What Should Traders Do When The Market is So Volatile?
A market obsessed with daily fiscal cliff headlines is as volatile as ever. One positive headline is followed by a negative one. The market didn't like comments by Senate Majority Leader Harry Reid on Tuesday; it liked what it heard from House Speaker John Boehner on Wednesday, but it didn't like it what it heard from Boehner on Thursday. So it goes.
Pre-market stock futures Friday were looking a lot better than they did last night after the White House proposed $1.6 billion in tax increases, $400 billion in unspecified entitlement program cuts and an abolishment of the debt ceiling. Republicans said it was nothing more than a rehash of prior budget proposals.
The story remains the same: It's hard to be long with conviction and it's hard to be short with conviction. Usually during times like this -- when uncertainty is rampant and whipsaw action is commonplace -- it's a good idea to do nothing. But the fact remains that the market trend is upward until proven otherwise.
Mr. Market isn't making it easy though, flashing mixed signals about its underlying health. On the one hand, major averages flashed a buy signal exactly one week ago. Solid percentage gains were made on the fifth day of the rally attempt that started November 16. On the other hand, major averages flashed a higher-volume decline Tuesday -- not good to see in the early stages of a rally. It was mild distribution, but distribution nonetheless. Still, the overall action in growth stocks has been pretty good. The market has served up its fair share of technical breakouts -- a critical element of any sustained rally.
Overall, the Nasdaq Composite's recent price action has been encouraging since hitting a low of 2,810 -- up eight up days out of nine with closes at or near session highs. But the tech index is fast approaching a possible resistance level at 3,027 -- its 50-day simple moving average. This price level could be a ceiling in the near-term.
Some short-term softness in the market wouldn't be surprising, but recent price and volume trends in the major averages say the chances are still pretty good for a rally into the end of the year. Overall, it's OK to embrace the nascent rally but not necessarily with a tight grip. It's too early to aggressively commit capital, but it's OK to nibble at few long positions and see how they work.
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