Well folks, there you go. The bulls managed to hold off the bears through yesterday, but the effort collapsed today. The S&P 500 and the NASDAQ Composite both broke under some key support levels, and as such made it much easier for the market to keep falling. SCN Elite Opportunity Free Alerts Get premium select stock picks via email and mobile text alerts from our SmallCap Network Elite Opportunity Team. It's 100% FREE! No strings attached and no credit card required. Click here to sign-up today! In any case, the whole thing got me thinking about something I learned long ago that I'd like to pass along to you today. Don't worry - it's a quick lesson, but still a good one. Perhaps just as important is the valuation-based "what if?" table we've got for you today. First things first though. The chart of the S&P 500 below is what it is. A major line at 2065 was broken. The VIX broke above its 20-day moving average line as well. The volume was above average too. The faithful bulls will be quick to point out the S&P 500 seemed to find a floor at the 100-day moving average line (gray) while the VIX stopped short of its 50-day moving average, both of which are organic reversal points for market. Ergo, this dip may have already run its full course. Honestly, I understand the logic of that bullish argument. On the other hand, I don't agree with it. Major and even minor bottoms tend to materialize with a sharp spike in the VIX and a distinct swelling in volume. We've seen neither yet. I do think we could get a pretty decent bullish pushback tomorrow or Thursday. I just don't think it's going to alter our near-term downside destiny. You know what though? The daily chart isn't even the timeframe I'm worried about right now. I think the weekly chart is the one that's telling us where the market's next natural floors are. Take a look. It's a little tough to see the microscopic details on the weekly chart of the S&P 500 above, but the lower edge of a long-term rising trading range is about to be tested. It's at 2030, give or take. It's also worth adding the 200-day moving average line (green) at 2002 as a possible floor, since it's been one before. Oh, you can also see on this weekly chart how the really good bottoms aren't made until the VIX peaks to 21.0 or so. This isn't to say the S&P 500 can't break under 2000 and dole out some more intense pain. I'm just saying, let's not assume the worst until we clearly have a reason to. Back to Basics So what is it about the market's current situation that prompts the teaching of a lesson? Giving credit where it's due, it was Charles Dow (as in the Dow Jones Indices and the Dow Theory) who first put the idea to paper back in the late-1800's. But, the premise is still applicable and still relevant today. The idea is, in simplest terms, at any given time the market is in three different trends, each with its own timeframe. Primary trends are long-term bull markets and bear markets, usually measured in months if not years; primary trends are ultimately driven by the economy. Secondary trends are generally measured in weeks because they last for weeks at a time. They're still fundamentally driven, but are stopped and started by the perceived, nuanced changes in the economy's condition. There's a fair amount of assumption in play with secondary trends. Tertiary trends are measured in days, and generally last no more than a few weeks. These are often characterized as emotionally-driven moves, and swayed by the fickle part of our brains. Sometimes all these trends are pointed in the same direction, and sometimes they're not. Great, but what's this got to do with anything right now? The pullback we're experiencing right now is only a tertiary trend. It could potentially turn into a secondary trend, but honestly, we don't even have much evidence that kind of move is in the cards. The S&P 500 breaking under 2000 would be such evidence. Regardless, there's nothing on the horizon to say we're ready to reverse the primary trend... the long-term bull trend. While this is interesting information and perhaps a new framework for some of you, it's not the lesson. The "lesson" portion of today's pep-talk is, while the media's message looks and feels dire in the wake of today's setback - as if this is a risk to the primary trend - in reality, this is nothing more than a tertiary pullback that quite frankly none of us should be worrying about with our long-term money. It's not something the financial media cares to admit to itself or anyone else, but the fact of the matter is, most market-related television programming likes to make mountains out of molehills, bearishly and bullishly. It's good for ratings. More than once I've heard some of TV's top financial program hosts ask a pundit "What do we need to buy or sell based today based on XYZ information?" They usually get a cut and dried answer too, but I'm here to tell you, there's no