A Complex Stock Market Correction - TheStreet

A Complex Stock Market Correction

Technical analysis suggests the stock market is entering a complex correction that should shake out most investors and set the stage for a rally.
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NEW YORK (

TheStreet

) -- Stock market volatility continues to shake things up, creating opportunities for traders who are quick to spot key reversal points, manage risk and take profits before the market shifts.

On Tuesday we saw the market go up and down more than I have seen in a long time. It moved more than 5% as it trended up then down in 1% increments. (See the chart on the following page.)

Members of

FuturesTradingSignals

were able to capture a 1%-2% market gain. Thatmight not sound like much, but those of us trading the leveraged exchange-traded funds and futures were able to make a 4%-200% profit within a few hours.

Even so, the recent price action is proof that the market does not know which way to go. That means traders must enter and exit positions quickly.

Tuesday's Extreme Volatility

Above is the recent price action I mentioned.

SPDRs

(SPY) - Get Report

The daily chart of SPDRs, the exchange-traded fund that tracks the

S&P 500

, shows my simple volume analysis during market corrections. During the early stages of a trend, pullbacks are quick and simple.

But as a trend matures we start to see corrections become much more complex. We first saw the simple one-wave corrections in 2009, then we saw a much deeper three-wave correction, which was enough to shake most retail (average Joes) out of the market, before we headed higher. Now it looks as though we are headed into a complex 5-wave correction that should be enough to shake out the majority again.

It's important to note that the longer a trend lasts, the larger the corrections/shakeouts must be in order to get everyone out. I'm reading lots of doom-and-gloom predictions, which is good, because it shows a majority of people are bearish. One more leg down should be enough to shake out everyone before we see a nice 10%-20% rally.

Once we see that bounce/rally then we can reanalyze the market to see whether we are headed back up to test the 2010 highs or whether we're just in a bear market rally. In the end it doesn't matter as we play both the long and short sides of the market.

SPDR Gold Shares

(GLD) - Get Report

This gold ETF continues to trade as we expected. We caught a good chunk of the recent rally and are now in cash waiting for another low-risk entry point in the coming days or weeks.

United States Oil

(USO) - Get Report

The United States Oil fund has been struggling to stay up the past two months. As you can see in the chart above, it's trading at a key resistance level. At this point it could go either way. I don't like to get involved in trades that appear to have a 50/50 probability of going in either direction. If anything, I think oil may head back down as the dollar continues its strong rally.

Midweek ETF Trading Conclusion

In short, the broad market is in a downward trend, and selling volume continues to rise. Investors around the world continue to accumulate gold and greenbacks as safe-haven investments. Oil is also in a downward trend and trading at resistance, which means we should see lower prices for oil and oil companies. This will weigh heavily on equities.

Cash is king, particularly during times of uncertainty. It is very comforting to know we are in cash most of the time and only get involved with the market when there is a low-risk, high-probability setup on the charts.

If you would like to receive my trading analysis and trading alerts, check out my Web sites

www.FuturesTradingSignals.com

and

www.TheGoldAndOilGuy.com

.

-- Written by Chris Vermeulen in Collingwood, Ontario, Canada

At the time of publication, Vermeulen had no positions in equities mentioned.

Chris Vermeulen is founder of the popular trading sites www.thegoldandoilguy.com and www.ActiveTradingPartners.com. There he shares his highly successful, low-risk trading method. Since 2001, Chris has been a leader in teaching others to skillfully trade in gold, silver, oil and stocks in both bull and bear markets.