Traders Need to be Careful as a Second Leg Down Is Likely

George Brooks |

Women of Wall StreetInvestor's first read - Brooksie’s edge before the open

May 21, 2012 9:12 a.m. ET

DJIA: 12,369.38
S&P 500: 1295.22
Nasdaq Comp.: 2778.78
Russell 2000: 747.43

Last Thursday, I projected a two-legged decline before the market finds stability. The market would hit the bottom of its first downleg atDJIA 12,275 (S&P 500: 1292), rebound to DJIA 12,610 (S&P 500:1333), then enter a second leg down with the ultimate bottom around DJIA:11,915 (S&P 500:1255).

Friday we hit the S&P target and got close enough to the DJIA target to mount a rally. From here on in so much depends on the flow of news, U.S. economic reports and Europe’s sovereign debt woes - Greece and Spain.

Right now the U.S. economic indictors are mixed with a slight negative bias. Europe looks horrible, but their problems are more than two years old and their leadership has been taken to the wall.

Maybe, just maybe, they will be able to resolve Greece’s problems without contagion setting in. At this moment, it appears everyone expects the worst. That kind of unanimity sets a stage for a pleasant surprise, ergo buyers of stocks.

This is a very dangerous market. We have seen an uglier market, but that was when the market averages were at much lower levels.

Negatives can be discounted, uncertainties cannot.

What to do:

Depends entirely on one’s tolerance for risk, some “nibbling” in depressed leaders is an option.

TODAY: I think we need some serious air-clearing news before stepping in here. I would feel more comfortable buying if the reported news was uglier, if we passed the “ouch” point and were on the threshold of the “I can’t stand it anymore” point. I still see a two-legged decline.

George Brooks

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The writer of  Investor’s first read, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

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