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Why the major indexes are making investors play defense

Published: May 28, 2015 1:29 p.m. ET

For traders, opportunities are surfacing as the market flirts with longer-term support levels, and for longer-term investors, red flags are popping up because those same support levels started to break on Monday, which is why a more defensive posture may be necessary.

Although the markets are only moderately lower this week, they have still started to break longer-term support, and that causes my overall analysis to shift. On a market basis, I was cautiously optimistic and holding a positive tone. I have been doing this for some time, but that was because longer-term upward-sloping support was holding in the Dow Jones Industrial Average, S&P 500 and Nasdaq indexes. Longer-term upward-sloping support in the Russell 2000 was shattered many weeks ago.

However, the other markets are more important to me than the Russell 2000 (even though the Russell 2000 should be monitored), so because the other markets were holding support it was considered positive according to my combined analysis. But on Monday that began to change, and instead of holding those upward-sloping support lines, the markets have now begun to break.

Many, and I would suggest traditional market observers, too, consider Monday's action to be attributable to Greece, the euro, the corresponding strength in the dollar, and possibly even concerns about oil given what Iraq may end up doing. Everything considered, there is absolutely a rationale for the decline that we saw on Monday, but then again, there is always a rationale for a decline.

As a result, my attention has been and always will be on price. Of course, we must pay attention to the news associated with market moves (it would be ignorant not to), but it is all about price if the objective is to make money. My preference is to look at price first, and news second.

Until recently, the market has been successfully riding support higher without officially breaking. In order for a break to be confirmed, the market will need to end the week under the aforementioned support identified in the indexes longer-term chart patterns. We don’t yet know if the market will end the week below these levels, but the objective of being proactive is to react when signals surface, not after signals are confirmed.

Therefore, we are already offering defensive portfolios to our clients who are not interested in trading (those are not day-to-day trading ideas), and we are also maintaining our more active strategies for traders, and the market risks that have surfaced are absolutely influencing these decisions.

Using that as a guide, it is my opinion that if you are a longer-term investor, you should make material changes to your portfolio to make it defensive, and that does not imply shifting to large-cap stocks. That implies adjusting your portfolio so it is not dependent on market direction. You can do that with ETFs.

In addition, ETFs can be used for trading strategies. For example, one of our trading strategies — The Strategic Plan — focuses on the DJIA and trades ProShares Ultra Dow30 DDM, -0.31% and ProShares UltraShort Dow30 DXD, +0.35% based on tests of longer-term support and resistance levels in the DJIA. This does not trade as frequently as many traders would like, but it is a great example.

No matter if you are a trader or investor, these red flags should be respected. If we do get a confirmation this week, it could be very ugly. Friday will need to come and go, and the market would need to be lower for confirmation to come, but again we are already taking action. The defensive portfolios and the proactive strategies both can also work if the markets increase, so they are not dependent on market direction and that is the key to being defensive in my opinion.

Although we are also watching longer term support int he NASDAQ and DJIA, as a point of reference given the nature of this article I should point out that longer-term support in the S&P is 2125, and the S&P is already under that level.

http://www.marketwatch.com/story/why-the-major-indexes-are-make-investors-play-defense-2015-05-28?link=MW_TD