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Last week, I was warming to the idea that the low was in for 2008. With 20-some days to go in the year, anything could happen, but there has certainly been resilience in the face of bad news. Friday will be a huge test, because bad news in the jobs report is the baddest news of all. I would not be surprised to see some selling pressure ahead of the number. But IF, and it's a big IF, we rally on a bad jobs report, shorts could get squeezed and we'd have a significant continuation of the holiday rally.
Despite Monday's scary drop, many technical traders consider it a textbook "50% retracement" move. What that means, basically, is that it's not surprising to see a move in one direction pull back in the opposite direction by half before it resumes. Indeed, expecting a retracement is one of Gartman's rules:
13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen... just as we are about to give up hope that they shall not.
What was shocking, of course, is that the retracement happened in only one day! But let's look at where we stand right now in the S&P 500 (click chart to enlarge).
 The red line is the 50-day moving average, and right now it sits around 950. Also, it should be noted that the rally pulled back just before the S&P reached 900, so 900 will act as resistance as well.
How am I playing it? I'm sticking with the biotech names that have showed good relative strength, like AMGN, EBS, CELG, and GILD. But as we get closer to resistance, I'll be placing stops to lock in gains. I don't know when the next leg down will occur--maybe this month or maybe next year. But I'm convinced there will be another leg down and don't want to be caught by surprise.
An important indicator on my screen is the real estate sector. Many have mentioned that commercial real estate is the next big shoe to drop, if it hasn't started already. It's easy to track "real estate fear" by watching the Ultrashort Real Estate ETF (SRS). (click chart to enlarge)
As you can see, SRS is still in an uptrend. The volatility in SRS is crazy, so please handle with care if you trade it, but even if you don't trade it you can watch it for signs of a market meltdown. Recent support has been just below 120, and if SRS gets close to 115 or so, I'll be looking to buy. The point is, we should have a plan for the next leg down even if that simply means selling some longs and raising cash. Enjoy the holiday rally while it lasts, but don't get stuck out in the cold when it's over.
[Note: After writing this, SRS did get to 115 and I started a small position.]
Disclosures: Long AMGN, EBS, CELG, GILD, SRS.
See more at www.thestocksurfer.blogspot.com
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