Tuesday, October 14, 2014

Now That The Correction Is In Full Swing What To Expect Next

After warning for weeks, and several attempts over the last year, the market is finally in its first real correction since 2012. Any attempt to rally or reverse intra-day losses, has been quickly met with more selling the very next day or closes near the lows of the day. 

Volume has clearly favored the downside and the NYSE and NASDAQ advance declines lines are leading their respective markets to new lows. But, the market is now getting over extended, and based on historical studies, closer to a multi-week rally attempt to test the their respective fifty day moving averages before resuming the downtrend. Ideally, the NASDAQ will test the 3,900 - 4,000 range to shakeout enough investors and setup the last major leg of the bull market.

The majority of leading growth stocks have suffered significant damage over the last couple of weeks, but not to the extent they couldn't repair themselves over the next few weeks or months. Biotech's, Celgene (CELG), Gilead Sciences (GILD), and Biogen Idec (BIIB), and semiconductor stocks, Avago (AVGO) and Skyworks Solutions (SWKS), which appeared to be weathering the correction so well, succumbed to heavy selling over the last few days.

As the correction progresses, not all leading growth stocks will follow the market lower. Some will tighten, finish up consolidations, and be ready to breakout before the market bottoms. Apple (AAPL) has been forming a flat base ahead of its Ipad Event Thursday, October 16th, and earning's report Monday, October 20th. Medivation (MDVN) has been pulling pack to the fifty day moving average in low volume, digesting a 30% gain since breaking out of a first stage cup and handle base on August 7th, in volume 350% above average. The stock was a featured trading idea on July 28th, Biotech Company Ready To Explode on Earnings. EPAM Systems (EPAM) has formed a second stage cup and handle base.

Short trading ideas have performed exceptionally well, breaking down and following through, but are now over extended from proper entry points. While the original group of stocks have followed through, recent setups have not been as profitable, trading wildly. While new setups appear tempting, most are now considered to be lagging the market and much more prone to failure. Gulfport Energy (GPOR), Pentair  (PNR), Covance (CVD), and UBS AG (UBS) continue lower.

With the market and most short trading ideas over extended, short traders cannot get too complacent. Traders need to start reducing recent positions that have failed to follow through and tightening stops on positions with significant profits. While it may be tempting to ride through the first market test of the fifty day moving average, it could be extremely painful, especially if the market doesn't stop and attempts to test new highs. If the market correction is going to deepen after the test of the fifty day moving average, most current positions will offer better short entry opportunities.
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