FREDAlert!
Volume 8, Issue 2
January 14, 2016
With Wednesday’s trading, SPY has violated the 189-area mentioned in the weekly as a stop loss. Especially for less aggressive advisors, this is the place to raise back the cash added back in at 194.00 on Thursday January 7th. In other words, do not “sell everything” but rather go back to a defensive position from an “all in” stance. Another reason to raise back cash is for the poor trading of MDY, IWM and IYT – all harbingers of a market that is in a sustained downtrend. The last reason for this move is that the action Wednesday suggests that bull market indicator parameters are not going to hold a decline, and the outside day negative reversal to a new low suggests much more selling pressure than demand for equities in the market. The market structure continues to be worse than expected.
We realize that we suggested being flexible regarding a stop loss at 189 in the Midweek Review, but we were tacitly assuming more of a rally before a retest of the low – the buy formation is basically broken by this early test of 189. This could end up being a classic bear market occurrence of the “Generals catching up with the troops” (per my friend Walter Murphy) so we give some numbers: IYT is down around 28% from its all-time high, IWM is down around 21% from the high, and MDY is down around 18% from the high. If SPY and DIA follow these they could trade at 154 (roughly 28% from 213) to 175 (roughly 18% from 213), and that assumes we see relative strength on the part of IYT, IWM, and MDY. Otherwise headline indexes could follow the “troops” down.
In the weekly, we mentioned that a test of 180 – 177 is possible should the low of Monday January 11th fail to hold and that continues true. There could be even lower targets as mentioned above, so risk management is key now.
