Take Out Your Fair Share

It doesn't really matter whether this week's selling pressure is the start of a larger-scale correction or the pause that refreshes ahead of a new rally leg. More important, traders and investors need to respond proactively to whatever the ticker tape throws at us to take our fair share of money out of the market.

I'm talking about a flexible approach in which we accept the recent selloff at face value, raise cash levels and start the hunt for strong stocks that are starting to pull back to substantial support. At the same, let's consider the likelihood of another false breakdown by building a list of momentum plays that have held up well through the downdraft.

This bilateral approach will only work well if we pay close attention to what the market tells us in the next week or two. Here are the initial questions: Do we hold our ground after Monday's breakdown of the two-week trading range? Do the big gaps posted that day get filled and do sellers return in force when that happens?

S&P 500 Index Daily eSignal

This week's downswing gives us several levels to watch as the battle lines are drawn. The key to the S&P 500 index lies at 940 at the upside and 894 on the downside. The top number is self-explanatory because it marked Monday's breakdown level. At the other end, the lower number points to support at the 50-day moving average.

This is a line in the sand because a selloff through that number might not stop until 880, which would completely unravel the last leg of the four-month rally. That would be bad mojo because the index has posted a higher low after each pullback since March. That violation would end the bullish string and yield a first failure pattern that might herald an even stronger decline this summer.