Analysis Of Continued Selling In The Stock Market

Many folks began breathing easier yesterday morning, as they say the U.S. markets trading higher. Those feelings of relief were torn from them and replaced with renewed concern as we saw renewed selling toward the close and the markets turned negative.

Last week, when this bout of selling began, I posted a video here on the blog walking you through some analysis of the S&P 500. I have not prepared a new video, but the analysis contained in the video still applies. It's still up so feel free to review it again, if you like. (Stock Market Correction Analysis Video)

What you see above is a snap shot of a price chart from the S&P 500, which was taken this morning. There are three blue lines, readily apparent on the chart. Those lines represent Fibonacci retracement levels, with the lower line representing a 61.8% retracement of the last impulse wave.

This bull market is an old one. It began in March 2003, and has been running the 4 years, 4 months since it began. The question that is everyone's mind is whether it still has legs left in it, or whether we are now seeing the development of a new bear market.

Either is a possibility and there is no one, including me, that can tell you with any degree of certainty which one will materialize. However, we can hedge our bets and we can take money off of the table. The name of the game is risk management.

In last week's video I talked about MarketClub's Trade Triangles, which had already flashed sell signals on the daily and weekly charts. We just had another light up on the monthly chart. These signals are not magic, but they are based upon trend following principles.

While my portfolio still has a net positive delta, I have tightened things up considerably and I have taken quite a bit of money off the table. I have seen some draw down as a result of this correction, but I am still up nearly 20% for the year. My goal is to protect those profits.

Any new positions I open under the current circumstances will be hedged with a bias to the downside. The goal in opening those positions will be to position myself to profit from further selling and to flatten out my currently positive portfolio delta. I do not intend to get wildly bearish, but I am listening to what the market is telling me and what it is telling me is that the bears currently hold the upper hand.

What's driving the selling?

I don't think it's energy or inflation, but most likely the deteriorating housing market and continuing credit woes. If housing prices are falling, this makes it difficult for consumers to finance large purchases from equity in their homes. Tightening credit markets are effecting Wall Street's ability to conduct business. The analysis could fill pages, but the bottom line to me is that it is going to be tougher for most companies to make a buck if they cannot cheaply and easily borrow money.

So, is a new bear here? I don't know. My advice is to continue listening to the market and watch for developing trends. The preliminary information that we have since this correction began is that we're seeing a shift in both short and long term trends.

Trade well!

Christopher Smith
TheOptionClub.com