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Will the Market Gods Finally Hit the Reset Button?

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If we are indeed seeing the beginnings of a sustained correction, we'll likely to see some back-and-forth action before the sellers can begin to dominate.

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The market's persistent uptrend continued into the end of last week, with the S&P 500 again scraping up against the upper end of its rising channel. I've been trying to ride this trend to the best of my abilities, but while the term "melt-up" can be applied to the entirety of the move that we've seen over the past several weeks (and months), it was exceedingly apparent as Friday's trading session developed. That left the market quite extended to the upside and ripe for the sort of reaction we are seeing this morning on this weekend's news of political unrest in Libya. There's plenty of hand-wringing going on over the situation, but so far, these events are merely giving the market a convenient excuse for a much-needed move to the downside.

The big question, of course, is if the bears are going to finally be able to capitalize on yet another opportunity that's fallen into their laps. Given how this market has performed since the beginning of September and particularly over the past 10 weeks or so, though, it's hard to really get very enthusiastic over the possibility that the market gods are about to hit the old reset button for the charts. Then again, oil is involved this time, and that gives this current situation an extra added twist.

One thing that we need to keep in mind is that tops are a process. Markets as strong as this one has been don't typically fall apart overnight. There have been plenty of market players who have been left behind, and are just itching for a way to get in, especially after how quickly we bounced back from the Egypt washout a few weeks ago. If we are, however, seeing the beginnings of a sustained correction (and I don't know many active traders who haven't been rooting lately for some serious backing-and-filling to kick in), we'll likely to see some back-and-forth action before the sellers can begin to dominate.

All we can do at this point is see how things play out. Until the pricing action reflects a change in character, I'll continue to look for long-side trades. My review of the charts over the weekend yielded very little, so it was already my plan to start off the week sitting on my hands. One thing I'll be watching for as today's trading session develops is if we see a lower low after the first hour following this morning's gap down. If that happens, then the chances of a trend down day increases significantly, which would almost certainly give us a technical distribution day. Let's see how it goes. Don't forget that flexibility is a tremendous advantage for the individual investor. There's nothing wrong with heading toward the sidelines if you don't like the way the action is playing out, and there isn't anything preventing you from moving back in if that caution proves to be untimely.


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No positions in stocks mentioned.
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