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Stocks wavering at Dow 10,000

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This morning's earnings warning from Juniper Networks (NASDAQ:JNPR) is starting to take its toll as stock trade near their session lows. The Dow Industrials have sunk to their session low of $10,001 and a move back below the $10,000 level could weigh on a bulls psychology.

Unfortunately/fortunately depending on how you look at it, I do think that too many investors hold the Semiconductor Index (SOX.X) in such high regard that they feel the "bull market" is dependent on this sector doing well day after day. While today's 5.5% decline there will also weigh on investor psychology, we knew this was coming. Those that have raised some cash in their account and perhaps "sold to soon" now lay in wait with the good feeling that they've locked in some gains, have been rewarded from risk taken previously and know that there's some upside to be had. Patience will be rewarded. Please trust me.

Bond market action is almost perfect in my mind. After a nice round of buying the past two session, we're seeing YIELDS start to firm up just above retracement and a rounding out 200-day moving average at 4.974% for the 10-year YIELD ($TNX.X). Current action in the bond market does not depict that of a flight to safety.

Subscribers also know that we're getting close to the end of the year. The recent rally in stocks from October-December has had many of this years big "losers" come back some, and we will most likely see some selling into that strength as losses locked in at a higher value. Better to lose $1,000 than the previous $2,000.

While I've profiled a couple of bearish trades in the Semiconductor sector as of late, it's not because I'm bearish on the group long-term. It's just that risk/reward is favorable for bearish trades right now. Bears shouldn't get the feeling that it will be an easy ride down. Be open to locking in those 8% or more gains when you get them. There is a lot of money that has been raised from the bond market in recent weeks, inflows are picking up at the mutual fund level and the selling in stocks near-term raises further cash.

There is almost always some type of "test of resolve" for the bulls. I don't think we've seen that test yet, but it may well be underway. What is going to give us the confidence to start nipping away is proper trade setup from the techniques we've tried to teach in our commentary.

Not long ago we were watching Cisco Systems (NASDAQ:CSCO) trading $22. Today that stock is beginning to look more attractive near $19. The first sign of trouble on the point figure chart is and has been a sell signal at $15. $15 was the risk from $22 and at $19, risk has been reduced. Let the trade come to you, get the proper setup and indicators in your favor, then ease back in.

Jeff Bailey
Senior Market Technician
Option Investor

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