Is this new trend a correction or a new downtrend? At the present, most of the talking heads are saying it is a correction. But I'm sure as the market heads down further, many of these talking heads will get more negative and start talking about a new bear market. In regardless whether this downtrend is a correction or a prolong downtrend, one must respect the market's price action. And don't get hung up on what is causing the market to turn downward.
Whatever the catalyst is, whether it is: the continuation of the meltdown of the Euro Zone with Spain as the recent trouble spot; the dismal job growth in the US economy; lack of conviction from the Fed to do anymore QE; the strong dollars; or the high crude oil prices; etc. (I'm sure there are more), pay attention to the price action first. It makes no difference to one's account whether he/she know what just caused the market to drop 200 points. What's important is to take appropriate actions to protect one's capital.
Here are my observations on the market. (click on the chart to get a larger view)
The DJIA gave up the 13,000 level and sitting below the 50 SMA & the 20 EMA. It bounced off the 12,700 on an oversold rally. If it breaks this support level, it can possibly go down to 12,200-12,300, which is equivalent to approximately an 8% correction.
The SP500 has been unable to reclaim the 1390 level. The next possible level of support could be in the 1340 area. If it can't hold this support level, then it could drop to the 1280 for a 10% correction.
For the Nasdaq 100, it is trying to hold above the 50 SMA. But with AAPL and GOOG rolling over, it is more likely to test the 2650 level for support. Depending on how the tech sector holds up, this index could drop to 2575 or 2515 for an 8% or 10% correction respectively.
Finally, the Russell 2000 already gave up over 7% from the recent high to the 780 support level. If it can't hold above the 780 level, look for possible downward move to the 10% correction level of 760.
As this downtrend still fresh, it is too early to switch from a long to a short position. But it is prudent to tighten up the stops to protect existing profits and minimize the losses. The extend of this slide won't be known until it is completed. The market has a way to surprise all of us. It can quickly reverse and the SP500 make an all time high above the 1575 level. Anything is possible, but might not be probable...but who's to say it won't happen. Stay alert!
