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The current excuse is concern about the White House’s bank plan, Fed chief Bernanke’s future, and China’s lending practices.

Stocks lost almost 250 points today, or a little over 2% of value.  Trading volume was not quite as high as yesterdays, but still elevated from average.  This is likely to spell the death knoll for a resumption of this rally, at least in the near future.

So what are we doing now?  Right now we are sitting this slide out until the market moves up on a bounce, and then we’ll likely take short positions.

Let’s take a look at the charts for some more analysis.

Trading in January now shows a net loss of about 200 points.  It appears that the so-called  “January” effect – documented in many media outlets – may not be a valid justification for new long positions.

On the weekly chart, prices have fallen and closed well below the lower trend line, and also below the PSAR indicator, so the weekly chart is appearing to be entering a down trend.  The CCI is close to dropping below the zero line – and we really need these two events to occur for a confirmation of a new downtrend on the weekly time frame.

The daily stock chart is a disaster.  After a week of ratcheting back and forth at the top, prices have finally broken down and closed solidly below the prior low set in December.  On their way past the prior highs of Nov and Dec, the price action didn’t even pause.

Our momentum indicators are clearly bearish.

On the 30 minute chart, prices tried to hold a little below even for most of the day.  However, when traders returned from lunch it’s obvious that selling was the object of the day.  Prices fell sharply for the remainder of trading with the last hour of trading closing near the lows of the day

Trading Strategy:

If you were following the trading strategies described here then you probably managed to get out of profitable positions with most of the profit intact.  Any tightened stops were likely stopped out over the last few days of trading.

Next week I anticipate we’ll be watching for an opportunity to take short positions in this market.  Aggressive short traders may consider new short positions if the market continues down on Monday, however, the market is extremely extended to the downside so a prudent strategy would be to wait for a bounce back up to overhead resistance.

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View information on the model stock portfolio and how it grew by over 170% over the same time period that a buy-and-hold S&P 500 portfolio lost 14%.  No margin, options, penny stocks, commodities, or other high risk vehicles were used – just two well respected ETF stocks.

Get free, no obligation access to the real-time stock charts used in these posts.

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Our cautious strategy towards this market for the last week or two seems to have paid off as the broad market loses over 116 points in the last hour of trading this year. 

It remains to be seen if more profit taking will occur on Monday, or if the bulls will return to push this market higher.  Right now it seems that Thursday’s sharp loss could be an early indication of additional profit taking that may occur at least during the early part of January.  Technical analysis of the stock charts will yield additional market timing insights.

On the monthly time frame, price growth still continued through December, but at a slower pace than earlier in the year.  Two momentum indicators, the stochastic, and the MACD are pointing towards increasing upward momentum.  However, the CCI is not which is a worrying sign.

Trading volume on the monthly basis has also been moving down even after accounting for the end-of-year holidays – which points out how low November’s volume was.  December’s candlestick finished with a topping tail and the PSAR getting closer to tripping to a bearish condition.

Prices on the weekly time-frame are looking a little top heavy, but the daily chart is where all the real damage was done during Thursdays trading.  I mentioned a few days ago the daily chart was looking a little top-heavy.  Regular readers will recognize the strategy of trading when the weekly time frame matches the daily time frame, and right now both the weekly and daily are looking down.

The CCI and the stochastic on the daily chart are both sharply negative, moving sharply in the same direction that was observed earlier in the week so there really wasn’t any surprise that we had a meaningful drop in prices.  The MACD has not gone negative yet, however, the MACD usually follows the stochastic and the CCI so that isn’t a surprise.  What is notable about the MACD during December is how flat it was.

On the 30 minute chart you can see the drop in the morning hours, the flattening during the mid-part of the day, and then the sharp drop during the last hour of trading where the market gave up 80 points in 30 minutes – not a good sign.

Looking to the last chart in the series, SH, which is a Contra ETF, is starting to look positive.  This is another indicator of the increasing potential for a downward move in stock prices. 

Trading Strategy:

If you don’t already have stops in place to protect profits and your overall portfolio from large losses, now is the time to do so.  Traders should hold off from taking new long positions until we see how far this down move will go.

