(By Rich Bieglmeier) There is very little doubt that a downtrend is underway. At the very minimum, stocks could be range bound for the next six weeks or more. In the past year, when the indexes bearishly breached their 50-day averages, it took at least two months for them to reach new heights.
Stocks dragged from April to September the last time support at the 50-day went bye-bye. There is some good news though. The first trip below the key, technical benchmark is usually followed by a sucker's rally. A jump is used by the Wall Street sharks to entice the dip buyers, so the cold-blooded predators can take profits.
As a 20-year trading veteran told me recently, "You know when you put your order out there that you are fodder for slaughter to the high frequency guys. You just hope they let you live. You know it's true."
That's why it is important for investors to understand the prevailing trend, "For long you live and high you fly, But only if you ride the tide, And balanced on the biggest wave." Otherwise, trading from day to day will have your portfolio "Race towards an early grave."
Since iStock tries to identify the prevailing trend, not the current wave, we think investors might consider taking defensive measures and using rallies to raise some cash – just in case a small correction turns into a big one.
Support on the way down usually flips to resistance on the way up. You might consider adding an inverse ETF such as ProShares Short QQQ (PSQ) if the NASDAQ hits 3,100 or more.