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How Bad Can It Get?

11/29/11 09:14:41 AM
by Billy Williams

Black Friday racked up billions of dollars in sales, but the market's price action was a bust, leaving traders to wonder just how bad it can get.

Security:   AAPL
Position:   Sell

Last week's price action was less than stellar, and the reality is that it could be more accurately described as a blood-letting. Across the board, almost every sector of the market has been affected by the bearish sentiment that is seeping into the market and gathering steam as bears begin to take control of the trend, causing distribution days to mount up in the major indexes.

This is done on the tail-feathers of Black Friday, which most analysts and economists had hoped would boost the market going into Thanksgiving Day weekend. Sales rose an estimated 6.6% to a record $11.4 billion on Black Friday itself, typically the busiest shopping day of the year for Americans, while the traffic at stores rose 5.1%, according to ShopperTrak. When taken into the context of the "Thanksgiving effect," a historical price pattern that has resulted into the market rising higher on the Wednesday before Thanksgiving to be capped off by a higher rise at the open of trading the preceding Friday, the expectations of investors took a beating.

FIGURE 1: AAPL. Apple Inc. has been a reliable stock leader that has taken the market overall much higher in the past but now is struggling under the weight of negative sentiment by traders and investors alike. Currently, its price is headed lower and could pierce its 200-day simple moving average (SMA), a key indicator of support, which could mean that AAPL is headed much lower.
Graphic provided by:
Stock leaders such as Apple Inc. (Figure 1), Priceline, and Chipotle Mexican Grill are all beginning to show signs of price breaking down. Even precious metals such as gold and silver have not been spared, as selling has been rampant across all sectors. Gold has failed to trade past its former high and appears to be developing a lower high, which could signal a price reversal in that commodity.

With Europeans bickering about how to deal with their debt issues and Americans making little progress on their side of the pond, just how bad could it get as 2011 finally comes to an end?

The historical bias of price being pumped higher by major institutions could reverse sharply at this point in the quarter. Typically, major mutual funds and institutional traders use their massive buying power to inflate the market as the end of the year approaches in order to pump up returns so they can rack up strong returns for their investors and secure their own bonus incentives.

If the big money begins to fear a further decline in the market, they could decide to lock in profits as best they can in the face of overwhelming sellers. If one major institution begins to panic, you can expect a domino effect to take place where the other major traders will likely follow, with the bears trailing closely behind.

Currently, the SPX is at its 0.618 Fibonacci retracement, and the odds say that even if the bulls take back control, in the short term, price is unlikely to trade back to its former high set on October 27, 2011. Wait for a follow-through day to materialize before resuming a long position and, if you have to trade, look to trade with a bias to the downside of the market.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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