Volatile, but indecisive

S&P500 daily at end of day

A lot of nothing in the market.  We broke out to the upside, made a new low, and then finished in the middle.  Not the most decisive of days, but we’ll get there soon enough.  The trend is lower and that is the direction we should plan for.  I would be suspicious of any rally from here without a decisive shakeout first.

MARKET BEHAVIOR

We had a volatile, but indecisive day.  The S&P500 exceeded Wednesday’s trading range on both the upside and downside, but it finally finished in the middle of the day’s range.  While the day eventually ended higher as compared to Wednesday’s close, it would be hard to say the action was bullish or bearish.  The market opened higher but then sold off, and it made new lows and then bounced back.  It gave a little something for both sides to hang their hat on, but it was a lot of nothing for the rest of us.  To get a better read on the market we’ll need to watch for more decisive clues tomorrow.  But the trend is lower and with all other things being equal, the trend will continue.  We should expect further weakness in coming days unless the market conclusively tells us otherwise.

MARKET SENTIMENT

Bulls had the opportunity to trigger a short-squeeze at the open and bears could have started an avalanche of selling with the new low, but neither was able to get the job done.  What we can tell from today’s trade is both sides are dug in and prepared to stand their ground.  Bears resisted the assault on the upside and bulls were resilient in the face of a push lower.  But these were fairly modest moves and no doubt a larger penetration in either direction will put the hurt on and lead to a cascade of stop-loss selling.

The trend is lower and the trend is more likely to continue than reverse, so we should plan for further weakness.  But at the same time, bears are getting pretty aggressive and we might see a short-squeeze thrown in before heading lower just to keep things entertaining.  The market doesn’t like to be predictable and a short-squeeze before plunging lower would zing both sides and humiliate everyone equally.

At this point I am looking for a plunge lower on gigantic volume to signal this correction is bottoming.  I would be reluctant to buy a rebound from this level without a huge selloff.  Lacking that, the rally won’t have the ammunition and sentiment necessary to sustain a move higher.  The market rises on fear and we need to scare everyone to get this rally going.  The only exception I would consider is if the market traded strong for four or more days.  I could get on board with that kind of strength, but that rally wouldn’t have the same upside potential as a market that had a decisive shakeout.

TRADING OPPORTUNITIES

There is no reason to be in this market and the conservative trader is in cash.  Let the gamblers figure this out and wait for a higher probability trade to emerge.  For the gamblers out there, the best trade continues being short this market, but only the most confident, experienced, and disciplined traders should attempt this.  A lot of money can be made quickly shorting a correction, but timing is everything and oversold markets bounce back hard, steamrolling anyone who showed up late to the party.  We’re in the later innings of this correction and probably only have one more leg lower before rebounding.  If you don’t have a profit cushion already in place from shorting earlier in this move, I’d suggest staying out and waiting to trade the rebound.  The risk/reward dynamic for initiating a short here isn’t worth it.  We are within a couple of weeks of the rebound, so wait patiently for that trade.

ET CETERA

Just to clarify my commentary about the impending election, expecting the market to rally after Obama is reelected has nothing to do with my personal political views or affiliations.  I don’t support or endorse Obama and my commentary is exclusively related to anticipating the market’s reaction.  And as far as that goes, it is pretty obvious to me, if everyone expects the market to tank if Obama is reelected, then clearly it will rally.  Supply and demand at its best.

Stay safe