For much of January, the market moved relentlessly to the upside. There was hardly a downtick during the day, and the dips were bought before they even began. It felt extremely artificial at times but when the computers are buying the bulls don't complain much.
This past Monday we finally had a shift in the action. We had our first real pullback of the year and then some intraday swings the last three. The computer algorithms that had been producing such lopsided action for so long reversed their programming, and now we see the inverse of that relentless upside. The indices have been dropping all day steadily with nary an uptick along the way. It has been a long time since we have had this sort of action and it is causing quite a bit of concern.
It is essential to keep in mind that markets don't go down in the same way they go up. Drops usually occur much faster and usually very broad. Even 'good stocks' suffer when the market corrects because the goal of market players is to simply escape rather than to do so on a selective basis.
Sharp drops tend to lead to big bounces. In fact, you will find that almost all the biggest positive days follow the biggest down days. This fall we see today is very likely to lead to a big bounce but right now we are in free fall and trying to catch that falling safe is a dangerous game.
Corrective action like this is a mixed bag. It naturally causes some great pain if you are holding a lot of positions, but there is no better way to create new opportunities. The key is preparation. Have a shopping list ready and then act like a stalker. Watch, wait and be prepared to pounce when the time is right.
I suspect that many traders are going to be champing at the bit to buy a gap-down open on Monday. It should make for some fun trading next week especially since we will continue to see a slew of earnings reports.
This corrective action is long overdue, and there is no reason to believe that it is the start of an extended period of misery. Stay positive and be ready to trade.
This story first ran on The Street's subscription site Real Money
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