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Market on the Brink of Capitulation

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The market is flashing caution signals. We are on bar 8 of a DeMark buy setup 9 that needs a new low to "perfect."

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Market technicals are weak, jobs numbers soft, and we found out this morning that economic growth may be slowing. Yes, it's is in the air, and it's rapping on the market periphery: Things are not well.

The market is on the brink… of capitulation.

There has been a lot of nervous energy in the media and on Twitter lately. Not panic, yet, mind you… just lots of up and down emotion as folks try to "game" the financial markets; economists remain eager to assert their views over what the financial markets are digesting (or ignoring) daily, while investors and traders remain eager to show their mettle, play short term setups, and chatter about adding to their book on every down day.

Maybe we're getting to that point in the game where we need a time-out -- some time to just sit back and tune out all the market "noise."

The market is flashing a short term yellow caution flag here, stuck between, and at the lower end of two important technical levels: S&P 500 (^SPY) 1290 and 1340 (see charts below). 1290 represents support at the current lows of this move, as well as the .382 Fibonacci retracement of the Oct '11 lows to April '12 highs. 1340 was prior support on the way higher and now remains congested overhead resistance.

As a technician, support and resistance levels are key. So until I see a breakout or breakdown (capitulation, I hope), I'll be playing small, guarding my cash. As Todd Harrison says, one can learn a lot from watching.

At present, I'm only 20% invested and feeling quite OK waiting for the market's next move. Right now, "cash is king." Not only does it allow for greater flexibility, but it allows investors to trade a bit, and to stay involved by nibbling at stocks they like as the market falls (and add larger chunks after the market heals). But unfortunately what I see all to often is traders/investors pressing to remain fully invested, arriving early and being forced to "gut" out some tough moments.

If you were early and now find yourself over-invested, I have news for you: I feel your pain. I've been there and lived through it just fine. You will too. It takes a lot of focus and work (emotionally, as well) to manage through it, but we live and we learn. If you find yourself worrying too much, you may want to give yourself a break and trim a small portion off enlarged positions. A little cash affords healthy flexibility.

In short, the markets are in technical limbo here, waiting for a capitulatory move. On the daily chart (below), we are stuck between the aforementioned 1290 and 1340 levels. And on the weekly chart (below), which is probably the most important, we are on bar 8 of a DeMark buy setup 9 that needs a new low to "perfect." If this setup plays out (with capitulation), we should see a solid tradable bottom in the next week or so. This scenario would "fit" well, as there is an open gap from May 21 that is beckoning lower prices. But, as you all know, the market has a mind of its own. And DeMark setups do not need to be perfected (although, they often perfect later on, if not during the setup).

One final takeaway: Contrary to conventional wisdom, I believe the key to becoming a market pro has less to do with how one manages the upside, but rather how one manages the downside. Avoiding big losses is the key.

Trade safe. Trade your plan.

S&P 500 – Daily Chart



S&P 500 – Weekly Chart




Editor's Note: Andrew Nyquist is an independent investor based in the Minneapolis area. This article originally appeared on his investing and economics site, See It Market.

Twitter: @andrewnyquist
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No positions in stocks mentioned.

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