Bottom pickers getting sucked in

The early selloff reversed and the S&P500 finished flat for the day.  Was this the panic driven capitulation that marks a solid market bottom?  Not likely.  The high-probability trade remains lower.

MARKET BEHAVIOR

Friday was the biggest single-day decline in months as bulls are losing control of this market.  In the last few months, down-days were muted and lacked a meaningful punch.  The real power came from upside moves, but that dynamic is obviously changing.  The ironic thing is the bear camp regained its strength only after its numbers dwindled.  But that is the way the market works, the side with the greatest numbers is the weakest.

Since June every pullback has been a buying opportunity and that trade has become fairly obvious.  Is it time for the market to change its personality to keep it from being too easy and predictable?  We’re about to find out.

MARKET SENTIMENT

There is so much analysis and research out there about what a ‘normal’ market does, but then the prognosticators always follow that up by saying the market we are in is not normal.  We have the Great Recession, Euro Contagion, unprecedented money printing, and countless other reasons why this time is different.  But can anyone name a time that felt normal as it happened?  Is there anyone who traded a normal market where everything was so predictable and easy that they were making more money than they knew what to do with?  The two takeaways, the market is never easy and looking back ten years from now this market won’t seem so special.  The repeating patterns that are evident in hindsight in past chaotic and unique markets will also be present in post-analysis of today’s market.  It is our job to see these ‘obvious’ patterns in real-time and profit from them.  This market is no more special than any other market, once we lose that bias, it becomes a lot easier to understand the market.

We had a big down day on Friday, the largest price decline in months.  The selloff continued this morning, but reversed in the last hour of trade to finish unchanged.  Is this a clear reversal or simply a dead cat bounce?  Given how low the volume was, it would be hard to count this as a panic-driven capitulation point and a legitimate bottom.  Most likely bottom pickers are looking for the rebound and were sucked into this low volume reversal.  Price is truth and gains are gains no matter what the volume, but this bottom is highly suspicious.  I feel we need some real gut-wrenching down-days to clear the deadwood before we can resume the rally.  Dropping under 1400 over the next few days would certainly do that.  I don’t know if that will happen, but the sooner the market spooks out the weaker hands, the sooner the rally can resume.

No doubt the impending election is weighing on the markets and tonight’s debate will influence expectations of the outcome.  We’ll probably see another week of volatility, but we are in the home stretch and many people are already casting their ballots in early voting.  The market will pick the winner soon and will have already moved on to the next thing by the time Election Day rolls around.  My best guess is we’ll see weakness into the election and rally after.  But that is just a guess.  We need to follow market sentiment daily and adjust our expectations as new information becomes available.

TRADING OPPORTUNITIES

Most likely today’s rebound is a dead cat bounce and anyone who is trading the long side should cash in early and often. We could see prices climb for a day or two, but we really need additional high-volume down-days that clearly violate technical support levels.  This selling panic driven selling creates buyers for the next rally.  It still seems like this late-stage rally is built on hope and the market needs to crush that optimistic sentiment.  Markets rally in the face of fear, not on the back of hope.  Lets get some of that fear back so the market can resume its uptrend.

The higher probability trade remains lower, but we could see a bull-trap rally over the next day or two before breaking support.  And of course my predictions of support violations could be premature and we retest the upper-end of the trading range over the near-term.  But there are never certainties in the market.  We make the high-probability trade and over time the odds will work out in our favor.

Stay safe