Disappointing corporate news – or should I say – a lack of encouraging corporate news, and increasing nervousness about the economy in general contributed to a sharp drop in stock prices today.

In addition to the sharp drop in prices of over 129 points, trading volume increased today, that can indicate more of the same is in the near future.

This market is becoming so treacherous that is seems logical to take the rest of the year and just watch the market. 

I’m becoming more suspicious that big investment and trading institutions are just keeping this market treading water until the year expires.  These fund managers have to show they made money this year.  What happens in 2010 is anyone’s guess, but the volatility is just creating a frothy market and a frothy market is a good sign of a top – at least an intermediate top.

Let’s take a look at the stock charts for some technical analysis and market timing insights.

On the weekly chart there are a lot of divergent signals – a clear sign of a directionless market.  The stochastic headed down today, the CCI headed up, and the MACD looks like it’s starting to head down.  None of these are bullish signs – in fact they look like warning signs to me.

On the daily chart prices were pushed down below the support level of 11,250, clearly indication how weak this market is. All three of the indicators are bearish on the daily basis and the price level is approaching a negative PSAR switch.

As we mentioned above, trading volume increased today, another negative sign.

Trading Strategy:

My recommendation is to step aside until this market displays some solid momentum in one direction of the other.

The model portfolio is currently invested in the market and in the unlikely event that the position is not stopped out during tomorrows trading, we will keep adjusting the stop upward each trading day to close to the prior close as possible.

Pretty much regardless of what happens in the market from now until the end of the month you may want to consider taking a break from trading until 2010.  

Weak global markets, a rising dollar, falling oil and gold prices, and some disappointing profit news from 3M, McDonalds, and Kroger, all contributed to a sharp drop in stock prices today.  Also in the background is a drop in consumer optimism regarding the future of the economy and President Obama’s lowest approval rating so far in his presidency.

I’ve discussed the weak technicals many times during the last 2 or 3 weeks, are we seeing the start of a meaningful trend reversal? 

Let’s take a look at the charts for an in-depth technical analysis and market timing strategy.

On the weekly stock chart I mentioned yesterday that the upward momentum was continuing to decrease.  That trend continued today.  All three indicators are moving to the bearish side with the Stochastic already significantly bearish, the MACD just starting to roll over, and the CCI dropping well below the 100 level.

My favorite indicator though, the price of the broad market itself, is still above the 11,000 level and in reality has not shown the type of downward move I would like to see on the weekly time-frame to call a solid reversal at this point.  Still, the week is young yet with only 2/5 of the trading week in the history books, stock prices could easily fall at a faster rate.  I’d expect a close below the 11,000 level will really get the bears to come out from hibernation though.

The daily chart is where you can really start to see the damage accumulating.  Prices dropped almost 110 points on the day; most of the drop came at the opening which we’ll see on the hourly chart.  Stock prices dropped below the PSAR indicator today which would normally be a sign to consider new short positions IF the weekly chart was confirming the same weakness.  So until the weekly chart and the daily chart agree, shorting this market should be left to aggressive or very active traders.  Prudent investors should remain on the sidelines.

The daily chart clearly shows the drop in stock prices from the opening bell.  Prices tried to recover through the morning hours, but gave up the ghost right before lunch, and then fell throughout the day.  Prices firmed a little in the last hour of trading which might create a bounce in tomorrow’s action.  But don’t expect any bounce to last long.

Trading Strategy:

Prudent investors should not take any new long positions.  Until the weekly trend and the daily trend agree it would be wise to sit and watch from the sidelines.  Don’t worry about missing a downward move, this market appears to be sufficiently overbought that safe profits will be made on the way down.

Aggressive and active traders should consider shorting the market with the Contra-ETF’s that are sent to subscribers of the stock picks email.  Only consider new short positions if the market is lower than the low made in the first 30 minutes of trading, moving lower, and prior to 1pm market time. 

Remember – Contra ETF’s are purchased long to take advantage of a downward move.  Prices on Contra ETF’s go up when the market goes down.