by Michael Tarsala, CMT
You might need an investment plan to deal with more possible downside, given the technical damage done last week.
The stock charts are anything but pretty now.
Source: Stockcharts.com
We closed just below the critical volume support area, around 1280 to 1320. While last week’s close of 1278 is still close to that general range, it is not a good sign that we closed near a low on Friday with fresh volatility highs. It’s an indication that the level appears unlikely to hold. Several moving averages were violated, as well, including the 200-day.
Many of the cyclical sectors suffered declines, with energy stocks being among the weakest. In a strong market, you want to see cyclical stocks leading the way to the upside.
Yes, this sector is showing signs some signs of selling fatigue But there also was a 50-day moving average cross below the 200-day (the death cross). More downside is possible for now, and it does not look like the oversold condition will not be rectified soon. There will be a time to play this sector for a major bounce, but it’s not yet.
Many of the risk markets are now moving to the downside together, including stocks and commodities.
In the longer-term picture, it looks like we are in for more than just the roughly 10% correction we have seen so far.
Source: MetaStock
Here you see major retracement levels going back to the 2007 high and 2009 low. The next retrace projects a move to at least the 1220 area — possibly below it.
Strategies that may help you avoid the big loss include:
— Temporary increases in cash and gold, a strategy being employed by a number of our Covestor model managers. Some, including Gerry Sparrow, who runs the Hard and Soft Commodities model, has 97% of his model in gold.
— Holding stocks with a lower volatility than the overall market, which is being done by managers including Bill DeShurko, who runs the Dividend and Income Plus model. He says there is not a stock in his portfolio with a beta higher than the overall market.
— If it’s right for you (it is rated a riskier model), swing-trading models can aggressively position for short-term market moves, perhaps in a small portion of your portfolio. Mike Arold’s Technical Swing model still has a performance chart that is up and to the right.
— Also if it’s right for you given your risk tolerance, there are about 15 different long-short models on the Covestor platform, including Dan Plettner’s Long-Short Opportunistic model.
