AM: Stocks finding a bid

AM Update

The market is finding support and recovering recent losses.  Should this strength be bought or sold?  AAPL continues its lifeless trade and AMZN is setting up to break either direction.

MARKET BEHAVIOR

Stocks are finding support above 1500 as the wave of impulsive selling abated and traders are using the pause to more rationally evaluate the market.

MARKET SENTIMENT

The last couple of days were dominated by “sell first, ask questions later”, but some sanity has finally returned after bottoming around 1500.  This is an important development because herd psychology can trigger massive selloffs when people start selling simply because everyone else is selling.  The most encouraging sign of support came yesterday afternoon when the market didn’t collapse after dipping under 1500.  That was the perfect setup for technical stop-loss selling to trigger wider selling.  Demonstrating support in face of all those automatic stop-losses showed selling was slowing down, not picking up.

Everyone acknowledged the recent series of non-stop new highs was getting frothy and this two-day pullback addressed that.  The bigger question is if this was enough of a dip to resume the uptrend, or do we need to see more selling before this thing finally bottoms?  Markets top on complacency and how quickly the mood changed once the selling started shows me this market is not complacent and traders are still cynical and edgy.  Topping complacency is when stocks start selling off a little at a time and no one seems to notice or care.  Clearly that was not the case here.

The encouraging thing for the bull is the recent dip created a new pool of potential buyers.  Recent shorts and swing-traders that jumped out will turn into buyers if the rally resumes.  Markets move on supply and demand only, this renewed pool of buyers gives us more fuel to keep the rally going.

TRADING OPPORTUNITIES

Expected Outcome:
Arresting the slide shows the emotional selling has dried up for the time being.  That doesn’t mean the coast is clear, it just says the risks of an avalanche of herd selling has returned to more normal levels and makes it a little safer to buy-the-dip.

Even thought we are seeing some calm here, this could simply be the eye of the storm.  We need to use stop-losses to protect our account we jump in too early.  A stop-loss at 1495 provides a reasonable level of protection while still giving the market enough room to move around.  Everything I see still points to new highs before the end of the quarter and set your profit target accordingly.  The only question is if 1500 is the bottom or we need to dip down to 1475 first.

Alternate Outcome:
This pause could simply be a dead-cat bounce on the way lower.  The market is the most humbling contraption ever created and if too many traders are betting on the bounce, it will humiliate all of us by continuing the selloff.  Of course if I were in charge and my goals was to crush as many traders as I could, I would let the market rebound before sending it down for real.  Rather than just zing bull or bears, why not get them both at the same time?

INDIVIDUAL STOCKS

AAPL is on pace to log its first green day in over a week.  While this is good, the lifeless sideways trade is showing little conviction supporting these gains.  As much as people hate to hear it, I still think there are new lows coming and any strength is a selling opportunity.

AMZN is doing its best to prove both bulls and bears wrong as it seems magnetically attracted to the 50dma.  Since everyone is expecting it to move one way or the other, the most frustrating trade is flat.  I don’t expect this will last and look for a break either way; buy $267 and sell $259.  Both the long and short trade have room to run; an upside breakout will make new highs and a dip will probably fall to the 200dma.  At this point it is a coin-flip and let the market show its hand first.

Stay safe