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NASDAQ Composite breaks February lows

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After a brief morning "pop," bears look to be winning the war of supply/demand as the NASDAQ Composite (COMPX) 1,1677 -2% breaks critical support dating back to the February lows and action here weighs on bull's psychology.

NASDAQ Composite Chart - Daily Interval

Today's trading below the February 22nd low of 1,696 has the look of realization from bulls that its time to rally the troops, regroup and look to mount a defense another day. From downward regression, we find the mid-point near 1,650 eventually crossing what looks to have been a level of support back in October after the rebound from the bottom.

My advice to bears short/put many four-lettered stocks we've outlined in recent months to be correlating some targets for their trades with the NASDAQ Composite near 1,650.

Until downward regression trend is broken to the upside, any bull looking long many four-lettered stocks had better be assessing downside risk on a longer-term basis to the 1,454 level or September lows.

Not every 4-lettered stock is a short. Look for stocks that are trading in downward trends and have bulls questioning risk to lower lows. Too often "younger" bears will attempt to short/put stocks in upward trends with the "hope" that broader market weakness pulls the stock lower. While this type of action can happen, when it doesn't, it becomes a waste of capital and wasted opportunity that could have had a better chance of gain in weaker stocks.

Look for resistance to be firm in the NASDAQ Composite (COMPX) between the 1,700 and 1,775 levels near-term.

Flushing mentality

In recent months we've noted some stocks that when they broke below 52-week lows and had some downside room to some "unrealistic" bearish vertical counts, the MARKET seemed to flush the stocks lower instead of risking declines to uncertainty.

Not long ago it was Adelphia Communications (ADLAE) at $18, which now trades $5.40 (close to bearish count of $4).

Yesterday we profiled Dynegy (NYSE:DYN) $15.70 -18% for bearish trader to be alert on the break of $20. At the time it had an "unrealistic" bearish count of $4.00, today is grows to $0.00.

Dynegy Corporation Chart - Daily Interval

Bulls have seen enough stocks break 52-week lows and see some drastic declines. Instead of waiting for the next quarter to come around to see if things are OK, they seem to be flushing the stocks and moving on. The more drastic declines are coming from stocks where accounting issues come into play. The MARKET hates uncertainty and in the current market environment, its really starting to show.

Trader's can use the "rolling retracement" brackets. Not only to establish some lower trading targets, but to also identify levels of where to be lowering stops to help try and assure profitability in the trade. I see nothing wrong with a bearish trader placing a stop on 1/2 of his/her position just above the $17.21 level to remove some of the risk from yesterday's short/put at $20 and then following the other 1/2 with a stop just above original entry at $20.00 which allows for some longer- term action to unfold. Stocks don't always achieve their bearish vertical counts, but sometimes they do.

Jeff Bailey
Senior Market Technician
Option Investor

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