AM: Another round of selling

S&P500 daily at 3:06 EDT

AM Update

MARKET BEHAVIOR
Stocks retreated following early strength.

MARKET SENTIMENT
In spite of this weakness the market is still above recent lows and is maintaining its composure.  With so many calling for a correction and claiming recent price action was the top, support at these levels for the third day is constructive and bullish.  Many of those that could be shaken out are getting shaken out, eventually leading to selling exhaustion and price recovery.

Understand what people think, how they are positioned, and what moves they have available to them.  Most expect a pullback after such a strong rally, sold recent weakness, and the only thing they can do is buy back into the market.  As for the bears, many shorted recent weakness and will be forced to cover when prices bounce.

TRADING OPPORTUNITY
Expected Outcome:
Continued support here is a warning for bears to cover shorts before they get squeezed out.  There is nothing wrong with making an aggressive trade, but recognizing when the trade is not working as planed is a key part of surviving the market.  Market collapses are scary fast, yet this selloff is two-weeks old tomorrow and hasn’t even fallen 4%.  Trading against the trend requires nimbleness and a deft hand. Take profits early and often; don’t get greedy and hold too long, allowing profits to turn into losses.

When we finally bounce, don’t expect the strong rally to resume.  The market moves in three directions; up, down, and sideways.  We did a lot of up recently, everyone expects down, so sideways it is.  Sell the breakout and buy the breakdown.

Alternate Outcome:
One of these days bears will be right and the market will correct when no one expects it.  It will start like any other dip, except this one doesn’t find a bottom and continues lower.  The best defense is keeping an open mind when the market doesn’t behave as expected, and when all else fails, hard stops.

Trading Plan:
Swing traders can buy the market with a stop under yesterday’s 1622 low.  Look for a move up to recent highs.  Breaking through 1622 likely means a retest of support at 1600 and represents another dip buying opportunity.  Slipping under 1600 will trigger a wave of stop-loss selling. At this point it is anyone’s guess if that will lead to a multi-day selloff or quickly find a bottom, but we will worry about that when we get there.  At this point assume every dip is buyable until we come across one that isn’t.

INDIVIDUAL STOCKS
AAPL continues holding above the 50dma and $440.  Seeing the eight-month selloff take a break is encouraging.  The big fundamental catalyst comes next week at AAPL’s developer conference.  In the past AAPL used this platform to announce new products and services.  Given the huge price decline since the iPhone5’s release, pressure is on Cook and Co to wow developers, the media, customers, and the market.  The fear for an AAPL bull failing to unveil anything more than software tweaks.  Without a big announcement, expect the slide to continue as investors assume AAPL is out of ideas.

Plan your trade; trade your plan