This is Either the Beginning or the End

In case you missed it, today's market action was pretty god awful. The SP500 made a run at taking out ALL intermediate term support levels and did it in convincing fashion. Two things usually come from action like today's:

1. This is the beginning of much more weakness to come in stocks going forward.
OR
2. This is a capitulation trade and has more or less exhausted the selling pressure. 

This sort of action is exactly why I trade weekly charts, levels and closes. When I see a day like today the natural inclination is dump everything along with the herd. But it is almost always better to see how prices respond in the subsequent days that follow to better assess the prior two outcomes stated above; we refer to this as confirmation follow-through. Typically the market will do its best to fool as many as possible and these kind of sessions can often be traps set by the market to get you to react exactly how you should not at exactly the worst moment.

Waiting for the weekly close of prices allows us to maintain our composure on a day like this.   Managing on a weekly timeframe will still get you out of the way if this turns into something really bad and it will keep you in long enough to see how price responds to whether this is the beginning of the move or the end.  

I am very interested to see how this plays out in the coming days. There will be plenty of Fed stimulus in the next couple days as well as the January Jobs Report on Friday. These will likely provide the ammo to either fuel the downswing or stop it right in its tracks.

If this in fact is the Beginning of a much weaker market we will know by the end of the week and will likely be headed down to long term support near 1,600. If this is merely a "bear trap" then we should see prices firm up substantially and retake the key support levels by Friday's close.

The bottom line after a big selloff like this is to not panic or do anything drastic based on one day's worth of action. Don't dump your winning stocks into the initial swoon and don't be too eager to buy the dip. The market is in "show me" mode now and my trading activity is currently on hold. If prices stay around the lows throughout the end of the week THEN I will likely have stops triggered and exit those positions. If the market can stabilize and rally back, we will have to see how much damage was repaired and whether our stocks were able to hang on.

This is the first real assault of the intermediate term uptrend and 20 WMA in the last year. We did see a shakeout selloff in early summer, but the market was able to hold and rally right back. If this does not happen quickly we will be forced to take defensive action come week's end.