The bears have taken center stage over the past several weeks, and they simply aren't ready to relinquish that position in the second half of the week. Over the past six months, every time the market has had a correction similar to the one we have seen over this past month, it has quickly recovered its losses before pushing to new highs.
The core strategy that worked well is to short two waves of downside on the 60-minute time frame and then look for reversal strategies such as an inverse head-and-shoulders pattern to turn the market around once more. The larger market still has this potential, and I do suspect that we will see new highs once again as we head into the summer.
This time around, however, the exhaustion the market felt as it retraced its path off this year's highs had stronger volume and stronger downside momentum. The market may look poised for a comeback, but in order to make it back to the year's highs or even further, the market needs to continue to shift momentum intraday with slower selloffs and stronger rallies on the 60-minute charts. Even after another attempt at highs in the overall market, many stocks will remain under even greater pressure.
Over the next couple of weeks, I will scan individual stocks that have shown greater relative weakness compared with the larger market. Mohawk Industries (MHK) is one example. It has been moving rapidly higher since late 2011, and it has been in an uptrend since 2009.
Almost exactly one month ago, Mohawk formed a momentum reversal to trigger a short. That short had two waves of selling, leading to exhaustion on the 60-minute time frame as Mohawk struck price support around $104. Although it is now at a strong level of daily support, if it continues to hug this support level without any strength returning from the bulls, then another wave of downside with similar momentum becomes probable. This is a strategy I call an "avalanche."
On the other hand, if this level does continue to hold and Mohawk pulls through the $120 resistance zone, then a retest of the highs becomes more likely. In either case, it the larger trend exhaustion will have the greatest impact. I'll continue to monitor Mohawk over the next several weeks for short strategies.
Archer Daniels Midland (ADM) and The Andersons (ANDE) are two other choices to add to the watch list. As with Mohawk, they may also see a period of correction off the support earlier this month, but the momentum shift off highs and the subsequent base intraday at lows on light volume definitely make it easy for the bears to cheer for these three. For Archer Daniels Midland, $31 is the next major daily support zone, and for The Andersons, $49 is the next major support. For Mohawk, $103 is the next support, but longer congestion on the daily time frame can weigh on the stock and pull it lower into $100. Monitor the 90-minute time frame for short strategies.