Buy This Dip… At Your Own Peril

Eurozone concerns have absolutely crushed stocks this week. Very few names have been able to shake off the negative sentiment, proving once again that positive earnings or guidance just doesn’t matter right now.

We are in a news-dominated market. As long as the press remains focused on the deepening crisis in Europe, it will be difficult for individual stocks to find higher ground. It will most likely take a major resolution to decouple stocks from the eurozone’s grip. Until that time, sentiment could continue to snap from bullish to bearish on the smallest rumor.

Yet, even if you ignore the news completely, the markets give important clues that can indicate where we might be headed in the coming days and weeks— and judging by how stocks are behaving this morning, I would not rush out to buy this dip. Here’s why:

Indecision on “non-event” days is crippling positive momentum. If you’re looking for the market to snap back with a powerful performance following a broad downward move, don’t hold your breath.

Since the beginning of November, stocks have struggled to string together more than one day of upside action. This is especially prevalent in small-cap stocks. On the days before Wednesday’s big drop, buyers and sellers yanked stocks back and forth to no avail. The close ended up the same as the open, with a lot of noise in between.

The market can’t match October’s highs. None of the major indexes have been able to top their late October highs. While I didn’t expect the pace of the October rally to sustain itself through the end of the year, it would have been ideal to see the market digest the move with additional sideways action.

Instead, several sharp downward moves have effectively corrected a good chunk of the preceding rally. It will take much more conviction from the bulls to push equities any higher.

Support levels are holding, but for how long? The silver lining today is that the S&P 500 appears to be holding a major support zone. However, stocks already tested this same spot earlier this month.

I don’t like the fact that we’re so close to key levels with so much in flux overseas:

If another onslaught of negative eurozone news hits— and support holds— I’ll feel much better about where the market is currently sitting. However, right now it feels as if stocks are dangling on the edge of a cliff. One wrong move could send this market considerably lower…

Sincerely,

Greg Guenthner
for The Penny Sleuth

Buy This Dip… At Your Own Peril was originally featured in the Penny Sleuth.

This story was originally featured on Penny Sleuth.

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