With the market breaking to new lows last week, the market ended the worst six months of trading since 1932. But even with the Dow and the broader-based indices down more than 50%, there appears to be no bottom yet in sight for the major indices.Some technicians are calling for at least a modest reflex rally, and that certainly is overdue. Perhaps we even saw the beginning of it yesterday.
But don't count on making money on reflex rallies unless you're almost perfect at picking tops and bottoms -- and I know of few traders who can consistently perform that bit of magic.
Instead, picking tops of rallies and buying one of the contra Exchange-Traded Funds (ETFs) is an easier game on the heart and can add girth to your account. Here are some overhead resistance areas to help you decide at what levels to jump on your ETF of choice.
The first resistance for the Dow Industrials is at 6,950 and extends into the pocket of trades at 7,100 to 7,400. For the S&P 500, that resistance starts at 740 and tops at around 780. But the breakdown from 743 is so recent it allows little time to form a meaningful zone of resistance. Thus the current rally could reverse this week, plunging stocks to new lows.
The volatility indices, the CBOE Volatility Index (VIX) and the CBOE Nasdaq Volatility Index (VXN), give scant support to the notion of a meaningful rally, since they show a remarkable level of complacency -- not what we would like to see in a sharply down-trending market making new lows almost daily.
There are no signs of a market bottom or high enough volume on the last sell-off to signal a capitulation. The only advice to investors is to sell into a rally and take short positions or contra ETFs, both of which should offset your losses in this now "Old Big Bad Bear."
Another way to shore up your portfolio right now is with investments in precious metals. And Gabelli Global Gold, Natural Resources & Income Trust (AMEX: GGN), my trade of the day, has confirmed a double bottom and is in an uptrend.
Sam Collins is a contributor to OptionsZone.com.
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