Stocks dropped Tuesday as investors belatedly reacted to weekend electoral victories by anti-bailout, left-leaning politicians in Greece and France -- wins that threaten the German-led austerity-focused status quo in the eurozone. The losses would have happened on Monday, but chatter of a potential bailout of the Spanish banking system tempered the selling pressure.

No matter. They happened Tuesday as the leader of a potential far-left Greek coalition government chafed against the German-led austerity-for-bailou​ts status quo that has plunged Greece into its fifth year of recession and pushed the unemployment rate to a record 22%. Markets are not happy and have taken out critical support levels in the process. As a result, stocks are threatening to return to levels not seen since December.

All this is being driven by some disturbing headlines of out Greece. The pro-bailout New Democracy party, part of the current coalition government, has failed to secure enough support to govern. That gives the second-place far-left, anti-bailout Syriza party a chance. 

Now the leader of the party has claimed the election nullifies Athens' bailout pledges, has threatened to halt new budget austerity measures and debt payments, and is exploring nationalization of the banking system.

After years of European leaders doing and saying things to placate the markets, this was rather shocking for people. The euro plunged against the dollar in response as traders headed for the exits. That was enough to push the exchange rate down through the critical 1.30 dollars per euro handle at one point, a level that's been an important line in the sand since 2006 -- with excursions, such as the initial 2010 panic over the first Greek bailout, quickly reversed. 

There was weakness everywhere as the euro-dollar exchange rate acts as an important source of capital for hedge fund carry trades, on which people sell dollars to buy risk-on assets like copper and crude oil. As the euro weakens and the dollar strengthens, these traders must be reversed frantically.

Thus commodities, which are particularly sensitive to the undulations of the dollar, are being smashed. The U.S. Oil Fund (USO) fell 1.3% toward mid-December lows.

But the real dramatics happened in the stock market as the NYSE Composite ($NYA) broke neckline support of a big multimonth head-and-shoulders reversal pattern. The pattern traces down to mid-December levels and suggests the sell-off is far from over.

You can see this in the way cyclical, economically sensitive sectors and small-cap stocks are leading the decline. That's a sign investors are in risk-off mode. And it provides short side opportunities for nimble traders.

For conservative investors, I recommend moving to cash. 

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Trading update

I expanded my Edge Letter Sample Portfolio's short positioning Tuesday morning with the addition of three new short ideas: Nabors Industries (NBR), Freeport (FCX), and HollyFrontier (HFC). Both NBR and HFC are in energy. FCX is in materials and is being pulled down by the drop in copper and gold.

My existing materials shorts are doing very well as steel stocks are pummeled. Highlights include a 10% gain in Gerdau USA (GGB) short and a 8% gain in AKSteel (AKS) short.

Disclosure: Anthony has recommended NBR short and GBG short to his newsletter subscribers.

Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.