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Minyanville's T3 Morning Market Call: How Deep Could the Correction Go?


Some leading sectors broke their 8-day moving averages, and leading stocks engulfed some upper levels.

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World markets followed the lead of US markets and sold off last night and this morning following yesterday's hawkish Fed minutes. The Fed minutes are only part of the equation though, as we saw weak earnings in a few key sectors lead to potent sell-offs. European PMIs also came in a little bit soft and many of those indices are now off 1.5% or so. Chinese markets are down almost 3% as they've been up big since December. The Nikkei (INDEXNIKKEI:NI225) shed about 1.4%.

Now that bears have finally had their day, you could see a lot of people coming out of the woodwork to predict how deep this direction could take us. Nobody truly knows how deep the correction could go, the same way we didn't know how long the 8-day moving average would be a great roadmap for a portfolio approach in 2013. All we can do is measure levels along the way and let the market tell us what it wants to do. You don't have to "know" if you switch gears at key inflection points when the market changes composure. Yesterday was a great day for that.

S&P futures are also getting some small downside follow through as we broke our 8-Day moving average yesterday. We were dancing around the 21-day pre-market, but are currently set to open above it. If we do break that, the next areas to watch would be the psychological 1500 level with bigger support at 1495. Yesterday's low is 1511, which should be an interesting pivot. Then next resistance level would then be 1518. If the bears want to keep the pressure on, they probably don't want the bulls to reclaim the 8-day moving average.

IBD did put the market in "rally under pressure" yesterday. One more distribution day and they will likely go to "market correction." Last year the condition changed five times or so, each time it was a time to switch gears, in my opinion.

The Homebuilders ETF (NYSEARCA:XHB) gave us clues yesterday as it broke lower first following weak earnings from Toll Brothers (NYSE:TOL). The ETF lost support of both its 8- and 21-day moving averages, and is holding just above its 50-day. Another major stock in the sector, Ryland (NYSE:RYL), broke a long-term uptrend and looks like it could be set for more downside.

The agricultural stocks are broke down yesterday after weak earnings from CF Industries (NYSE:CF). Much like the homebuilders, the Agribusiness ETF (NYSEARCA:MOO) broke below both short-term moving averages and is near its 50-day.

Some leading sectors also broke their 8-day moving averages, and leading stocks engulfed some upper levels, giving further signs for caution.

Google (NASDAQ:GOOG) has been the best-in-breed high beta tech stock, and that held true yesterday. GOOG held above its 8-day moving average in the sell-off, and this morning is set to open about $5 higher while futures are down. If GOOG can continue to hold up well in this pull-back, it will be a positive sign for tech overall.

Netflix (NASDAQ:NFLX) has been the momentum favorite, but did engulf some of its upper level yesterday. Yesterday's low to watch is $186.50 and the 8-day is $185.48. The line in the sand for upper level longs is $174-177.

LinkedIn (NYSE:LNKD) also put in an outside day yesterday after a big move since earnings. It traded above $163 and then closed below it on the lows of the day. Yesterday's low is $157ish, then $154-155 should be an interesting area.

Apple (NASDAQ:AAPL) has been weak with very limited action and been controlled by a major descending trend line. Maybe it will go positive for cash flow, but it's not compelling. The shareholder meeting is next week. Support levels to watch with today's down open are $442 and then $435.

Amazon (NASDAQ:AMZN) gave in to the selling pressure after it was a nice day-and-a-half long, then I left as it couldn't hold $270.65. The 50-day is $262.

Baidu (NASDAQ:BIDU) has been a nice shorting vehicle as its earnings gap has been controlling the action. The $95 level was the pivot short area, now it's coming into $86, which could be a good spot to cover if you stayed the course.

VMware (NYSE:VMW) also had a big downside gap after earnings and continued lower. Now it's around $70.

Facebook (NASDAQ:FB) still hangs around. I'd like to see it hold $28ish.

Financials came in a bit yesterday, with the Financial Sector ETF (NYSEARCA:XLF) getting its first definitive close below the 8-day moving average this year. Now is when you choose your time frame. Active traders probably got out of most yesterday, while longer-term players can wait to see what it leads to.

Goldman Sachs (NYSE:GS) closed on the lows yesterday and is opening lower. It looks like the 8-day won't hold, and the 21-day is down at $149.00. That could be spot to buy.

Bank of America (NYSE:BAC) engulfed its upper flag and could see more downside. I will give mine to $11.50ish but I am active and can always buy back. If you sell yours and don't navigate, you might save money now, but I don't think the highs of the year are in.

Metals' weakness intensified yesterday before and after the Fed minutes, but they are up a bit this morning. They could bounce a bit this morning with the market down and some weak European data. See how much of yesterday's sell-off these can take back, which will give us clues to see "what type of bounce" we get. Gold (NYSEARCA:GLD) held above macro support of $148-$150. There is some short-term resistance now at $153, then $154.56ish.

Now is a time to think about your time frame. Hopefully you navigated your portfolio yesterday. Even if you are a longer-term trader, there was reason to potentially buy some insurance. You're allowed to sell some stock, add to hedges and lighten up positions, depending on your preferring method.

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Scott Redler is long VZ, FB, GE, BAC. Short SPY.
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