The week got off to an interesting start with futures selling off overnight on Sunday, leading to a sharp downside break on Monday. In the process the Dow Jones Industrials Index dropped just over 200 points on an intraday basis Monday, but rallied into the close to end the day down 122 points.
On Tuesday the selling continued, and a number of big-stock leaders re-tested support levels, at which point I felt the pullback could be bought into per my blog post early in the day yesterday. As I wrote at the time, my approach would be to go after big-stock leaders that had already announced earnings and which were pulling into areas of support at their 10-day or 20-day moving averages in most cases.
What I had noticed relatively early in the day Tuesday was that despite the scary-looking index action, breadth as measured by the NYSE and NASDAQ advance/decline liens was actually flat to slightly up. This divergence was a clue that the action was more typical of a “sit on it and rotate” type of day where sellers sit on the indexes but at the same there is rotation into other areas of the market.
Going after big-stock names is one way to help reduce risk in that these stocks will offer ample liquidity that assists in making a quick exit if things don’t work out. In addition, the market has been showing a predilection for big-stock names, particularly those of the NASDAQ variety.
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