The price action of the market is undergoing a change in character today. There has been steady selling all day and four different bounce attempts have failed and led to new intraday lows. Most notable is that small caps are being hit hard. The iShares Russell 2000 Index Fund ETF (IWM) is down over 1.6% and breadth is now at a very gloomy 1700 gainers to 5450 decliners.

The selling has been steady and broad and that is a significant change in the action. The bulls quite often put together a late day bounce to take the indices off the lows and we’ll see if they are brave enough to try again today.

It is easy to forget that there is a natural ebb and flow to stock prices. We so often see strong trending action that goes further than we think reasonable, that it is easy to forget that the market needs downside action periodically to remain healthy.

If you are an aggressive trader, days like this can cause a high level of stress as carefully chosen trades fail to work but it is action like this that eventually produces the next crop of opportunities.

I have no idea how deep this corrective action may go but at this point there is little chose but to play tougher defense and to keep losses contained. If the market finds its footing and turns back up then we can put money back to work. If we have to pay higher prices it is still a cheap form of insurance against another meltdown like we had in the fourth quarter.

I don’t believe that the uptrend off the December low is finished but I still have to respond to this price action which suggests that there is more downside to come. We respected the price action on the way up and we have to respect it even more on the way down.

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