Traders Should Stay Cautious… But Get Ready to Buy

Yesterday’s stock market action had a little something for everyone.  
 
The Dow Jones Industrial Average was up 72 points. The S&P 500 was basically unchanged. And the Nasdaq got clubbed for 23 points. So whether you’re bullish, bearish, or agnostic… you had something to smile about.
 
But it looks like the bears may be the only ones grinning in a week or two. Take a look at this chart of the S&P 500…
 
 
 
Stocks broke below the blue rising support line early last week. They bounced, formed a lower high, and now appear to be heading down toward the first red support line at about 1,345. That’s only about a 6% drop from the highs of two weeks ago – not too bad, but still enough to cause a few of the late-arriving bulls to grimace a bit.#-ad_banner-#
 
If the S&P 500 doesn’t hold at 1,345, there’s another support line near 1,320. Below that, 1,275 comes into play. That’s where we started the year. And if the market decides to play the same script it has acted out for the last two years – when stocks rallied relentlessly for a few months and then gave back all their gains in just a couple weeks – 1,275 is a reasonable target.
 
We have good reason to be cautious here. Stocks have enjoyed an uninterrupted four-month, one-way move higher. The S&P 500 registered its best first-quarter performance in over a decade. So if support levels start to get taken out, traders will be quick to hit the “sell” button and protect profits. We saw that happen in each of the past two years.
 
But remember… the springtime declines in 2010 and 2011 set the stage for higher stock prices heading into the summer months. I expect we’ll see a similar setup this time around.
 
The market is dangerous right now. And we could see a good move lower – especially if the S&P 500 loses support at 1,345. So if you haven’t already taken some profits off the table, now is a good time to do so.  
 
But stand ready to jump back in as the S&P 500 approaches its lower support lines. 2012 should still turn out to be a good year for the stock market. A swift correction right here could give traders a great buying opportunity.