How the market correction unfolded, where do we go from here

The S&P 500 had a rocky start to the year. Our swing trading the rules largely kept our exposure low and created outperformance as a result. Here’s how we’ve handled the year so far using the SPDR S&P 500 (TO SPY) as our S&P 500 market example.




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S&P 500 starts the year weak

A major sign of trouble in the S&P 500 came earlier in the year when the index pierced its 50 day line (1). Note that many growth stocks were already showing weakness as early as February 2021. But that weakness was largely masked in market indices by the strength of mega-cap stocks. names like Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGLE) and Tesla (TSLA) are at the top of that list.

This time it was different, however. Like many of its declines throughout 2021, the S&P 500 quickly reversed higher. But the rally ran out of steam after only a few days with resistance at its 10-day moving average. Mega-cap names also began to see declines below their 50-day lines. As a result, the S&P 500 saw a rapid drop before the reversal on January 24. (two).

Given our low exposure and outperformance cushion year-to-date, we initiated a short trade that day in the ProShares Ultra S&P 500 ETF (single sign-on) on Swing Trader. We bolstered the gains but closed it to keep it profitable a few days later. We then switched to the Invesco QQQ Trust ETF (QQQ) when the rally resumed (3). He did not qualify as a follow-up day but it was a day of power.

Here again, we take gains in strength and exit at the first sign of trouble around the 21 day line (4).

Light exposure in another downward wave

Although we finally had a follow-up day, it’s important to remember that not all of them work. The S&P 500 reached its 50-day line and found resistance there. The subsequent drop finally made a new low on an impressive reversal day on February 24. (5).


This week Podcast Investing with the IBD We talked about the sharp pullback in battered stocks and what it means for the market.


We tried another index trade with SPY shares (6) but was shaken when the Nasdaq Composite undercut its February 24 low. (7). What is remarkable is that the S&P 500 did not undermine its lows and that left the recovery attempt intact.

As a result, the S&P 500 marked a follow-up day when the Nasdaq Composite was out of position for the signal. (8). We responded by increasing exposure to more than 50% invested for the first time since the beginning of the year.

Where do we go from here?

Our focus remains on stocks with strong lines of relative force, many of which are in raw materials. Those areas are mostly spread out now. As for the indices, they have been driven higher in large part by stocks with the worst lines of relative strength. It looks like a market that could go either way, and as a result, our exposure is 50%.

With the S&P 500 returning above its 200-day line (9), we expect a pause here. That may allow some of the destroyed charts a chance to show tight action and give extended actions a breather. If this rally is to work, there will be plenty of opportunity for more trades. If he rolls this far, our half exposure should keep us from getting hurt.

Subscribers and SwingTrader test participants can access more details about past trades. free trials They’re available. Follow Nielsen on Twitter at @IBD_JNielsen.

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