The Sideways Action is Resolved

The sideways action of the last 3-4 weeks has now resolved itself to the downside. You may recall I said don’t buy until the market breaks out to the upside on volume which clearly hasn’t happened. We have now had some wild triple digit up and down days in quick succession. Big swings up then down then up again have been common which is very typical of a market that is in a topping process. This occurs because we have the buyers that we had on the way up but we also have the sellers who are getting nervous driving it down. Some days the buyers win giving a big up day other days the sellers win giving a big down day. As long as we have heavy buying and heavy selling we get the volatility and the sideways action as we have seen. It could have gone in either direction as the bulls or the bears give up first on their campaign. In this particular case we lost the buyers leaving only the sellers to drive the market down. The 50 day moving average has been broken on heavy volume so clearly the market is now in a down trend and my readers should be mostly in cash as their tightened stops have been hit. The graph below of the Dow indicates quite nicely what has been going on, see all the distribution days (red volume bars).

Graph is courtesy of http://www.bigcharts.com/

The downturn could end tomorrow, next week or next month I have absolutely no idea. Beware of the pundits claiming now is the time to buy but also beware of the pundits that say stay out of the market….nobody can know, let price and volume decide.

We have just one thing to do now which is stay on the sidelines and wait for a follow through day to indicate a turn. A follow through day is a big up day on volume followed by sideways movement with no real selling then another big up day to confirm (this is the follow through day). You absolutely must wait for the follow through day because any down trending market is volatile and you will see lots of triple point up days which are fakes just to get you in before the next plunge. We need to see the follow through day as a confirmation. However I must stress that even follow through days are not fool proof. No bull run will start without a follow through day but not every follow through day will lead to a bull run. All the follow through day can do for you is put you in an odds favor position.

Remember when we resume buying we start small in case the market fails again and build on the successes. Now is the time to go fishing or do the gardening and keep your powder dry ready for the next great run.