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Monday's sell-off was caused by the forced resignation of General Motors' (NYSE: GM) chief, and the threat that both GM and Chrysler would face bankruptcy.
This classic example of a news-triggered correction, or perhaps even a confirmation of the bear market, came just as stocks were broadly overpriced.
In addition to a sell signal from most of the internal indicators (most graphic being the stochastic), the close below the psychologically important 800 number on the S&P 500 and the Dow's failure to surmount 8,000 sent a clear signal that prices are headed lower.
But even though breadth was decidedly negative, volume is on the low side, which may mean that the March 6 lows will hold.
However, in this situation, investors shouldn't rely on that too heavily since it takes much less volume to drive stocks lower than higher. And that is simply because the bears are "in the open," in contrast to the bulls, who have a broader overhead of potential sellers to deal with and must generate relatively high volume to succeed.
The initial downside objective is at the 20-day moving average at S&P 757 and the Fibonacci 50% number of 752. For those that were holding contra exchange-traded funds (ETFs) and were caught in the rally, you should now make up for your losses.
And traders who are just hearing the bear's renewed voice should scan the list of financials and ETFs and take either a quick trade or hold for a full test of the market's lows.
I suggest that you ride the slide with my Trade of the Day, the UltraShort Financials ProShares (NYSE: SKF). The recent rally was led by financials, so Monday's reversal down should have a multiplier effect on SKF.
Sam Collins is a contributor to OptionsZone.com.
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