AM: Selling stalls

AM Update

MARKET BEHAVIOR
Stocks gapped lower at the open, but recovered a big chunk of the losses by midday.

MARKET SENTIMENT
The Japanese market was slaughtered 7% overnight, but most of the panic tapered by the open in New York.  It is encouraging to see our market find a floor following the impulsive rush of selling over the last 24-hours.  This pause gives holders a chance to assess the situation and decide if new information materially affected their economic outlook.

Yesterday’s selling was setoff by the Fed’s discussion of when and how to end monetary easing.  Just the mention of trimming easy money triggered a selloff from paranoid holders and aggressive bears.  But was this really news?  Hardly, and is why the market found a floor after fear-based selling exhausted itself.  Most owners already anticipate the end of QE and are holding based on the recovering economy, not money printing.  This did nothing to change their views on the economic recovery and once the panic induced selling ran its course, supply dried up and we found a bottom.

It is difficult to make money trading what everyone knows and expects because it is already priced in.  Without a doubt this bull will end at some point, but it will not be because of the reasons people are currently talking about.   An encouraging development for bulls is last 24-hours flushed the “QE-crash” crowd out of the market and this preemptive selling will make the eventual ending of QE less of a problem.  A couple more scares like this and the end of QE will be fully priced in and could actually be the start of the next leg higher as all the QE bears are forced to chase the market higher.

TRADING OPPORTUNITIES
Expected Outcome:
It is premature to say the weakness has ended and we could easily return to 1600.  We came a long way over the last month and a consolidation here is expected, healthy, and part of a sustainable continuation.  We could see more volatility in coming days, but as long as we hold 1600, the rally is still alive and well.  We didn’t learn anything new yesterday and anxious traders were simply looking for an excuse to sell.  Now the rally is in the hands of more deliberate and thoughtful holders. If they still believe in the economic recovery, expect them to continue holding and the rally will resume on this tight supply.

Alternate Outcome:
The best way to know this market is breaking down is to see it actually breakdown.  We could see a couple more days of selling, but  every dip has been buyable and we should assume this one is too.  We need to see a series of lower-highs and lower-lows before we can say this rally is ending.

Trading Plan:
The rally remains intact, but there is no reason we need to sit through this volatility.  We are in this to make money and can only do that by selling our winners.  If anyone feels uneasy, take some profits and wait for the next trade.  We violated trailing stops at 1650 and those defensive tools only work if we use them.  Maybe this was only a 24-hour selloff and we were shaken out unnecessarily, but I would rather be out of the market wishing I was in, than in the market wishing I was out.  Longer-term holders can keep stops at 1600, but they have more money at risk if this selloff continues.  Reclaiming 1670 over the next couple days shows this was a false alarm, but be highly suspicious if we stall and cannot make new highs.

INDIVIDUAL STOCKS
AAPL continues holding the 50dma and shows a larger group of buyers is willing to step in and defend the stock.  Previous rebound attempts failed quickly and this stability shows a shifting character.  There are many headwinds in front of this stock, but it is acting like it wants to go higher in the near-term.  As always, protect yourself with a stop under the 50dma.

GLD found a bid after the dramatic events over the last 24-hours, but look for the price to sag when calm and complacency returns in coming days.

Plan your trade; trade your plan