A Typical Shakeout?

The most notable thing about the action this week was that it played out pretty close to the conventional rules of technical analysis - for those that believe. We had a big ugly breakdown the prior week, we bounced back on declining volume, failed almost exactly at the 50-day simple moving average of the S&P 500, rolled over and filled the Monday morning gap.

That is textbook technical action. The folks who were caught in the breakdown on May 6 and 7 wanted out, and as soon as they had a chance to reduce losses, they started selling, and that killed the bounce. The levels we hit and the way we moved perfectly illustrated the psychology that technical analysis attempts to capture.

What is ironic is that we have been in a market environment for so long that has tended to ignore the traditional rules. We have rallied on declining volume, cut through resistance areas like they haven't mattered and pulled off a series of V-shaped moves to new highs. Perhaps the fact that we haven't seen the traditional patterns in so long helped them to occur this time. Just when people start anticipating that the exception to the rule will continue, we revert to the rule.

Obviously, the million-dollar question now is, "What happens next?" Are we undergoing a major change in the market trend, or is this just a healthy shakeout which will quickly find support and set the stage for a move back up?

We have suffered some pretty severe technical damage, which hasn't mattered much in this market until this week, but we can't just dismiss it and hope the market shrugs it off and goes right back up. We are dangling without much technical support, and the S&P 500 has pretty clear sailing all the way down to 1100 or so.

While conditions are good for an oversold bounce, especially if we open weak on Monday, we have to be on watch for a lower series of highs and more failed bounces. That is what will make for a downtrend, and we can't rule it out just because we've recovered so easily from every other pullback we have had since March 2009.

I believe the best approach here is to make sure you are in stuff you're comfortable with, whether that be cash, AAPL, or what have you. There are always opportunities for profit if we stay open-minded and are persistent.....

long AAPL