With turmoil in virtually every equity market, caused by the uncertainty of the world's economies, there was a rush for the exits Tuesday. But negative breadth of 14-to-1 on the New York Stock Exchange -- with just 1.6 billion shares traded -- is usually not the mark of a breakdown but of an emotional selling climax.Yesterday, the Dow's close came within just 0.31 of the index's lowest close made on Nov. 20 at 7,552.29, with decliners on that day ahead by 15-to-1. Curiously, on that day the Nasdaq recorded breadth of 6-to-1 compared to a negative 5-to-1 yesterday.
On Nov. 21 stocks opened lower, falling about 150 points, before a massive short-covering rally resulted in a bear trap that ran the Dow up more than 9,000 in just two weeks.
Virtually every internal indicator is very oversold, and the sentiment indicators show almost unprecedented fear on the part of the public.
Conclusion: The group at greatest risk at this low point in the major indices is the shorts, since the chance of an impending bear trap is very high. The market may pull back even more, but traders may now want to identify positions in the oversold sectors that provide the greatest chance for an immediate reversal and then jump on them as they reverse.
One issue that could catch a draft from this reversal is the ProShares Ultra QQQ ETF (NYSE: QLD), my trade of the day.
Sam Collins is a contributor to OptionsZone.com.
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