Heading for Downside Targets ... as Expected

 | Nov 08, 2012 | 5:30 PM EST  | Comments
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In Monday's special column, "My Take -- Victory is Obama's," I made a couple of predictions. First, that President Obama would win and that he'd get at least 290 Electoral votes. That one wasn't so tough to figure if you just looked at the available information. From the reaction I got (mainly from the fact-free zone), you would have thought I was saying that Martians would land this week. The other forecast that I made, which I've been reiterating since September, is that the market would sell off "on the news" after rallying for months "on the rumor." So, the market is selling off. No big shock.

I highlighted a couple of downside targets for the pullback. The first one, the .382 retracement of the rally off the June lows in the S&P 500 weighs in at 1395 and that was easily exceeded Wednesday. The second one still hasn't been tagged and I suspect it will be before this shakeout is over. That's the 50% retracement of the rally off the June lows and it occurs at exactly 1370.63. The low so far of 1381.28 (as of 1:30 p.m. EST) has been within striking distance. I still am allowing for a pullback to that level, and, if it is seen, I will add to my positions. Just for the record, that doesn't mean I will be 100% long at that level. I am currently invested up to a maximum of 55% (I added to positions Wednesday after selling into Tuesday's pop). If the S&P 500 reaches that next downside target, I may increase my exposure (in the Aggressive Growth Accounts) to 65%, depending upon the action.

 

SPX: Probably headed for its 50% retracement.
Source: optionsXpress

 

The Dow Jones Industrial Average, however, also bears watching as it has just tagged its 50% retracement level at 12,848. The low so far has been about 12 points lower at 12,836 and it has bounced off that level. Now we'll see if this area holds. Remember, it was the Dow, not the S&P 500, that called the recent lows on Oct. 25 and again on Oct. 26 as it made a neat double bottom right at its .382 retracement at 13040. Maybe it will be the Dow, which again marks the bottom. Maybe.

DJIA: Bouncing off the 50% retracement.
Source: optionsXpress

Apart from these index plays, I am also sticking my neck out a bit on Apple (AAPL) here, though I know it could fall further. I am watching the intraday action and I like the fact that during the midday selloff, it only broke the morning lows by a few pennies while the indices were collapsing to lower lows by a good margin. I have to allow for the filling of the May 21 gap at the $530 level. That's an important level. If broken, it is headed for a test of the May 18 low at $522. In either case, I won't be thrilled to see such a drop, but as I am generally short the December $500 and $480 puts, I can handle a pullback to that level. My December call spreads won't fare as well.

 

AAPL: Maybe headed for its May 21 gap.
Source: optionsXpress

 

The action in the Volatility Index (VIX) is a bit disconcerting. I'd prefer to see evidence of a bit more panic out there. The VIX still hasn't exceeded its recent highs at the 19.65 level. That's not great news. But somewhat better news is that the market is becoming oversold again. The McClellan Oscillator settled at -87 Wednesday on the oversold side of neutral. It would have been well into oversold territory if it weren't for the sharp pop in bonds, which artificially held up the NYSE AD line. If the market closes in this area with the S&P 500 off about 10, it should certainly be below the -100 oversold threshold, though it must offset the pop in bonds.

 

VIX: Still exhibiting too much complacency.
Source: optionsXpress

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