Today’s market action seems to suggest that the market is transitioning from an uptrend to a correction. Its change in character is obvious, as we watch it fail to bounce back after heavy selloffs, with increasing volatility. In addition, the number of negative news items seems to be ramping up again.

Last week I mentioned that I was looking for a bounce to follow this pullback, as a sign the market uptrend was still healthy. Needless to say, this is not the bounce I was looking for. Friday’s low volume attempt only lasted until the first half-hour today, before demand ran out and the sellers took over. We closed poorly (especially in the last hour, so today we add another distribution day to the already high count, as volume picked up on all indexes.

This is a reminder that capital preservation is always your first priority. We always try to hold our best stocks to the last, but I’m not sure now is the time to be brave. Just as I advocate incrementally scaling into the market at the beginning of an uptrend, I also advocate scaling out incrementally, when it appears that uptrend may be ending.

Look for sell signals on your individual stocks in order to take profits and cut losses short. I hope I’m wrong and the market can still bounce back, in which case I’ll end up buying back much of what I sold last week. However, in the short term at least, the line of least resistance appears to be down.

Best returns,

Scott O’Neil

President, MarketSmith Incorporated

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