After Wednesday's drop, it was reasonable to view it as the beginning of an overdue pullback. Yesterday's gap-down open looked to be a continuation, and confirmation, of that pullback.
But buyers came in, showing no fear. IWM, the Russell 2000 ETF, ended up forming a possible reversal pattern. A one-day pullback? Notice that back on May 2nd IWM had a sharp down day on the highest volume in 5 months, but reversed the next day, gapped-up the following day, and continued on. Will the US markets do it again?
SMH, the semiconductor ETF, staged a similar reversal yesterday. Most of the other indexes and major ETFs were very close.
How overdue are we for a pullback and how much of one should we expect? Since 1981, the S&P 500 has had 315 short-term cycles. The up and down portions of each cycle average out to:
By these averages, we're certainly overdue for a correction, and should expect much more than a one or two day 1.5% pullback.
But as bad as it looked the past two days watching the overall markets, some individual stocks are ignoring the fuss and are steamrolling upwards.
Forest Laboratories, for instance, was not a stock to be short:
In fact a lot of drug and biotech stocks showed strength the past few days. Some of the big names though look ready to fall. McDonalds for instance, is setting lower highs, and is showing increasing volume on pullbacks.
It's possible we may have a ‘rolling correction', where profit-taking may hit several sectors, but the money just moves right into other sectors. That may be too much to hope for, but it does happen periodically in the markets.
In case you're curious, most stocks, indexes, and ETFs I analyze, come out with similar track records of cycles. Up-cycles usually last about 14 days, on average, and down-cycles about the same. McDonalds track record is:
We need more than a one or two day correction. Yesterday's rebound may be providing a good spot to take some profits and cut back other positions. Of course, the market could just thumb its nose at us and resume reaching for the clouds. But I'd rather be more of a spectator, not a speculator, right now. Smaller trades are in order. The best approach may be to just add to winning positions, and cut back or close the weaker positions.
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, type in www.markettamer.com/seasonal-forecaster
By Gregg Harris, MarketTamer Chief Technical Strategist
Copyright (C) 2013 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 with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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