AM: Tap dancing in a minefield

AM Update

MARKET BEHAVIOR
Stocks are tap dancing a few feet from the minefield below 1540.  Technical traders view a violation of this level as a confirmation the correction is finally taking hold.  It will be the first material lower-low since this rally began five-months ago and many traders put their stop-losses under this widely followed support level.  Once the selling hits, expect it to accelerate as it takes out more and more stop-losses.  How far it goes depends on the volume of stop-losses triggered and how quickly value buyers jump on discounted shares.  But value investors are more disciplined than most and often wait for the dust to settle before acting, so don’t expect them to rush to the market’s aide.  Of course we need to fall into this area before the autopilot selling starts.  Rebounding and holding 1570 shows bulls are still in control and bears’ inability to push the market down these last few points will be a major defeat.

MARKET SENTIMENT
It is comical to see the financial press rationalize each of these whipsaw moves.  One day they are promoting great data, 24-hours later everything is bad news.  We go back and forth, day after day.  If the market was up huge today, I have little doubt they would find a reason.  But they are journalists and that is their job.  We are traders and our job is seeing through all the BS and understanding why markets are really moving.  It always comes back to supply and demand.  We are stuck in a fierce battle between bulls and bears.  The first couple of months bulls had the clear upper hand as we marched higher every week.  But since March bears have evened the fight, leading to this choppy sideways trade.  The market works in cycles and after a period of up, it is inevitable we will run into a bout of down.

TRADING OPPORTUNITIES
Expected Outcome:
Dip buyers are supporting the market at 1540.  The question is if they have enough money to keep us from sliding into all the automatic stop-losses just a few points away.  Every dip this year was buyable and many are sticking with this game plan, and to this point it’s been the smart trade.  But all good things must come to an end and eventually we will run across a dip that doesn’t bounce.

I cannot say conclusively this is the start of the selloff and the Teflon market could throw in another bounce, but given the age of the rally the and gains we’ve seen, the risk of an explosive downside move far outweighs the potential gains from another tired bounce.  An interesting trade here is shoring a break of 1540 with a stop around 1545.  Look for a slide to at least 1400.

Alternate Outcome:
Everyone is watching this market, waiting for it to breakdown.  Most of the cautious traders are already out, taking their profits weeks ago.  This preemptive selling took a lot of supply out of the market.  If we bounce and hold 1570 for a few days, the rally is back on and no matter what our biases are, we have to respect the market’s resilience.

INDIVIDUAL STOCKS
The stock that cannot go lower keeps going lower.  AAPL sunk to $395 and it is harder to find people promoting the buying opportunity at these new levels.  Formerly enthusiastic bulls are now confused and uncertain.  They are the ones selling at these levels as they finally give up on their favorite stock.  Earnings next week will is a coin-flip, but it wouldn’t surprise me to see one last flush lower.  $350 would be a 50% selloff and makes for a nice round number.  Of course many top stocks decline an average of 72% after their peak, meaning there is still a lot of downside risk left if the stock falls to $196.  While shocking, this level is not unreasonable if AAPL continues losing market share, doesn’t come up with a new innovative product, and margins decline due to price competition.

Bottom fishers are buying GLD at $135 figuring it cannot go any lower, but we probably haven’t seen the last of the selling.  And even if we have, there are a lot of horrified GLD  holders looking to get out of their positions on any strength.  The thing to realize is many buyers at these levels are opportunistic knife catchers.  They will dump their shares at the first signs of weakness, triggering another leg lower.

Plan your trade; trade your plan