Markets were roiled Monday, and the old adage held up well today that corrections do not end on Fridays. Also markets take the staircase up and elevator down rang true. Follow through was strong today and bulls have to be somewhat nervous for the first time in awhile. We are obviously not in a bear market, but this action of CLOSING hard upon the lows is classic negative demeanor. That would be further enforced if the recent habit of selling rallies continues instead of buying dips. Everyone including myself has been calling for potentially successful 50 day SMA tests recently and today the Dow, Nasdaq, S&P 500 and the Russell 2000 sliced through it like the proverbial hot knife through butter. The pace of todays selloff was breath taking and looking back no one could have predicted this, but tests of the 50 day SMA are ideally done gradually and on light trade. Tops often form in this type of violent fashion, with bottoms occurring in the opposite way. This is not a time to be a hero, but rather to let the dust settle and raise some cash.
Looking at individual groups there was no escaping the wrath of the selling today. The utilities lost 1.7%, the “best” performer Monday, and among the worst were healthcare, financials, technology, industrials and energy with all falling more than the 4%. It is hard to extrapolate much from the sectors action today, but some red flags with PRICE are certainly here. The XLE hit the oversold 30 RSI number and if investors can filter out the noise, that may prove to be a good entry. From a risk/reward scenario you can not blame those that held their breath and hit the buy button there, as the last time that occurred last August it set off a nice run higher. Just like most of the major averages, trade in the energy ETF was becoming a bit wide and loose, hallmark bearish action. The finnies were certainly not swimming upstream Monday as they were the hardest hit with the XLF off more than 5%, but they did CLOSE right near its bull flag breakout trigger near 28 today. Again it is best to take a wait and see approach. If many trend followers have held on for a long time now they are most likely sitting on big gains, and the volatility that has returned should give better entries in the short term.
Even in todays bloodbath it would be unwise to not look for opportunities. They often do not reveal themselves easily and one has to have a bit of courage to enter on days like this. This is when the brave can, of course never guaranteed, reap nice profits. One does not have to jump in with both feet, but start small and if the position starts to work in your favor, adding is a good idea. Below is a possible candidate, a retail name whose chart still continues to trade taut, while many peers and the overall markets fluctuate wildly. The idea below comes from our Thursday 2/1 Game Plan and today did indeed fill in the gap from the 1/19 session. As long as this name remains above its rising 50 day SMA it could be viewed as a buy. The round 20 number did not offer much support today on a CLOSING basis, but a finish above their could generate a long as Monday registered a bullish inverted hammer candle. Trade accordingly.