It's Portfolio Crunch Time

10/10/2013 10:20 am EST

Focus: ETFs

Thomas Aspray

, Professional Trader & Analyst

Politically induced market volatility notwithstanding, MoneyShow's Tom Aspray counsels that one must not lose sight of longer-term portfolio goals amidst the noise of the short-term gyrations.

The stock market’s early strength on Wednesday was overcome by another wave of selling as the major averages made new correction lows before closing mixed. All of the Dow averages closed with slight gains as did the S&P 500. The Nasdaq Composite and Nasdaq 100 once again were hit the hardest with slight losses in the mid- and small-cap indices.

The overnight news of a possible short-term budget and debt ceiling deal has spurred a nice rally overseas with the major Euro averages up well over 1%. The S&P 500 cash and futures formed dojis yesterday so a close in the cash S&P 500 above 1662.47 and $166.20 in the Spyder Trust (SPY) will trigger high-close doji buy signals.

In the current environment, it is necessary to separate the near-term outlook with the longer term portfolio goals. Clearly, the drop over the past week has been more severe than I expected as the selling has reached panic levels once again. Though this is likely to create a buying opportunity for higher stock prices by year end, how much pain can investors or traders take over the short term?

As we get closer to the debt ceiling deadline, some stocks are violating key support levels and therefore hitting many stops. If the market soon reverses to the upside, then getting stopped out will be quite irritating but it is preferred to taking a double-digit loss if the political stalemate is not resolved. The technical indicators reveal that the strength of the next rally will be important.

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Chart Analysis: The NYSE Composite dropped down to test the daily starc- band and came close to the previously identified support at 9415.

  • The uptrend, line a, was broken during the day but the NYSE closed above it.

  • The close was just above the monthly S1 support at 9483 with the projected monthly support at 9309.

  • So far, the decline has held well above the August low at 9246.

  • The McClellan oscillator has turned up from the -160 level and is close to testing the former downtrend, line b.

  • The oscillator is still well above the oversold levels at -300, line c.

  • The NYSE Advance/Decline has dropped further below its WMA and still has major support at line d.

  • It would take a move above the WMA to break the short-term downtrend. This would take two-three days of positive A/D ratios.

  • The NYSE has near-term resistance at 9558, which is the quarterly pivot with the monthly pivot at 9607.

The PowerShares QQQ Trust (QQQ) has dropped from a high on October 2 of $79.76 to a low yesterday of $76.35, which was just below the quarterly pivot at $76.92.

  • The daily starc- band was exceeded with the 38.2% Fibonacci support at $75.64.

  • The 50% retracement support from the late June lows is at $74.37.

  • The OBV has been below its WMA since September 27 and has now reached next important support at line f.

  • The weekly OBV (not shown) is still above its WMA.

  • The Nasdaq 100 A/D line is now testing its uptrend, line h.

  • The A/D line failed to make a new high with prices as it has important resistance at line g.

  • This A/D line resistance needs to be overcome if the QQQ makes further new highs or it will send a stronger warning.

  • There is first resistance now in the $78-$78.60 area.

NEXT PAGE: A Stock & ETF to Watch

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Microchip Technology Inc. (MCHP) is a good example of the market’s current critical juncture.

  • The Wednesday low at $38.46 was just above the late August low of $38.44.

  • The close was just below the monthly projected pivot support at $38.88, line a.

  • The on-balance volume (OBV) was stronger than prices in August as it moved above the early August highs.

  • The OBV has now dropped back to more important support at line c.

  • The weekly OBV (not shown) is still above its WMA.

  • There is initial resistance now at $39.59 with the monthly pivot at $40.

The SPDR S&P Homebuilder (XHB) dropped below its uptrend, line d, on Wednesday as it hit a low of $28.71.

  • This was just above the monthly projected pivot support at $28.63.

  • There is further support at $28.39 to $28.16, which corresponds to the early September and August lows.

  • The OBV broke out in early September as the resistance at line e, was overcome.

  • This is now support for the OBV, which is being tested as volume has been heavy over the past five days.

  • There is minor resistance now at $29.50 with further at $29.89.

  • The monthly pivot and stronger resistance is at $30.36.

What it Means: The severity of the recent decline has stopped us out of several of our positions, especially in the homebuilding sector. This has been one of our better sectors since it bottomed in October 2011. Though I still expect this sector to be higher by year end, I was clearly early on the long side.

If the market can close above Wednesday’s highs, it will be a short-term positive but further gains are needed to suggest that the worst of the selling is over. A debt deal could cause a major short-covering rally.

Conversely, a failure to raise the debt ceiling by the deadline is likely to trigger a wave of much heavier selling. Therefore, stops have been adjusted further in the Charts in Play Portfolio.

How to Profit: No new recommendations

Portfolio Update: For the PowerShares QQQ Trust (QQQ), should now be 50% long at $77.42 and would add 50% long at $76.64 with stop at $73.13. On a close above $79.35, raise the stop to $75.89.

For Microchip Technology Inc. (MCHP), should be 50% long at $39.75, use a stop now at $38.19

NEXT PAGE: The Charts in Play Portfolio

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