Still stuck

MARKET SENTIMENT

We continue trading inside the 1400-1410 range.  The longer we grind it out here, the more we wear down the bears and the more believable this level becomes for cautious traders sitting on piles of cash.

All I hear from the financial press is how bad September is, worst month of the year historically.  While technically accurate, September is skewed by just a handful of large outliers.  There were two really bad Septembers during the Great Depression.  And who can forget 9/11 and its affect on the markets immediately after.  And finally the indexes were hit hard in September during the 2002 recession and again in 2008 during the Financial Meltdown.  But these are just 6 major outlier instances over the course of 100 years, meaning we historically have a 6% chance of a major crash in September.  That might be higher than any other month, but I don’t know about you, but I prefer betting on 94% probabilities, not 6%.

This obviously doesn’t take into account risk/reward, but as an individual trader I can go from 200% long to 200% short in less than 5 minutes, so I’m not too worried about getting stuck on the wrong side of the market.  Major institutional money managers don’t have this luxury and have to plan further ahead, but as an individual investor my nimbleness is far and away my greatest advantage and I will always exploit this strength in my trading strategy.

Right now the market is poised to go higher due to the large skew between skepticism and excitement of buying this market.  I’ll gladly change my views if the market tells me it wants to go lower, for now the bull case is setting up nicely.

MARKET BEHAVIOR

The market is frustratingly boring as it struggles with the 1400 level.  There is good support for the market at this level and we have bounced off it countless times since first breaching it on Sept 7th.  We’ve flirted with this level for the last month, but have not closed materially under it.  But we are also failing to see follow-on buying necessary to push the market higher.  This is telling of the market’s widespread reluctance to believe in this rally and is confirmed by the low volumes indicating not a lot of traders are buying this market.  While many widely followed trading systems are skeptical of low volume rallies because it shows lack of conviction, that is not the only way to interpret low volume.  Low volume also show a lot of people sitting out the rally that are potential new buyers that will be forced to chase the market if it continues marching higher.  It is this large crowd chasing the bandwagon that will fuel a rally higher when the market breaks out.

TRADING OPPORTUNITIES

Hard for anyone to make money in these tight markets.  Even day traders and option sellers are struggling with the low volatility.  But not making money is always better than losing money.  We’ve clearly transitioned from a swing trading environment to one where extended holding periods are working better.  Many leading stocks are putting together nice breakouts and follow-on gains.  The market is always changing personalities.  Q1 was all about hanging on for the ride. Q2 was a volatile swing trader’s dream.  And now Q3 is dull and boring, but with a slight bullish bias.  We trade the market we are given and this is what we got.

INDIVIDUAL STOCKS

LNKD and DIS are having high volume breakouts today.  DIS is a 50dma bounce and not part of a  base.  LNKD would also best be described as a 50dma bounce since this recent consolidation is too wide and loose for a flat base and it doesn’t fit any other pattern.

HD is trading very tight after it’s earnings related breakout a couple of weeks ago.  Such tight trade is often indicative of accumulation as big money managers are piling into the stock any time the price pulls back, even by the slightest amount.  This puts a solid floor under the stock and once the stock runs out of sellers at these levels it will drift higher under the continued accumulation by big money.

Stay safe