Stocks jumped around following yesterday’s plunge, showing early gains, slipping into the red by midday, and recovering losses by early afternoon. Given yesterday’s 2.5% slide, this morning’s 0.5% dip was relatively benign.
Buy the dip or short the weakness? That’s the question on everyone’s mind.
Markets pullback and this one is no exception. They also rebound after every selloff and so will this one. And to think some people claim it is impossible to predict the market! All joking aside, the hard part is figuring out the timing of these “obvious” moves and is where all the money is made and lost. Plenty of bears are beating their chest, proclaiming to the world how right they are. Of course they forget to mention they’ve waited months for this pullback and missed the majority of the recent rally, and those are the lucky pessimists, many actually lost money shorting this bull. But they’ve waited this long, so lets give them their moment in the spotlight.
People trade the market for many different reasons. Some do it for the gambler’s rush, other need to be right, and a few are simply here to make money. While it is impossible to leave our ego at the door, I’m in this to make money. That means I am flexible in my analysis and quick to switch views when presented with new information. It’s okay to be wrong, but it is fatal to stay wrong. I did this following April’s bounce off the 50dma when I was bearish and expecting a breakdown. That was the perfect setup to selloff and when it didn’t happen as expected, my analysis was obviously flawed and I quickly changed sides to the bull camp. But that was then and this is now. Given the recent weakness, what do we do here?
If any think this prelude means I am changing sides, they will be disappointed. I remain flexible and open-minded about this market, but in late May I shifted gears from rally mode to sideways chop. So far everything I see fits within that model and until further notice, I will continue buying weakness and selling strength.
Trading chop is the most difficult way to make money in the market. There is no set-it-and-forget-it. The key to surveying periods like this is taking profits early and often because a few days later they will evaporate. And of course the most conservative approach to this market is to sit in cash and wait for the next directional trade.
Without a doubt bears could be right here. Every rally ends at some point and this one is no exception. While we can buy weakness, always trade with defense in mind and keep a stop under recent lows. Aggressive bears can press their shorts, but move your trailing stop down and don’t let those hard-earned profits evaporate.
Game plan is buying the dip. This morning’s rebound gives an interesting entry point with a stop under this morning’s lows. 10-points of risk for a potential 50-point gain if we recover the “Tapering” selloff. For bears, a lot of selling is behind us and today’s stability shows many who wanted to sell are already out. No doubt we could continue selling off, but if we assume the market will remain volatile, taking profits early is the best way to stay ahead of the market.
AAPL’s out-performance yesterday is offset by today’s underperformance. The stock lost support at the 50dma and keeps pushing toward $400. The recent low was $385 and breaking this will like result in another leg down to $350. Stocks that cannot go any lower usually do, but this shouldn’t be an issue for the disciplined bull who sold the break of the 50dma.
GLD is trading sideways following yesterday’s plunge. A couple of days ago I said we could short a break of $130, but that was if the commodity rolled over. The gap lower took a big chunk of the short profit with it and we should expect sideways chop in the $120s. Clearly the trend remains lower and anyone buying the dip is trying to catch a falling knife.
Plan your trade; trade your plan
Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.