Today’s dip cleared the air of complacency and is making traders fearful again. Is this the real selloff or just another buying opportunity?
Biggest selloff of the year, down 1.25% and finishing at the day’s low. While 1.25% is noteworthy, it isn’t nearly as dramatic as some in recent memory that dipped multiple percent. Volume was 20% above average and typical of a selloff that takes out several layers of stop-losses.
The market broke through minor support at 1525 before ending a few points under 1515. The next major support level is 1500 and is more meaningful because it goes back nearly a month. If we trade near this level, be wary of a dip under because a huge pile of automatic stop-losses will push a wave of new supply on the market. If we still cannot find a floor there, the next level is the 50dma down at 1475.
We finally have the selloff everyone’s been waiting for, and that is why this isn’t the real deal. No doubt we could see further weakness, but this rally will most likely end in a double-top. While Tuesday set a new high, a 0.7% gain on average volume is hardly exhaustion. But even if the rally is not dead, that doesn’t mean we should rush out and buy stocks because an intermediate dip could easily take us back to 1475.
The excuse for today’s selloff was dissent in the Fed minutes over when to withdraw stimulus. This is a two or three-year story, not an imminent change in Fed easy-money policy, but just a hint of withdrawing liquidity was enough to send already paranoid traders to the exits. After that, selling accelerated as we tripped automatic stop-losses.
Today’s dip rattled the market and it led to a lot of selling. We are left wondering if this is just another buy-the-dip opportunity or the start of something larger? While I can’t give you answers right now, there are clues we can look for to guide our trading over coming days.
We have one of two likely outcomes, finding support tomorrow and bouncing back to 1530, or selling continues and we don’t find a bottom until 1475. If the cascade of selling ends and we rebound, the rally is back on and look for a new high next week. But if we keep taking out stops, don’t try to bottom-fish and let the market continue shaking out weak hands.
This market will eventually set a new high, the only question is if that is next week or next month. Double-tops are one of the most common topping patterns and probability-wise we should expect this trade. After that second top we can start looking for a bigger shorting opportunities, but until then take profits on shorts early and often.
Sometimes markets top without much fuss, but those are rare. Usually we see elevated volatility accompanied by one last surge higher, a double top, or a head-and-shoulders. Rarely do bulls simply give up and roll over without a fight. While today could be the start of a bigger selloff, heading straight down from here is not the most likely outcome.
AAPL closed under $450 and has been down six-days in a row. When the stock hit $485 last week, holders were most hopeful of a rebound when they should have sold. The market loves to play head games and the most successful traders expect this; buy when you don’t want to buy and sell when you don’t want to sell. If AAPL cannot find support at $450, new lows are just around the corner. This is a swing-trading stock right now, not an investing one. If you want to make money here, buy the dips and sell the rallies.
The market brought everything down with it, especially high fliers like NFLX, LKND, GOOG, and AMZN. When the market has a bad day, there are few places to hide. Look for these high-beta stocks to go down further than the market if broad weakness persists.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.