Wednesday, October 08, 2014

Largest Price Swings Occur During Corrections

The market gapped down Wednesday but found support at last week's correction lows and started to rally around 11:15 am. Volume was running heavy to the downside in the morning and accelerated as the market exploded higher after the FED minutes were released at 2:00 pm. By the close, all three major indices were up over 1.5% in the second heaviest trade since the end of June. If all three indices had not taken out last week's correction  lows earlier in the day, today would've have been considered a fifth day follow through.

The FED knows that any hint of an accelerated time table for raising rates would spook the markets and would lead to an irrational downside reaction. So they will try, for as long as possible, to keep the bears at bay, even though their time tables have not changed.

China has continued its strong uptrend, but the rest of the world, especially Europe, have continued their corrections, and need time to digest recent losses before firming up for a rally, which could take weeks with further downside.

The VIX marked new correction highs but reversed significantly as the market rallied. The NYSE and NASDAQ advance decline lines and the fifty two week high low ratio marked new lows for the correction and barely bounced with the strong afternoon rally.

Keep an eye on interest rates, they are near recent support levels. If these levels hold, there could be a significant spike in interest rates over the next few weeks despite the FED's apparent dovish stance, which could put further pressure on the stock market. 

Leading growth stocks still need time to setup. There are very few stocks that are ready to breakout, and most are from late stage consolidations, but in strong industry groups. Biotech stocks Gilead Sciences (GILD) and Celgene (CELG) are ready to breakout of flat bases, and Medivation (MDVN) and United Therapeutics (UTHR) are bouncing off their respective twenty day moving averages.

Short trading ideas squeezed along with the market, but most did not experience any unusual trading activities associated with a bottom. Recent breakdowns 3D Systems (DDD), UBS AG (UBS), and Avon Products (AVP) held up well and digested their recent gains.

The market was over-extended at the lows of the day and bulls took solace in its ability to hold support, a continued dovish stance by the FED, and a lack of bad news. As impressive as the day appeared, traders have to keep in mind that the biggest percent moves tend to occur during corrections and are nothing to get excited about initially.

There's little reason to cover most short positions or rush into long positions, but traders need to keep an eye on the action over the next few days to decide how tight to tighten stops to protect profits. The market may follow through today's gains as earning's season gets underway, but it will be important to see if volume continues to confirm the move or the market begins to stall around moving averages. Stay patient and do not panic.
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