A Classic Reversal

 | Feb 25, 2013 | 4:29 PM EST  | Comments
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It has been a while since we've had a day this ugly. In fact, the last time we had a reversal this big was back in June 2011. On Nov. 14, 2012, we had somewhat similar action and that marked the end of a three-month downtrend. Unfortunately, the action today definitely does not look anything like a bottom. There was outright panic into the close and you can bet there are some stuck longs who are going to be looking for exits in the next few days.

This action is a classic reversal. We were warned last week that the topping process was starting and then had an oversold bounce Friday. That led to a gap-up open this morning and that was the invitation to sell. Last week's lows were easily breached and, most notably, the selling pressure continued all day and accelerated into the close.

Last week I changed my market bias to topping process from uptrend. It now looks like we have moved to a full-fledged 'correction. If you haven't already taken some defensive steps, it is not too late to do so.

What always happens as the market begins a correction is that there will be a multitude of bulls in the media telling us that this is a buying opportunity. They will go on and on how you have to rush in and buy before things bounce.

While I tend to agree that a correction is a healthy event that will provide new opportunities, there isn't any big rush to jump in. We need to let stocks find support as they continue to shake out the overly optimistic.

I can't say I'm unhappy to see this sort of action as it is what we need for better trading down the road. The key is to make sure you stay safe while it plays out. Another positive is that maybe CNBC will forget its ridiculous obsession with new index highs for a little while.

Have a good evening. I'll see you tomorrow.

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