1257, Now What?

Over the past few weeks, I tweeted words of caution about the stock market. Early last week, I highlighted some warning signs in a 5 minute video. In the video, I expected the S&P 500 to correct to the 1257 level for three reasons: 1) It’s the 200-day moving average 2) It would close the gap from 3/16/11 and 3) It would bring us back to even on the year.

There is one big problem: EVERYONE is saying the same thing! When I realized that the ENTIRE WORLD was thinking the same as me, I immediately had to change my opinion because as Jesse Livermore says: “The stock market is never obvious. It is designed to fool most of the people, most of the time.”

Therefore, earlier this week I started to think of 3 scenarios: 1) The market never gets to 1257 and we turn higher (that option is out). 2) We actually get to 1257 and bottom for the year (I would bet my left kidney THAT won’t happen). 3) We get to 1257, bounce enough to “sucker in” everyone on the long side, and then slice much lower through this key level of support.

I am unfortunately leaning towards the third scenario for the following reasons: 1) Stocks are acting VERY POORLY right now. The selling pressure is relentless and the market is having trouble sustaining any rally. Even the FEW names on my watch list that are holding up well are getting hit. My feeling is that the market will eventually get to everything. 2) Many stocks are breaking down from late-stage bases and the bull market that began in March 2009 is also getting a little long in the tooth. 3) The market is never obvious. Bottoming at an area (1257) that everyone expects WILL NOT HAPPEN. We may bounce, but I doubt it will hold.

I’m not trying to be too negative, I’m simply going by what the market and its leading stocks are telling me. My best advice from here is to raise some cash, especially into strength. Stay defensive and DO NOT force trades. If you trade (either long or short), I suggest taking smaller than normal positions, locking in quick profits, and obeying your stops. As always, maintain a watch list of stocks that are holding up well so you can be prepared for the market’s next uptrend. The key right now is patience and discipline.

One final note, I mainly use the NASDAQ Composite when evaluating the general market. I only used the S&P 500 in this post because it seems that most traders use that index. I plan on writing a future blog post discussing why the NASDAQ is the true leading index, and the only one worth watching…in my humble opinion. We’ll save that topic for another day. Good luck!

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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