Friday’s colossal sell-off action brought a couple of very important questions to Wall Street’s collective mouths: Was that it? Was that the top?

We’ve seen stocks rally hard in 2010, and it’s no surprise that investors are anxious about the prospects of another tumble for the market. While most shareholders try to make a bet on the market, let’s take a look at what the charts are actually telling us.

You see, more often than not, stocks usually get some sort of rally attempt after they pull back – that’s when we need to be on our toes. What we really need to see is if this is just a bump in the road or the start of something more.

I suspect it’ll be something more as the markets have been looking for a catalyst for a while now. We’ll find out in the coming weeks, if not sooner. Right now though we have to treat this as a pull back.

In the short-term I want you to pay attention to what I call a “First Thrust Down” pattern. Here’s a look at the S&P 500 Index and the NASDAQ Composite:

NOTE: Every Index out there is showing this same pattern!

Notice where each index stopped for the day on Friday? Yep you guessed it, right on an uptrendline – that’s suggestive that stocks are far from out of control. Instead, they’re being obedient to the technical patterns. When that happens, it means that the potential to make a profitable trade is strong.

So if this is going to be a classic “First Thrust Down” pattern, then the next move is a big break to the downside.

And a few hours into the trading day yesterday, sure enough there we were in bombs away mode after a little chart time above the light blue trend lines that formed the snapback rally.

From here the order of the day on the long side is “Let Them Come To You.” Just to be clear, this downside pattern isn’t indicative of a major tumble in the markets. In fact, many large stocks are still posing good long-side trades, however we need to see where the indexes shake out over the next day or so first.

1150 on the S&P 500 would be my best guess for next stop before any serious bounce could ensue. We’ll take it one step at a time.

On the long side we will continue to add names that have that look. On the short side we still need to see what happens when this leg down in the indexes is complete and what happens on bounce mode.

I suspect that we will see a boatload of these same names that we are looking to trade on the long side for a trade will end up putting in big picture tops. But that’s still a few weeks away. Let’s stop going down, stabilize, bounce then we talk. That’s the mantra over the next few weeks.

Sincerely,
David Grandey, AllAboutTrends.net
for Penny Sleuth

April 20, 2010

David Grandey

David Grandey is the founder of All About Trends, an email newsletter service revealing stocks in ideal set-ups offering potential significant short-term gains.  A successful canslim-based stock market investor for the past 10 years, he has worked for Meriwest Credit Union Silicon Valley Bank, helping to establish brand awareness and credibility through feature editorial coverage in leading national and local news media.

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