AM: Bounce or false bottom?

S&P500 daily at 1:44 EDT

AM Update

MARKET BEHAVIOR
Stocks slipped again in early trade, challenging 1600 and the 50dma.

MARKET SENTIMENT
The market clearly wants to test these widely followed technical levels, but the real question is how much stop-loss selling is left to trigger.  If we saw a large amount of preemptive selling on the way down, there are fewer traders left to dump this violation of support.  Under this scenario we will see an initial surge of selling when we break support, but since so much defensive selling happened early, it quickly exhausts itself and bounces in decisive a capitulation bottom.  This is the exact behavior we saw on April 18th when the market rebounded strongly after testing the 50dma.

The alternative is many traders are anticipating the inevitable bounce and have all their stops clustered under 1600.  A modest dip will set off a furious tidal wave of selling that doesn’t stop until we plunge at least 20 points.  At this point either outcome seems likely and the most conservative trade is to watch from the sideline.  It is an ego boost and gives us bragging rights to challenge the market and win, but allowing our ego trade is a good way to go broke.  Let the market show its hand and jump on the subsequent move.

TRADING OPPORTUNITIES
Expected Outcome:
The market briefly dipped under 1600 as I wrote this and all we can do is wait and see what happens.  Was this the capitulation bottom, or the prelude to a major QE selloff?  I wish I had the answer, but like everyone else I’m simply a spectator.  1600 is an important level because so many people are watching it and basing their near-term outlook on how we respond. Over the next couple days we will know a lot more about the what the market thinks and how people are positioned.  A bounce is buyable for a trade, but resist adding new shorts if we keep selling off.  Bull or bear, expect a short-squeeze/bull-trap bounce in the next couple days.

Alternate Outcome:
Trading would be so much easier if the market actually did what it is supposed to do.  The problem is it has a nasty habit of convincing us we are wrong just before proving us right, or convincing us we are right just before proving us wrong.

Bears are looking for a collapse, bulls a bounce.  Obviously one is right and the other wrong, but if only the market’s price-action was so clearcut.  A likely outcome is fake out with a false move before reversing and revealing its true intentions.   A bounce before a plunge, or a plunge before a bounce.  Just because the market is doing what we expect doesn’t mean we can let our guard down.  Prepare for, even expect it to snap back in our face.  In uncertain and volatile periods like this, take profits early and often because they will likely be gone in a couple of days.

Trading Plan:
Let the market do its thing.  I still expect a near-term bounce because everyone is on the selloff bandwagon, but the momentum is clearly on the bear’s side.  A bounce is buyable with a stop under recent lows.  It is late in the game to be adding new shorts and existing shorts should look to take profits.  The goal isn’t to make all the money and hold for top dollar is a sure way to give back all your hard-earned profits.

GLD daily at 1:44 EDT

INDIVIDUAL STOCKS
AAPL challenged its 50dma this morning, but is holding it at the moment.  It is hard to be excited about this company given the complete lack of meaningful innovation over the last couple years.   Rumor is AAPL will release new default icons for iOS next week.  Without a doubt they need to get rid of the cheesy glare and  gimmicky graphics on the in-house icons, but hopefully there is something bigger than that.  Of course at the same time we also don’t want another half-baked iMaps episode either.  If the market is not wowed next week, expect traders to continue souring on AAPL’s and actually start to question the company’s long-term prospects.  It’s up to Apple to prove it is not the next Palm Pilot or BlackBerry and the way it is bleeding market share is not a good start.

GLD reclaimed some of its luster in the face of today’s selloff.  Thank a plunging dollar for the lift.  Gold could continue higher on Dollar weakness, but if we are making a currency trade, trade currencies, not gold.  Fundamental reasons to own gold continue eroding along with people’s trust.  Maybe gold will come back some, but it will be a long while before it reclaims its economic fear driven heights.

Plan your trade; trade your plan