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Bearish Phase or Garden-Variety Correction?

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The ferocity of the recent Wall Street sell-off caught many by surprise, and may be a signal that the market is moving into a more bearish phase. Michael warns self-directed investors to tread cautiously.

The ferocity of the recent sell-off was a bit of surprise as it appeared that the market would attempt to bounce off the 200-day moving average. Instead the sell-off was more intense, clearly establishing a foothold below the 200-day moving averages on all major indexes. This usually signals a major break of a trend.

Such a break would suggest the market may be entering a more bearish phase, rather than just a garden variety correction. My view is that there will be some attempt to rally the market over the upcoming several days. Another possible scenario would be a severe correction that would take out the February correctional low.

Obviously, there are a number of macro-economic factors in play -- slowing growth in Europe and China is creating some panic. The best course of action to manage risk is to lean on the pure technical aspects, including price-volume action of both leading stocks and the major market indexes, to guide trading decisions. At this juncture, trading and investment poses more risk, and should only be attempted by experienced professionals. An intermediate bottom cannot be a certainty at today’s levels. If deleveraging and margin calls were to impact the market, this could be pouring more gasoline on the fire.

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