When stock indices started correcting in April and May, there was no real sense of panic since the market already seemed to be overbought. The market had plenty of room to correct to the downside and still stay within a healthy uptrend. Even though the recent decline is a bit scary, as indicated by panic calls to brokers and advisors, we have to realize that the current decline is only similar to some of the prior larger declines since late 2011.The daily chart of the S&P 500 is a good illustration of this.
Note that the two prior declines I marked were at $155.94 and $134.00. The most recent decline so far has been $117.52. If we project the two prior declines from the April highs, they show us potential support to the decline around the 1288 handle and the 1266 handle. So, we could trade down another 38 points on the S&P 500 and I would still believe that this market might be OK. If it trades down more than 38 points and break those support decisions by a decent margin, however, then I will start to be concerned.
I have no interest in stepping in front of the steamroller here, but I will watch for technical indications that suggest the decline might be ending. Until then, look at selling some of the technically weaker stocks, like Netflix (NFLX) and Schlumberger (SLB), and only buying the very technically strong stocks, like Amazon (AMZN) and Google (GOOG), for a trade with your risk clearly defined.
Another way to protect yourself in these markets is to wait for confirmation that a stock is worth placing a bet on. Let's look at a recent setup in Macy's.
On the weekly chart, I have been focusing on two possible areas where this stock might have value. The first zone is $35.84 to $36.72. The second is $33.85 to $34.83. The plan was to see if one of these key zones held, and if it did, watch for a lower time frame to trigger an entry. Price initially held against the first key price support zone, so I was watching the 30-minute chart to see if the pattern would shift back to bullish. The 30-minute chart shows what has kept me out of this stock so far.
Two things on the 30-minute chart indicate Macy's (M) is not ready to resume the rally. First, we have not seen a bullish moving average crossover on this chart. Second, important resistance, including 100% projections of prior rally swings, wasn't cleared. Look at the similarity of those swings between $1.29 and $1.69. Macy's was unable to rally for more than those prior rally swings. This told me that it was not time for a buy entry. What to do now? Wait and see if M tests the next key weekly support decision. If it does, I go through this same process and see if it is worth placing a bullish bet. As of now, I have not placed a bullish bet on Macy's.