Investors hit the reset button on the market and we lost two months of gains. The major indexes fell into a 10% correction and knocked us back to levels we have not seen since Thanksgiving. The December ramp higher on tax reform hopes was erased. The January euphoria rally was eliminated. Two months of buying, selling and investing were wiped out in 11 days.

On the bright side, this is a buying opportunity. Our stop losses took us out with gains on most of our positions. In hindsight, when something like this happens we always wish our stops were tighter. However, when stocks are tight we always risk getting knocked out on simple headline volatility. We try to find a middle ground but it is never easy. I always encourage readers to choose their own stop losses and change them frequently. You have the ability to exit and reenter positions at any time where the newsletter is once a week and that limits my flexibility.

The markets may have exhausted the selling. There is no guarantee but quite a few stocks have what appear to be double bottoms and the indexes all stopped at major support points.

Typically, when a market corrects and creates a volatility event like the one we saw last week, it takes 4-5 weeks for the volatility to fade back to normal. That means the market should continue to see triple digit intraday swings while portfolios are restructured and repaired, but probably not 1,000-point swings and losses. This coming week could be volatile but it should begin to fade soon.

The -10% level on the S&P was 2,586. The index closed just below that level on Thursday and Friday. The S&P traded significantly lower intraday on Friday but recovered at the close. If the index can hold this level and begin to retest the 100-day average resistance at 2,639 next week, it would be a good sign. Markets rarely bottom on Friday's but it has been known to happen.

The Dow touched decent support just above 23,250 on Friday and traded in a 1,022-point range. The index closed under 23,954 and in correction territory on Thursday so we can check that off the completed list. The Dow was the most overbought so it makes sense it should have sold off the worst. The 100-day average at 24,100 would be a good spot to build support this week. I would rather not test the 200-day like we saw on the S&P.

The Nasdaq has not closed in correction territory under 6,755 but it has traded there. The index rebounded 287 points from the intraday lows to close with a 97-point gain. That is a very strong move no doubt powered by short covering before the close on Friday.

The Russell also traded in correction territory under 1,449 but has not closed there. The index found support at 1,462 and the 200-day average. Resistance is now 1,508 and the 100-day at 1,520.

We have a busy economic calendar next week but traders are going to be focused on market movement and market levels rather than the Philly Fed report of the Housing Market Index. As long as economic conditions continue to improve, the reports will remain filler headlines in the background.

The earnings calendar still has a few well-known names although the intensity has faded. There are only 57 S&P companies reporting this week and 341 have already reported. Cisco and Applied Materials will be the largest tech stocks to report. Under Armour should get a lot of headlines as a cult stock and the rest will be minor headlines depending on market direction. If we have another 1,000-point move in progress, the earnings will be ignored.

I would like to think that the worst selling is over. However, there are a lot of damaged portfolios and managers will be kicking out the injured positions and trying to add some more winners. They are as confused as retail traders but they have a mission. Cut the deadwood and keep accumulating the green shoots. Any stock that appears to be fighting the market decline will suddenly become a favorite.

This is a good time to go shopping if you have extra cash in your account. Even if we do dip a little lower, the odds are very good for a double-digit rally into the Q1 earnings cycle. Wells Fargo was pounding that drum on Friday.

Enter passively, exit aggressively!

Jim Brown

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