After the big move last week, we are seeing fairly routine profit-taking and consolidation so far today. Some small-caps are being hit pretty hard, so you can't be too sanguine about the action, but at this point there isn't any indication that it is anything other than just a reaction to the overbought condition.
The big question we face is, will the selling eventually turn into a major reversal, or will it stay contained and help set the stage for further gains into the end of the year?
Generally, very strong moves like we've had off the early October low don't just suddenly reverse. Action of that sort affects sentiment and creates a new supply of bulls. Many of them were underinvested and missed out on gains. They are afraid that could happen again, and the trends to motivate them to buy dips and pullbacks.
When the market runs like it did in October, even the bears have to question to some degree. Even if you believe the action was unjustified and totally irrational, you have to at consider the possibility that it will continue. When you are run over by a freight train, you have to wonder about the wisdom of arguing with the action.
My view at this point is that we are just undergoing some routine consolidation, and I'll be looking to add to positions as it plays out. It is a good time to more fully develop your shopping lists and to have a game plan in mind as the action develops.
Although there may not be a whole lot to do at the moment, I'm feeling quite optimistic about how this is playing out and am looking for some very good trading to develop.
Keep an eye on VirnetX Holding (VHC). I mentioned this one a while back as a play on patents, and it is popping on an initial buy and a $50 price target from Craig Hallum. There is a big short interest here, and the potential for a squeeze is quite high.