AM: Testing support at 1500

AM Update

Stocks dipped and are testing support at 1500.  We could see a little more weakness, but this is a buy-the-dip moment, and those piling on the short bandwagon are going to have a bad time.

MARKET SENTIMENT

There are two kinds of holders, those that sell a 2% pullback and those that don’t.  Today we find out how large each contingent is.  New buying largely dried up because anyone already reluctant to buy the recent rally is not rushing in when the market is “melting down”.  The key to this pullback rests firmly in the hands of holders and how many are running for the exits versus those saying this is no big deal.

So far all the headlines say “buy protection while it is cheap”, “the pullback could be ugly and deep”, “correction”, etc.  It really is hard to find anyone shouting “buy the dip”.  When everyone thinks this is the real correction, I’ll take the other side.  I’m not saying this is the bottom and no doubt we could easily see further selling, but I do think we will make new highs before the end of the quarter.  That makes this a buy-the-dip opportunity, we just need to find the right timing to buy that dip.

Real tops happen when everyone is complacent and buying the dips.  When the guy running around saying the sky is falling is labeled Chicken Little and ignored.  Right now the guy promoting the rebound is the oddball and more likely to be ridiculed than the one saying the market is on the verge of collapse.

Why this matters is it gives us insight into how traders are positioning their portfolio.  Anyone who expects a major selloff is already out of, or short stocks.  These were the people who sold yesterday, but once they are out, they no longer have vote in what direction the market goes.  The only people with a say are those still holding and those contemplating buying the dip.  Those are the two groups we need to focus on when determining how to trade this market.

So far holders sat through too-far, too-fast, a negative GDP number, and everyone knows sequester is just around the corner.  I think it will be harder to shake these core holders out and this wave of selling could be short-lived.  The market is already finding support at 1500 as the selling is temporarily abating.  We have to be careful of the stop-losses sitting under 1500 because that could trigger one last wave of selling, but that will be the last of it.  Once those autopilot sell orders work through the system selling will climax and we will bounce higher.

Holders are just half the equation, we also need to consider who will buy this dip.  There are a lot of big money managers still underweight this market, wishing they bought the rally back at 1500.  Here is their chance and no doubt some are taking advantage of it.  Expect the buying to intensify if the market starts making new gains and big money fears being left behind for a second time.

This rally since November is running out of steam and we are closer to the end, but this is not that end.  Look for a more typical double-top or head and shoulders pattern before we see a bigger pullback.  That means new highs in the near-term and this dip is buyable.

TRADING OPPORTUNITIES

Expected Outcome:
I am looking for buying opportunities here, not shorting ones.   This selloff is too easy and once all the weak hands bailout, supply will dry up and we will continue higher.  I like going against the crowd, but that is different from catching a falling knife.  We need to look for a valid entry to buy back in.

The low of this pullback will be somewhere between 1500 and 1475.  If you are okay with another 25 points of weakness, buying now is not a bad thing.  Another strategy is putting a trailing buy-trigger just above the market.  Right now that could be 1506 or yesterday’s close of 1511.  This would let you ride the market down if it continues sliding, but will get you in when it is trying to rebound.  Another strategy is to wait a few days and let this market find and hold support. But either way I would not be short this market here, the high probability trade is a rebound, not a collapse.

Alternate Outcome:
The market can do whatever it wants and doesn’t stick to a standard playbook.  While most markets top with exhaustion, volatility, double-top, or head-and-shoulders, there is no rule that says it can’t just roll over one day and die.  While this is certainty a possibility  it is not the high-probability trade.  If you need a guarantee, get a savings account.  If you can handle a little risk when the odds are in your favor, look for the eventual top to be more consistent with history, making this a buy-the-dip opportunity.

INDIVIDUAL STOCKS

AAPL just cannot find a bid and is now under $445 now.  That is a 10% decline in 10-days.  Buyers are just not showing up because everyone who wants this stock already has some.  The high-probability trade is waiting for new lows and swing-traders to jump in and buy the dip after the stock hits $430.  This could lead to another bounce to $450, but that will be a selling opportunity.  There are still far too many hopeful holders in this stock for it to rebound and it will take time and volatility to grind that out.  Some people won’t ever give up, like the CSCO holders waiting for the bounce back to $50.  But that is a vice, not a virtue in the markets.

Stay safe