I hope some people read my previous blog and that it saved or made them some money.
On Jan. 7, when the Dow traded as high as 10,612, I said that equities are in a long-term bullish trend but were not currently offering a good risk-reward entry.
I warned that, despite all the bullish comments you might be hearing from the media, refraining from buying or adding to positions at those levels was the most prudent thing to do.
I also pointed out then that the markets were vulnerable to a long-delayed and more significant pullback.
We are now at about Dow 10,200, although we could get a small relief bounce during the next couple of days.
I closed some shorts I had on Friday and now will evaluate if this correction is going to extend.
We broke down to some important support zones and are reaching an oversold condition in a bull market, which normally would be a time to buy.
However, I would monitor the market from the sidelines until Wednesday when the Fed fund rates and Federal Open Market Committee, or FOMC, statement is delivered to the market.
We have seen dismal economic data in the short term: Contracting consumer credit, lower retail sales, raising unemployment claims and today a historic 17% plunge in existing home sales.
The Fed will need to once again get aggressive in their monetary policy to reignite the rally in stocks and add liquidity to the market with quantitative easing policies.
If the Fed fails to impress, I think the correction could extend until the 1,030 to 1,040 level in the S&P 500.
It is also important to monitor how January ends.
If the month finishes with losses, there is a near 80 percent probability that the year will be negative for stocks — and a shorting/bearish bias will have a high probability of success.
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