Heading Down and Then Up Again

01/19/2010 9:25 am EST

Focus: MARKETS

Mark Leibovit

Chief Market Strategist, VRTrader.com

Mark Leibovit, chief market strategist for VRTrader.com, says we may see a sell-off in the coming weeks, but then he looks for the market to rally again.

The bears had their way on Friday as the week closed out on a decidedly sour note, but a round of late buying brought the indices up off of their lows. For the session, the Dow Jones Industrial Average was off 100.90 at 10,609.65, the Standard & Poor’s 500 index was off 12.43 at 1136.03, and the Nasdaq Composite index was off 28.75 at 2287.99. Volume increased over Thursday and breadth was weak.

Friday's trade got off on a sour note as the bears applied pressure all session long. Semiconductors got waxed as SMH lost 3.13%, breaking through support at 27. Gold miners also were high on the loser's list, falling 2.37%.

Small caps (-1.31%) and mid caps (1.32%) each lagged their blue chip counterparts in what was a noticeable flow away from risk today.

In other important sectors, financials fell despite JP Morgan Chase's (NYSE: JPM) strong earnings report as both JPM and Capital One Financial (NYSE: COF) raised loss reserves. Transports (-1.18%) and homebuilders (-1.94%) were also negative.

The market had its worst day in a month. Small cap stocks underperformed (falling 1.45%) as traders moved to safer large-cap stocks.

Volume ran pretty heavy to the downside and several Negative Volume Reversals ® were formed. I was looking for a “Cycle Change Point” by Monday, and with Monday being a market holiday, it apparently came early. The market is running headlong into a potential cycle “change of direction point” into or just after this weekend in my work—a CDP as I've called it for nearly 25 years!

We are now trading the short side of the market. On a trading basis, I am pretty much back into a cash position, though I remain on my near-term “Buy” signal—the same one I've been on since December 1st.

Should a correction begin, we could be looking at 5% to 10% to the downside. I believe a trigger would be “key reversal” day on heavy volume (higher high followed by lower low) and/or broad-based Negative Volume Reversals ®.

I must emphasize that these are short-term trading comments. With potential in the Dow Industrials to the previously forecast 11,300-11,500 range and the S&P to 1,275 (and possibly more), I would not be running for the hills!

We're going to get our zigzags and, yes, we may have a pullback into late February or March, but the trend is still up. Once we get to Dow 11,300-11,500 and S&P 1,250-1,275, we will reevaluate. Time is as important as price, and time says we still have a ways to go before the onset of a more serious correction or bear market.

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