Ready or not, the stock market correction we've been waiting for is finally here. And after Friday's session, where 81% of Nasdaq's volume flowed into declining stocks and 83% of the stocks that make up the S&P 500 closed the day in the red, it's fair to say that sellers are ready to get involved.
But remember this: While Friday's bearish momentum may set the tone for this morning's session here on Monday, if you're selling short while the major indexes are above their 21-day exponential moving averages (EMAs) and 50-day simple moving averages (SMAs) and the Relative Strength Index (RSI) is above 50, you'd be wise to have one eye on the exit as you're betting against the short and intermediate timeframe trends.
Look at a chart of the iShares 20+ Year Treasury Bond ETF (TLT) . While I rarely day trade TLT, the indicators line up pretty well.
While the chart and uptrend of TLT are anything but smooth, you can see how the RSI held above 50 through July and the uptrend remained relatively intact. But on Aug. 11, TLT broke that uptrend line, the 21-day EMA and the 50-day EMA and the RSI cracked beneath 50. The subsequent churning was an opportunity to sell, not buy.
While this is all easy to see with the benefit of hindsight, it supports the general idea that if you're a momentum or dip buyer, you want to identify the direction that the market is trying to move in and participate in that direction. In the case of TLT, I would not want to be long unless you're scalping during the day timeframe.
If we switch our focus to the Invesco QQQ Trust (QQQ) , we have price back beneath an 8-day EMA (it really doesn't matter if you're using a 5-day or 10-day, they're all about the same) but still above the 21-day EMA, and the RSI is above 50. From a day-trading standpoint, I'm willing to be long if price is holding above the day's volume-weighted average price (VWAP). But from a swing trading perspective, when I see the aggressive selling that has flowed into many of the momentum names over the past week, I'd rather wait for a strong setup around the 21-day EMA or, preferably, a bullish reversal near the 50-day SMA and VWAP anchored to the June 16 swing low.
If you're watching the SPDR S&P 500 ETF (SPY) or iShares Russell 2000 ETF (IWM) , it is worth noting that their charts are nearly identical to QQQ. In all three cases, the VWAP anchored to the mid-June swing low is sitting right near the 50-day SMA. For now, if we dip that low, that's where I'll be looking for a strong showing from dip buyers.