Heavy Volume Reversal Erases Day’s Gains

A light volume rise in stocks for most of today’s session were completely erased as heavy volume selling sent stocks lower erasing all of the morning gains.  The media is blaming China for reviewing their Euro holdings, but the fear of further weakening of the Euro had traders selling stock in droves.  Volume on the NASDAQ rose giving the index a distribution day and dampening the likelihood this market has a follow-through day.  This market remains a difficult one and today was another example of why cash is still king.

There were plenty of market pundits indicating a bullish hammer formation on the S&P 500 and recommending going long the market.  Not too mention many were calling a bottom entirely.  Comparing January to now is quite simple to see in January the market had much tighter price action than we do now.  Not too mention the distribution seen in April and May made January and February look like child’s play.  Therefore, for this correction to bottom it will take much longer than a few weeks to recover.

Even more dangerous many were going long stocks breaking out this morning.  Breakouts are especially dangerous in market corrections as they are more than likely to fail.  Many of those proved that today reversing hard by the close and disappointing those who went long.  Even in our chat room I was asked if I was going to go long a few and my answer was simply “no.”  It wasn’t luck that I decided to pass, but an understanding of where we are in terms of the market.  I believe we have further downside and any breakout here is considered too risky.

This market has had a tough time clearing oversold conditions and further proof even tough we get into oversold territory we can stay there for much longer than we anticipate.  At some point we will rally and clear out these oversold conditions, but it is highly likely we still have unfinished business to the downside.

Cash remains a perfectly good spot as the market sorts out the heavy volume selling we suffered over the past month.  Stay away from trying to do too much in this market.  Over-trading will only lead you to churn your account and leave you without a stake for when this market does make another run higher.  We always have time on our side, make sure you allow yourself to remain patient and await a high probability trading situation.

Be well