Sellers took over in the last hour sending the major indexes near the lows at the close. When you have a market in correction late day sell-offs are not unusual, but expected. Volume was higher on the day indicating institutions were willing to dump stock at lower prices. It is clear the trend is down for the time being and we are likely to see the trend continue for the foreseeable future.
The market does not move in straight lines and we are in extreme oversold conditions. However, we do know these conditions can last for longer than we expect. Today proved we can remain in oversold conditions and it isn’t unreasonable to think we can continue to head lower.
Tomorrow we get another FOMC rate decision at 2:15pm EST. The Federal Reserve’s liquidity programs are set to begin to expire in March and the market knows this. In addition, Ben Bernanke’s confirmation is still in question leaving the Federal Reserve in flux. Expectations are for the Federal Reserve to continue to hold the overnight rate at record lows, but it is always the statement the market always pays attention to. Not one person knows how the market will react to the decision. What we know now is the market is in correction and for the past few trading sessions we have seen sellers take over during the last hour. The path of least resistance is lower, do not fight it.
At this point stocks that may appear like great shorts are more than likely too obvious to get short. Often times these stocks will have a natural rally occur within the downtrend shaking out those who short too late. Low volume rallies are often a great indicator of a natural rally occurring within a downtrend. Just because we are lower certainly doesn’t mean you get reckless with shorting.
Interestingly enough we are finding stocks setting up in bases and a few giving buy signals. Those who aren’t seasoned as traders should not buy during corrections. If you haven’t been able to make money in an uptrend it is increasingly difficult to make money in a downtrend. Three out of four stocks will follow the market’s direction.
Finding longs in a downtrend certainly isn’t unusual, especially in a normal correction in a bull market. We are in one now and these long signals are encouraging if we are to rebound. We’ll be looking for the market to find a low and produce a follow-through-day to get long. Until that time, we’ll continue to watch for long setups for when we do finally rebound.
Keep your losses small and be sure to take profits quickly if you are shorting.
