Do you feel like a 9-year old the week before Christmas?
You know there is a big event coming but waiting is really hard. We know there is probably a decent market correction in our immediate future but waiting for that potential buying opportunity is very difficult. We are all trained to expect instant gratification and waiting another two weeks seems like forever.
I am not going to repeat my points on why we should expect a significant market decline in January because by now everyone should be aware of the danger. The current market appears to be undergoing a distribution phase where volume increases on every spike higher and those spikes are instantly sold. This is a leading indicator of a potential correction. Portfolio managers and institutional traders are slowly reducing positions in order to not shock the market. Retail traders with a bullish mindset are continuing to buy the rallies only to be frustrated by the declines.
The Dow has failed to hit 20,000 despite multiple attempts because there are heavy sellers waiting at 19,950 and they have stopped every intraday surge at that level. This has taken some of the danger out of a sell the news event at 20,000 because they have already been selling in advance of that level.
Support is well below at 19,200-19,250.
The S&P is showing the same pattern of distribution with three consecutive lower highs. Support has formed at 2,250 but the real level to watch is 2,190. The S&P has been spared to some extent by the rotation between sectors. Those gaining have been offsetting profit taking in others.
The Nasdaq 100 Index posted a minor gain for the week but it is threatening to fall back below prior resistance at 4,900. That could target a return to 4,800 or even 4,700. The big cap techs have been sporadic as portfolio managers sell techs to buy financials and industrials.
The Nasdaq Composite is stuck in a very tight 50 point range with obvious distribution at the 5,480 level. A break back below 5,400 could easily retest the 5,225 low from early December.
The Russell 2000 closed 15 points below its intraday high on Friday. That is also a clear sign of distribution and the index was down most of the week. The small caps are the sentiment indicator for the market and sentiment is weakening.
The economic calendar has some important reports but after Tuesday there will be nobody around to react to the news. Volume is going to decline sharply after Monday's quadruple option expiration settlements and by the end of the week it will be negligible.
I am not adding any new plays until we get at least a minor correction. I do not want to buy the highs only to have a 5%, 7% or even 10% drop in January. I suggest everyone keep their stop losses tight and you can always reenter any stopped positions when it appears we have found a bottom. Look at the Dow chart for last January when the index fell more than 2,000 points in just over two weeks with no warning. History does not always repeat but there is a good chance this January could be a duplicate.
Since Sunday is Christmas and Monday is a market holiday there will not be a LEAPS newsletter next week.
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