A Little Waterfall After a Long Journey

The Dow is off by nearly four hundred points as I write this, a seemingly jaw-dropping number if you have been trading for more than a decade until you realize on a percentage basis it is barely off by 1.5%. On that note, this little waterfall action is simply part of the game and should be accepted as such, even though the recent melt-up likely conditioned many traders to expect smooth sailing all day, every day. 

In reality, we are likely seeing a long overdue pullback in lieu of calamity on the major averages to at least their respective 20-day simple moving averages, which is actually a fairly short-term reference point. 

And to give you an idea of how unique the recent rally was, relatively speaking, the S&P 500 Index still has not tested its 20-day since roughly one week prior to Thanksgiving. 

At the moment, I have a few index hedges on inside the service, one which I put on last week and then added another one yesterday afternoon. I am not in a rush to unload them, despite the big down move here, precisely for that 20-day moving average thesis--I think we do indeed make our way down to those reference points this time around on the S&P, Nasdaq, and Dow. 

Regarding the VIX, the rule of thumb is still to view anything under 20 as barely a correction, let alone of sizable dip.

Again, the market has conditioned us to think otherwise, but a more standard bull market correction (not a top, but one which actually sets up a new leg higher) would indeed see the VIX spike back into the twenties before we would consider calling a near-term bottom. 

It remains to be seen if the State of the Union speech tonight, alongside the many big earnings later this week like AAPL FB GOOGL etc. (let alone the jobs number on Friday) will motivate buyers to step back in aggressively, as they have many times before. 

However, I am leaning towards the notion that this time around we see some more typical pullback action to keep overly-aggressive long speculators honest and reset some extended charts and sectors. 

I also put on a State of the Union-related trade which is a bit of a curveball, one which I will flesh out for Members in my usual Midday Video, coming up.