading of the best positions right before the turn. Note the Nasdaq 100 ETF, the QQQQ:

For weeks this index struggled with the $42 resistance area. After breaking above on decent volume and basing the price sold back down to the $42 area, now support. Theoretically this area should lend support but we have to wait and see how the market handles this today to be sure. Volume was heavy on the pullback so there is no guarantee that support will hold, meaning we will be looking for a return to trend support at $41.50 before we get a buyable bounce. The Dow is in similar shape as money continues to flow out of the small cap Russell 2000 stocks into blue chips. Yesterday's bleeding stopped right at the Dow's 50-day average and right at it's uptrend line. The S&P on the other hand didn't fare so well yesterday. Recent breakout support failed to hold indicating that the breakout (which we have been calling into suspicion over the past few weeks due to its low volume) has failed. Unless a miracle occurs we would expect the SPY to pull back to the $127-$128 area before finding support. If the QQQQ can find support and the SPY can tread water we could see the divergence between these two indices start to even out a little, which would bring indices back to their norms.

Bottom line: If you are in the mood to short this market after three days of onslaught, you are too late. A lot of short positions were opened after Friday's sell off and negative breadth has hammered virtually everything out there. Action over the past few days has been very disheartening for longs but we are either at support or very close to finding solid support. Those short positions put on could potentially add fuel to the fire on a strong rebound if the bond market does indeed provide a relief rally over the next day or two. If you are long and crossing your fingers for support to hold the best thing that you can do here is continue to cross your fingers and hold and/or considering averaging in at these lower prices. Averaging down is not normally the best policy, but considering the fact that we are much closer to a bounce than to more real decline it makes some sense under the circumstances. We would avoid metals stocks at this juncture. They have gone a long way very quickly and could correct deeply. Corrections in this sector are still buying opportunities, but right now the sector is risky.