Monday, April 07, 2014

Another Major Day of Selling Solidifies Correction

If Friday's high volume distribution was not clear enough, today's heavy volume selling nailed home that the rally is dead, and the market is back in correction. Outside of an early morning rally attempt, the market spent a second day in a row, selling off in heavy volume, and closing down over one percent.

Leading growth stocks, which managed to hold up well during the first wave of selling off the March 6th high, have started to break key moving averages in higher, above average volume, suffering a second major day of heavier selling. While the short term technical picture looks ugly, long term, leading growth stocks are still within acceptable correction levels, holding longer term trend lines and support levels, and several are still holding up well despite the broad based selling.

Short ideas resumed leading the market lower. Many managed to hold tight during the market's rally attempt over the previous few days, but have started to roll over in higher, above average volume on Friday. Recently discussed short ideas, Pier 1 Imports (PIR) and Ocwen Financial (OCN), rolled over at their fifty day moving averages and are following through to the downside. There are still a few stocks positioned to roll over, but the risk of a short squeeze increases as the market falls further below its moving averages.

Once again, all signs point to a deeper correction, but every time the market and leading growth stocks have looked this way, they have managed to settle down after a few days of heavy selling and setup the next leg higher. So now is not the time to go fishing yet. The next few rally attempts will tell us if leading growth stocks will setup up properly to lead higher, or end up in more bearish patterns like the head shoulders top, double top, punch bowl of death, etc., and roll over further. This process could take a few weeks to a few months, presenting several trading opportunities.

As discussed in recent blogs, when value leads growth, rally attempts tend to be choppier and short lived, so stops should have been tightened to protect from taking major losses on newly initiated positions and profits on existing positions. Long traders should have been stopped out on Friday, since almost not a single stock managed to hold above recent breakout points or support levels. Aggressive short traders had an initial opportunity on Friday to enter a position or two on the short side, and another opportunity today on the early morning rally attempt. Long traders should continue to track leading growth stocks resisting the downside pressure.


Rackspace Hosting (RAX) was one of the first stocks to breakout after the market bottomed in 2009. The stock ran up over 400% in just under four years, and has spent the last year and a half setting up a head shoulder top. Its recent attempts to test the fifty day moving average have stalled and come in lower volume. A breakdown below recent support levels could see the stock drop below $30, and possibly closer to the next support level around $25. Buyout rumors do continuously circulate around the stock, so shorting it is riskier, but each rumor has been met with selling after an initial gap up.

Resmed (RMD) has been forming a head and shoulder top for the better part of a year now. The stock has spent the last two months testing the fifty day moving average in lower volume. A breakdown below recent support, should see the stock trade down to at least the next support level around $40.

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