AM: Continued weakness

S&P500 daily at 2:30 EDT

AM Update

MARKET BEHAVIOR
Stocks sold off hard, continuing last week’s slide to 1560, but found a bottom and reclaimed 1580 by late afternoon.

MARKET SENTIMENT
There was no obvious news catalyst for today’s selloff and it is simply a continuation of the pain trade as previously confident holders are running for cover.  Markets overreact on both the high and low side.  This selloff is the snap back from recent gains and will likely overshoot to the downside before bottoming.  What level qualifies as overshooting is up to interpretation and where all the money is made.  Maybe we are already oversold and ready to bottom, or only in the middle of this selloff.  That is the sport and challenge of trading.

TRADING OPPORTUNITIES
Expected Outcome:
The recent selloff is a great example of how valuable trailing stops and stop-losses are.  The market retreated to levels first seen in early April and anyone who failed to lock-in gains took a round-trip.  We’re in this to make money and the only way to do that is selling our winners when we least want to.  On the other side, shorts who stubbornly fought this market were vindicated by recent weakness but at what cost?  In the market early is the same thing as wrong.  We all come to the markets with opinions and ideas, but we must trade the market we are given and often that means admitting mistakes and taking small and calculated losses. Successful traders are not bulls or bears, but opportunists.

I was looking for a bounce near 1600 and clearly that didn’t happen, but that is the nature of this beast.  We take our licks, cover for a modest loss, and keep looking for the next trade.  No one is right on every trade and why planning our exit is the most important part of any new position.  The aggressive trader can try the dip again with a stop under recent lows, but most are better off waiting for the market to prove itself.

I still think this selloff is an overreaction to the inevitability of Tapering, but this weakness is therapeutic and taking the QE risk off the table in a sell the rumor, buy the news setup.  The market is always looking ahead and will already be looking past Tapering by the time it actually happens.

Alternate Outcome:
The market is clearly weak here and we must remain defensive.  If the market doesn’t find support quickly, the 200dma is the next level to challenge.  Selling begets selling and no matter what common sense or fundamentals show, crowds rush for the exit at the same time and the resulting selloffs are often breathtaking.

Trading Opportunity:
Obviously this is a volatile market and the best trade remains locking in profits before they evaporate.  A cocky bull or bear will get steamrolled, so use your ego as a guide.  Take profits when you feel most confident.

A dip-buyer can try again with a stop under 1560.  It is a little late to jumping on the short bandwagon and existing shorts should move down their trailing stop to make sure they don’t give back these well deserved profits in a bounce.

AAPL daily at 2:30 EDT

INDIVIDUAL STOCKS
AAPL‘s weakness persists as it broke $400 this morning.  The value buy of the decade struggles to regain upward momentum and is likely a victim of its own success.  When everyone loves a company, they already own it, leaving few new buyers to continue pushing the stock up.  It is a great company, but the stock was too popular for its own good.  If we cannot hold $400, the next level to watch is $350 and would be a 50% selloff from recent highs.  Any AAPL bull should have bailed when the stock failed to hold the 50dma.  Support at $400 is an interesting place for a dip-buyer to swing-trade a bounce with a stop under $400.

TSLA is still holding strong and any short should run for cover.  Climax tops collapse quickly and this stock doesn’t look ready to collapse.  With so many traders short this stock and a large percentage of the float in the hands of management and loyal investors, another short squeeze seems far more likely than a collapse.

GLD is holding up in the face of market weakness as last week’s plunge sucked out most of the downside in a single move.  Look for further consolidation, but the trend is still lower and it is better to bet on a continuation than a reversal.

Plan your trade; trade your plan