Pulling the Trigger

 | Apr 10, 2012 | 4:03 PM EDT
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Yes, I might be early. And if so, it won't be the first time. In fact, as you may know, I have already been doing some buying into this selloff. But I raised plenty of cash during the recent pop to new highs, so I was well positioned to add to bullish bets on the way back down, especially as some key gaps have been getting filled.

As of yesterday's close I had returned to a maximum of 65% invested for my accounts at Guggenheim Investments (formerly Rydex), with most accounts in the 40%-50% invested range. Good news, at least for the moment, is that a chunk of those funds are in the Precious Metals Fund and that sector has been holding up pretty well over the past few sessions. In fact, the Philadelphia Stock Exchange Gold/Silver Sector Index is up a bit for this week, and the fund should be up as well. I like the sector even more, now that I hear that Dennis Gartman has been cutting back and is no longer so bullish on gold. That's a pretty good sign that gold is putting in a near-term bottom.

As for the overall stock market, I am becoming increasingly interested in the long side of things, now that the VIX is surging back toward the 21 level. (The high so far is 20.98.) All of that is music to my ears.

VIX: popping to 21 for the first time since early March

Equally important in my analysis of things is the increasingly oversold condition. The McClellan Oscillator closed yesterday at an already fully oversold -234. If we close somewhere in this area, it should be the most oversold reading of 2012 and probably the most oversold since last August, which, you may recall, wasn't a bad time to buy stocks.

In addition to all of the hand-wringing over the end of the bull run and all that, I also am encouraged that this is apparently the sharpest decline in the DJIA and S&P 500 since November. So do you think that's a bad thing? I don't. Last November was a great time to buy. So what's the problem?

Then, there are the charts evidencing the sharp downturns of the past few days. Let's look first at my recent favorite index, the Nasdaq Composite and see what it might be telling us this time. Recall, the Nasdaq Composite warned of a bottom on March 29 when it took care of that island reversal but left a sliver of the March 26 gap intact. Then, when everything else but the Nasdaq Composite was making higher highs, it warned of a near-term top. And now look at it.

So what's it saying now? Today, the Nasdaq Composite has gotten inside of its gap from March 13, originally 2983.66-2996.46, though still hasn't filled it. The low so far, well inside the gap is at 2992.85, is about 9 points shy. If I were a betting man -- and I am -- I'd say that gap could mark some kind of bottom, at least for a bounce.

Nasdaq Composite: returning to its March 13 gap
Source: optionsXpress

The story being told by the Russell 2000 isn't exactly compelling, but this thing has come down hard and in a hurry. Already off 7.4% from its recent multi-month highs. The low so far today is 785.24, which, not coincidentally is just pennies below its March 6 low of 785.41. Here, there was a March 7 gap, which was filled at 787.09. So there is some support in this area.

Now we'll see if the Russell 2000 can hold at this level. I have been writing a bunch of May 74 and 72 puts in the iShares Russell 2000 Index Fund (IWM). I am taking some heat on these, but I will hold for now.

On the upside, there is now a bearish island reversal in place of the March 13 gap, which runs from 814.29 to 815.99. A return to the top of this island is a minimum upside objective for a bounce. And yes, there will be one.

Russell 2000: a bearish island reversal beckons overhead
Source: optionsXpress


Finally, there is the S&P 500, which has also collapsed below its March 13 gap. But here, the March 7 gap is well below current levels at 1343.

Is it headed there? I am betting that it's not, at least not right now -- perhaps over the next couple of weeks, and, if so, I will add to my positions. But for now, I am betting on the bounce.

S&P 500: holding well above its March 7 gap
Source: optionsXpress


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