How Do I Judge a Market Pullback?

How do you judge a market pullback? Is it going to be relatively shallow followed by a quick rebound, or is it likely to widen into something bigger?

No one has a crystal ball with 100% prediction reliability. The best any of us can do is to apply rational judgment and make educated guesses based on experience.

I like to look for evidence of what institutional traders are doing. My logic is that if big players are not selling off the quality companies with reliable track records, their profit taking may be limited. Instead, they will quickly jump on quality stocks that have temporarily hit lower prices. There may be some rotation going on, especially in riskier companies. But unless there is a drastic change in market sentiment, the quality companies will hold up.

Let's look at a couple of stocks that Jim Cramer focused on recently. On Friday, the Dow fell 279 points (1.5%) on above -average volume. The index is now challenging its 50-day simple moving average.

But Home Depot is a Dow Jones Industrial Average component, and while it did drop 1.26% on Friday, it was on barely average volume. HD so far is still remaining above the gap produced from last week's earnings release that was 18% above expectations. No evidence of institutions exiting this quality stock.

How about Thursday's star performer on earnings, Costco (COST)? After Thursday's strong 4% gain, Friday's trading produced a slight loss on slightly above-average volume, and the stock closed in the upper half of the day's session (actually only the first half-hour was weak – strong buying came in at 10 am while the overall market continued its selloff).

United Health Services (UHS) has barely moved. Electronic Arts (EA) hardly blinked. Money clearly rotated into Foot Locker on Friday as it climbed 4.1% on 3 times average volume (they beat estimates on Friday's earnings announcement).

After going through a number of charts this weekend, so far I see little in this current pullback that suggests it will be anything more than brief interlude.

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, please click on the following link: www.markettamer.com/seasonal

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2015 Stock & Options Training LLC

Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.

Gregg Harris is the Chief Technical Strategist at MarketTamer.com.

The content on any of Market Tamer websites, products, or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options, and other securities involve risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities are not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/publications/risks/riskstoc.pdf). The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.

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