PM: Will 1540 hold?

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks gave up all of yesterday’s rebound and then some.  We found support at the 50dma, but still finished near the lows of the day.  Volume was well above average as formerly confident holders were selling enthusiastically.  This was the third test of 1540 and breaking it will trigger a huge wave of technical stop-loss and short selling.  The recent pattern is alternating strength and weakness and a strong rebound Thursday will build a larger margin of safety above all the sell orders sitting under 1540.

MARKET SENTIMENT
Yesterday felt like the rally was back on, today the inevitable correcting is taking hold.    What will tomorrow bring?  Every breakout/breakdown over the last month was a head fake.  Was today’s selloff simply another buyable dip?

The key to figuring it out is getting into the heads of other traders.  Was the two huge volume down-days this week enough to shake out weak holders, yet not so bad it damaged the confidence of the majority still holding?  With all the various breakdowns around the market, the haze of complacency is vanishing by the day.  Some traders are taking a proactive stance and selling while others are anxiously holding on.  Some of these holders remain confident while others are simply indecisive.  This latter group is who will provide the supply if the market does breakdown.  Hope is not a strategy and holding on simply because the market bounced back every other time is a good way to lose money.

But this is not a one-way street.  Bears are increasingly cocky as they finally see the pullback they’ve been waiting for.  If we rebound and continue higher, it will be due to the huge volume selling on Monday and Wednesday.  The anxious are climbing over each other to get out and after a certain point we will run out of sellers.  Twenty percent above average volume is strong for an intermediate dip.  If that is all this is, we will bottom soon.  If this is a much larger correction, twenty-percent is just getting started and we could see a hundred percent surge in volume if the market slices through the 200dma.

Both sides have equally valid arguments, our job is deciding which outcome is more probable.

TRADING OPPORTUNITIES
Expected Outcome:
Neither bulls nor bears can take control of this market as we bounce around the trading range.  No one knows for sure what will happen, the best we can do is look for clues.  We face a real test on Thursday.  If the market stumbles, we are dangerously close to an avalanche of selling just under 1540.   Break this level and many money managers will flee ahead of the widely expected pullback.  When it comes to selling, it doesn’t matter what starts it.  Once the stampede starts, it takes a life of its own as people sell for no other reason than everyone else is selling.  The market could easily bounce one more time, but the potential downside is far more frightening than any reward is worth.

Alternate Outcome:
Bears are turning into the boy who cried wolf and if they don’t deliver soon, they will lose all credibility.  A powerful rebound and holding 1570 through Monday  shows bulls still own this market and the next move is higher.  The sideways consolidation and high-volume dips are clearing the market and setting the stage for a move higher.  The linchpin is holders.  If they continue holding and are not afraid of a little weakness, that will keep supply tight and there is nowhere to go but up.  If they fall prey to the fear-mongering, there are a lot late buyers that will rush for the exits when their positions fall into the red as we dip under 1540.

AAPL daily at end of day

INDIVIDUAL STOCKS
AAPL had another bad day and set new 52-week lows.  It managed to hang on to $400, but just barely.  The stock is finally losing its status as a market darling and becoming something people are ashamed to admit still owning.  This is pure anecdotal, but I get far less animosity directed my way when I criticize AAPL than I did a couple of months ago.  The cheerleaders are losing their faith and that is an important part of finding a bottom.  We might see on last plunge lower, but we are closer to the end of this selloff.

There are an absurd number of conspiracy theories surrounding gold’s selloff, but the truth is it was simply and over-owned asset and fell victim to its own success.  There is not a cartel of reserve banks conspiring against gold.  This has nothing to do with Cyprus.  The long-held investment thesis behind owning gold is as a hedge against money printing, inflation, and the inevitable economic collapse.  While it sounded good, the theory failed to pan out no one else is interested in buying Gold.  This is supply and demand plain and simple.  No one wants to buy gold at $1700/oz and this week they said they don’t want to buy it at $1500 either.  The ferocity of the selloff is due to the high leverage traders were using to buy this ‘safe’ asset and margin calls triggered an accelerating cascade of selling.  The simplest explanation is most often the right explanation

Plant your trade; trade your plan