For weeks investors and traders have been wondering what excuse the market would finally find to sell off and relieve the severely overbought technical conditions that have developed over the last couple of months.
While, there have been several news events that could have triggered some selling, the strong momentum continued.
When the news of the coronavirus in China hit, a number of traders thought that may finally be the triggering event. However, after the World Health Agency made some optimistic comments about the likelihood of the virus spreading the market bounced back and then celebrated a good earnings report from Intel (INTC) .
Friday morning it looked like the uptrend was back on track without any notable corrective action. There were price target updates for Apple (AAPL) , Facebook (FB) and Alphabet (GOOGL) , as well as strength in the semiconductor sector but then headlines appeared about a virus case in the U.S. and it started to become clear that maybe the situation was worse than had been portrayed. China has quarantined population equivalent to the state of California and cases are coming up in several other countries.
While the declines on Friday may cause some pain, this selling was badly needed if the market is going to develop a healthier technical pattern. The S&P 500 has only given back five days of gains and hasn't broken the uptrend line so this is hardly a major technical breakdown at this point. On the other hand, it is the sort of corrective action that will create better conditions moving ahead.
It is very likely that there will be some substantial news about the coronavirus over the weekend, although to what degree it was discounted by the market Friday cannot be determined. If the dip buyers don't jump in quickly on Monday it may cause some increased pessimism. That may be a good thing for aggressive traders looking for increased volatility to trade.
As always, bad action isn't all negative as it ultimately leads to new opportunities. The key is to manage positions closely, protect capital and be ready to act as things develop.
Have a great weekend. I'll see you on Monday.
(Apple, Alphabet and Facebook are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
