AM: Dragged down by Japan

S&P500 daily at 1:56 EDT

AM Update

MARKET BEHAVIOR
Stocks opened weak following turmoil in Japanese markets, but US markets brushed off those worries and reclaimed a chunk of the early losses.

MARKET SENTIMENT
There are plenty of issues in Japan, but current volatility is largely driven by an over-crowded hedge fund trade going long the Nikki and short the Yen.  It was guaranteed easy money until it started falling apart a couple of weeks ago, no doubt execrated by margin calls on over-leveraged hedge funds.  But that is there and this is here.  We live in an interconnected world and some of that spills over, but remember the US markets are leaders, not followers.  Bearish traders trying to get a jump on the expected breakdown in our markets shorted US stock futures overnight, but much to their dismay, the US market bucked the trend bounced just minutes after the open.

From a supply and demand point of view, much of the selling in US markets took place last week, meaning there was little supply left to continue a breakdown.  Fundamentals or not, the market bounced because there was no one left to sell.

TRADING OPPORTUNITY
Expected Outcome:
Everyone wants a strong market to pullback so they can get in at lower prices, but every time they get what they asked for, they become paranoid and are afraid to buy the dip.  Last week’s selloff gave people a chance to get in at 1600, those that missed Friday’s strength had another chance this morning.  The market is entering a volatile range as we consolidate recent gains.  Don’t get greedy and lock in long and short profits early and often.  We can trade the breakout when it happens, but as long as we remain inside 1600-1700, swing-trade it.

Alternate Outcome:
Today’s weakness shows some buying restraint by those watching the bounce from the outside, but we are still well above the 50dma and 1600.  Falling back to this level so soon after testing them shows buyers are scarce and the breakdown is finally here.

Trading Plan:
Shorts that failed to cover last week can use this weakness to take profits.  Staying above 1622  means the bounce is still intact and buyable.  Falling under 1622 over the next couple days is a red flag and demonstrates lack of demand.  Outside of that, look for the market to trade up to 1670ish over the next couple weeks where we will take profits and short weakness.

Plan your trade; trade your plan