The rally in the Powershares QQQ Trust (QQQ) failed to overcome the resistance at $68.35, line a, before the 1.5% drop Wednesday.
The iShares Russell 2000 Index (IWM) made a slight new rally high at $92.68 before reversing sharply to close at $90.83, which was down 1.8% for the day.
What It Means: The stock market has a seasonal tendency to decline this month, which was the February surprise I discussed last month, and typically, they last several weeks.
The daily technical studies are still mostly positive and the current technical outlook suggests two likely correction scenarios.
The first and most likely is that we will see a 3-5 day decline in the S&P 500 to the 1480-1485 level. This would be followed by a sharp rally that should take the major averages back to, and possibly above, the recent highs.
The other likely scenario is that we will see a brief but sharp drop that is followed by a rally that would take the S&P 500 to the 1540-1550 area.
The expected showdown over the sequestration deadline is likely to cause a further increase in volatility and put buying was heavy yesterday. This is wild card as some nervous selling is likely as the deadline is approached but another last-minute deal could be followed by a relief rally.
I have been recommending select profit taking for most of the month and have continued to tighten the stops on stocks in the portfolio. It is updated today.
How to Profit: There are no strong signs yet that the inverse ETFS have completed sustainable bottom formations, so I have no new recommendation.
Portfolio Update: Should be long the iShares Russell 2000 Index (IWM) from $82.55 and sold half on the close last Friday at $91.74. Use a stop at $87.92 on the remaining position.
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