On Friday, the market outlook in The Big Picture turned to "market in correction." The volatile action in leading growth stocks like Tesla (TSLA), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOGL) and Advanced Micro Devices (AMD) reflects that downgrade in market trend.
XThe Innovator IBD 50 Fund (FFTY) ETF, which tracks stocks on the IBD 50, also mirrors the recent turbulence. The shrinkage in the number of stocks on IBD Leaderboard is another indicator of the trouble in growth stocks and the stock market indexes.
As a result of the spate of selling, Tesla stock, GOOGL, MSFT, and NVDA have all pulled back to test support at their 50-day and 10-week moving averages. ServiceNow (NOW) has fallen sharply below that benchmark in rising volume.
Further reflecting trouble in growth and tech stocks, the Innovator IBD 50 ETF has undercut both its 10-week and 40-week lines.
Despite the sell-off, Leaderboard stocks Adobe (ADBE), Microsoft, ServiceNow and Google parent Alphabet maintain their spots on IBD Long-Term Leaders.
How To Correctly Approach A Stock Market Correction
While volatile drops in growth stocks and the indexes can cause fear and even panic, it's important to keep in mind what a stock market correction is. Whether an intermediate pullback of less than a 20% drop from the market's highs, or a full bear market with more than a 20% decline, a "correction" is also an opportunity.
That does not mean you should buy stocks while the market is in a downtrend. But it does mean it's a good time to build your watchlist to get ready to profit in the next uptrend.
Current pullbacks in Tesla stock, Microsoft, AMD, GOOGL stock and others means these growth stocks may form new chart patterns and set up new buy points. Gauge signs of strength and weakness by monitoring the price and volume action at key moving averages.
For example, Tesla showed resilience Monday, retaking its 50-day line. GOOGL stock did the same, while Microsoft came found support at that benchmark and stayed above it.
Also look for rebounding relative strength lines to show stock market leadership. During a market correction, most stocks will also pull back. But the strongest stocks will begin to show rebounding strength as the indexes recover and ultimately establish a follow-through day.
When Will It Be Time To Buy Tech Stocks Like Tesla And GOOGL Again?
As growth stocks retreat and the stock market indexes fall into a correction, investors need to follow sound sell rules to protect prior gains and avoid any big losses. Once you've protected your portfolio, take steps to profit when the market rebounds.
In terms of the overall market, look for a follow-through day to signal a change in market trend for the better. While not all follow-through days work, sustained new uptrends do not ever begin without one. You can track the progress of any potential rally and see when a follow-through occurs by checking The Big Picture each day.
For specific stocks, such as Tesla, Microsoft and Alphabet, wait for them to establish new buy points and break out before jumping in.
Patience leads to profits. History shows that the biggest gains are made when stocks break out in big volume at the start of a new uptrend, with their RS lines at or near new highs.
Waiting for such signs while following a simple three-step routine remains a sound way to stay profitable and protected in any market environment.
Follow Matthew Galgani on Twitter at @IBD_MGalgani.
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