A Good Day - Or is it?

Nice day in the stock market today with most major indexes making good gains such as the DOW up 116, NASDAQ up 23 and S&P up 15. When a market is in a down trend we often get reactions to the upside but most are not sustainable before the correction resumes. Of course one of them will be sustainable and that is the one that marks the downtrend low point as we turn back up. We cannot know when this happens until after the event. For this reason it is foolhardy to try since you would end up buying every bounce that occurs in a down trend. This could be the low or it could be just a bounce in a longer term down trend, don’t buy every bounce. This is why we have to wait for the “follow through day” which has been discussed previously. Even the follow through day can be wrong but it will at least give us an “odds favor” position. Let’s take a look at the chart of the DOW below courtesy of http://www.bigcharts.com/.

I have circled in the volume area at the bottom of the graph, the high volume red spikes. Those days are mostly down days on heavy volume with lower volume up days. This market is clearly under distribution and should NOT be bought. Even today’s nice 116 point jump is on lower volume. We need to see the conviction of a substantial up day on heavier relative volume. Making matters worse the 50 day moving average line has now been decisively broken to the down side and even the 50 day line itself is starting to turn down. If a prolonged downturn was to develop you will see the moving average act as resistance. In other words each time the DOW starts moving back up to approach the 50 day moving average it is likely to be sold off again. Of course at some point we will move across that line to the upside as a new uptrend begins and once again the 50 day moving average line would act as support as it has for the last 9 months.

Low volume bounces with the index under the moving average and the moving average turning down are not a good recipe to buy stock. Do not initiate new positions and manage the positions you still have. Tighten the stops to protect gains and maybe even buy more if they are acting well. Remember the main indexes are only important when deciding to initiate new positions. If you already own positions treat them in isolation and manage them individually. During the 2001 bear market the housing stocks made massive gains as interest rates were lowered, that’s why you need to manage each position individually once bought.