Markets Setup for Further Test of Support

Investors are attempting to define their short term beliefs relative to the markets future. The data is mixed along with the opinions and it is easy to get caught up in the emotions of it all. The key currently is to take a deep breath… exhale and keep looking forward. Know your time-frame for trading and the objective you have relative to your portfolio. Remember, what the market does relative to what you are attempting to do with your money is all that matters. Opinions of others are based on their perspective relative to what they are doing with their money, and if they are on TV it is drama to gain viewers. Focus on your money and your goals. That is the hardest thing for investors to learn and implement day in and day out.

Breaking down the markets heading into today’s trading is one of mixed signals and uncertainty. These are the times I much prefer to watch, listen, chart and develop my own opinions as it relates to the outlook short term. Is this just a pullback or is there a correction on the horizon? This goes to the topic of belief versus reality. My belief is we are setting up for a pullback short term with some sideways trading. As the data is compiled and the outlook clarified the direction will be set in motion, up or down. The bias remains positive for stocks overall looking forward, but the economic data is building in some doubts relative to the sustainability of growth looking forward. This creates the tug-o-war effect we are experiencing short term. That is why we are seeing the near term selling that is testing the faith of the buyers/believers in the market. If the doubts grow to fear the selling will accelerate creating a correction. Thus, patience as we move forward and all the data unfolds.

Since we are all traders/investors the psychology of the market is not as interesting as what to buy or sell. Which brings me to my point of the day. Three sectors or indexes worth watching today. First, Small Caps or IWM. Testing support at $78.40 is the level to watch. I don’t own the sector as we stopped out of our position. but if we hold this level of support that is a plus and I would look for a trade opportunity on the bounce. However, the downside is what concerns me going forward. A break of support brings $75.40 into play as the next support level. The downside is in play short term and there may be more to come. What about a short trade? That is a trade opportunity if you understand shorting and are willing to accept the risk associated the activity. The bias is lower currently and the target support is $75.40 near term.

Second, the NASDAQ 100 index broke support on Monday with selling in Apple, Google and Priceline. The overbought conditions in all three stocks has been rectified short term, but the bigger question is the index. QQQ has moved near the next level of support at $65 and the 50 DMA. The importance of this index to the investor/market psychology is big. The leadership of the sector has been key to the advance in the first quarter. A break lower would accelerate the selling in the index overall. Monday hit our stops of $66 relative to the holding and opens the door to more downside near term. Step back and look for support to be established before attempting to catch a falling knife. If there are bells ringing, lights flashing and a horn blowing loudly, it may be a train. You don’t need to stand on the track to confirm it, just step to the side and see if passes by. Then look to see if it is safe to cross the track.

Third, the technology sector has pulled back to a key support level as well with XLK near $29.25. The pressure from the large cap technology stocks is hurting the overall sector short term. Software (IGV), Internet (FDN) and networking (IGN) have all pushed lower the last couple of weeks. If we break lower the next level of support in near $28.40. The retracement of the uptrend off the December low shows support at the 50 DMA as well. If you still own the sector set your stops accordingly and watch as this unfolds. If the selling in the sector accelerates it is not good for the broad market overall.

These three sectors are worrisome for the short term outlook. I am not stating we are going lower, this is simply a look at what my belief is short term while waiting for the reality in the charts to confirm what future action I should take. We continue to hold cash as this plays out. But, we are also looking at where the best trading opportunities are developing based on the reality of the outcome.