Current rally attempt hangs on the edge
Heavy volume poured into the market from the start as sellers dumped stock at the open. However, the selling dried up and the market was able to find a bit of support. On the bright side, the morning session turned around relatively quickly. But, the lack of volume on the upside certainly didn’t signal institutions were behind the move. Volume continued to dry up as the market moved higher during the early afternoon hours. Sellers picked up where they left off in the morning pushing down prices for the majority of the afternoon. It was as if the market failed to inspire bids to support the market. Just another blemish of this current uptrend that is more than likely about to fail.
Friday’s distribution day was a huge blow especially so soon after a follow-through day. Not only was volume much higher the losses on Friday were quite massive pushing the NASDAQ and Russell 2000 below the 200dma a major blow to these indexes. In addition, the S&P 500 broke down from its 200dma another sign this rally attempt is almost over.
Cash is certainly the best place to be for those who are new to the market. Going long here is simply trying to catch a falling knife as conditions are right for the market to rally here. Unlike February where we had plenty of stocks setting up, forming bases with tight price action at the moment we have plenty of stocks breaking down. Price action continues to be wide and loose and without proper leadership from stocks forming proper bases it simply isn’t the cards for a meaningful rallies. Let’s not forget off he March lows our deepest correction was 8% and even then we had plenty of stocks setting up in bases. This deep correction has been long overdue.
In terms of historical terms the rally off the March lows went much higher and longer than any past rallies after a 50% or more bear market. In 2004 the market went into an eight month correction after rallying from the October 2002 lows. The correction was 19% deep before rallying in August. TravelZoo was a notable big winner as the stock moved from the teens to over $100. Corrections help setup big runs, embrace corrections as a way to clear the slate. It is precisely why you must have capital ready for when the market does make a run higher.
Cash is king at this very moment and we are finding shorts to take advantage of. However, preservation of capital is of the utmost importance as it will give you the ammo to take advantage of the next uptrend.