single piece of information that should prod you into a long-term buy or sell. It's a bigger-picture kind of premise... the kind that financial journalism can't fit into a neat and tidy box. Trust me when I tell you if you're feeling panicked to ever make a major investment decision, you've been bamboozled. Trading may require snap decisions, but investing doesn't. Just make sure you have a really good grip on the timeframe that matters regarding any certain piece of data. And just so you know, this has been tough to do of late mainly because we've not had any discernible secondary trends since 2011. We've seen the primary trend, which has been bullish, and we've had a ton of tertiary trends, which have - on a net basis - also been bullish. We haven't had to deal with any major bearish secondary trend though... .which has us (frankly) a little spoiled and unrealistic. But I digress. My key point is, most of the time for your buy-and-hold stuff, taking less action is better than taking a lot of action. The tertiary trends should only matter for the smallest, most aggressive "trading" portion of your portfolio... and that's coming from a group of people (the SmallCap Network and Elite Opportunity teams) that love and do short-term trading as much as anybody. Indeed, the EO services makes a point of separating and labeling its short-term and long-term trades for this very reason. Just for Perspective Though I've shown you this chart before, I need to show you an updated version of it. It's a look at all the valuation scenarios for the S&P 500 at various price levels. This is useful to the extent that we're toying with a bearish secondary trend. (Remember, secondary trends are at least partially driven by fundamentals.) Have a look-see. The value of this chart is figuring out where the S&P 500 should be trading based on its typical valuation at some point in the future. The S&P 500 may have a swath of short-term floors in place all the way down to 2000 or so, but under 2000 there aren't any technical floors and finding the bottom will become a valuation-driven affair. The inherent flaw in this type of analysis is one we've discussed before.... investors may or may not care about valuations right now or in the future. We'll have to survey the landscape if-and-when the time comes. Still, it's a framework. and that's half the battle in this game - putting a plan in place. If it matters to you, the market's long-term average trailing P/E is 15.35, and the more recent (10-year) average is 16.95. The average long-term forward-looking P/E is 13.0, and the more recent average forward-looking P/E is 14.1. If we're going to revert back to norms soon, that could mean 2015 is going to be a very lethargic year. That's a huge "if" though. By the way, does everyone recognize the name Sam Stovall? He's the chief strategist for Standard & Poor's. Though he's got a hand in the creation of the very same marketwide earrings outlooks that have me worried now about a tepid 2015, he recently acknowledged 2015's actual earnings could roll in better than expected, IF the GDP growth rate sustains at a more normal pace of around 3%, versus about 2.4% for last year. And, if the dollar should fall back from its recent, crazy rise, that may well be the catalyst to make American multi-nationals more marketable overseas again, and drive the very earnings-outlook improvement Stovall is talking about. I like the sound of the premise. On the other hand, that's still a very big "if." Is there anything that's apt to reel the U.S. dollar in at this point to inflate our GDP this year? Maybe, but I can't see what it might be unless the dollar is pulled back. That's a discussion we'll have to have another time though. For today, just keep our trailing and forward-looking valuations in mind if you're trying to figure out just how far a secondary trend might pull stocks down. One last thing.... I think we mentioned to you yesterday the Elite Opportunity's free alerts suggested a short-term (tertiary) bearish trade last Thursday. In light of today's big dip I don't suppose there's any harm in telling you now, the specific suggestion was the ProShares UltraPro Short QQQ (SQQQ). Assuming an entry on Friday morning at $25.12, the people who get those free text and e-mail alerts are now up about 7% on their trade.... IN THREE DAYS! If you string a few trades like that together over the course of a year, all of a sudden you've turned a good portfolio into a great one. This is kinda why I made a point of suggesting leveraged ETFs as an opportunistic tool last Tuesday - those nickels and dimes can add up over the course of a year. It's probably too late to bother with the SQQQ trade now. But, it's not too late to make sure you don't miss the next quick winner given to you by the Elite Opportunity team. Just go here to register, or cut and paste this link: https://www.smallcapnetwork.com/pages/SCNEOL/v1/