AM: The start, or the end?

S&P500 daily at 2:29 EDT

AM Update:

MARKET BEHAVIOR
Stocks continued sliding this morning, but found support just above 1600 in midday trade.

MARKET SENTIMENT
Is Chicken Little finally right?  Every other prediction of doom and gloom this year was met with a powerful rebound, will this time be any different?  This is the “overly-bullish” market everyone loves to hate; but if the crowd hates it, can it really be overly-bullish?

Weeks ago we identified the 1600-1700 trading range and so far this “plunge” is still within the expected range.  Everyone is tempted to sell the least surprising Fed statement that QE continues at full speed but tapering is in the future.  If that caught anyone by surprise, clearly they are not paying attention.  No doubt some of the disappointment stems from hope Bernanke would be more supportive of QE and dispel rumors of tapering later this year, but should a few months here or there radically change our investment thesis?  Some people seem to think so, but aren’t these the pessimists already out of the market and actively short it?  Should we really trust what they have to say?

We can safely ignore people promoting their existing biases because they already placed their trades and are simply along for the ride.  The only traders controlling the market are the ones changing their minds.  Maybe they are rationally evaluating new information and acting on it, or maybe they are impulsively reacting to market moves, but either way, only people actively buying and selling are driving prices.

Every dip this year ended in a bounce when we ran out of sellers.  When everyone expects a market top, they sell ahead of it, taking excess supply with them.  By the time the expected event rolls around, there is no one left to sell, keeping supply tight and we have nowhere to go but higher.  Will it be different this time?  The market obsessed over “tapering” for more than a month and the recent 5% slide flushed out many weak holders.  Given that setup, I have a hard time identifying where the next incremental seller comes from.  The only thing left is an irrational rush for the exits, but so far the majority of holders demonstrated a willingness to own stocks in the face of recent weakness.  There are no guarantees in the market, but calm and confident holders make the rebound far more likely than a collapse.

TRADING OPPORTUNITIES
Expected Outcome:
Everyone wants a strong market to pullback so they can buy more, but every time the market pulls back, they get scared and chicken out.  Anyone following our game-plan of taking profits early and often in this volatile trading range can use today’s dip as a great entry with a tight stop under support.  This will be a choppy summer and if we fail to capture profits when we have them, they will likely evaporate days later.

Alternate Outcome:
This market will breakdown at some point because every market does.  While markets rarely collapse when everyone expects it, we need to play defense so close to major support.  Everyone is watching 1600 and many have stop-losses under this key level.  Breaking it could trigger an avalanche of stop-loss orders sending us sharply lower.

GLD daily at 2:29 EDT

Trading Plan:
The dip is buyable until the market tells us otherwise.  A lot of selling happened over the last couple of days and weeks, meaning there are fewer nervous holders left to flood the market.  We might dip under 1600 in one last flush before bouncing back into the trading range, but the dip is buyable with a tight stop under 1595.  Only short the market if we accelerate through 1595 and no one is buying the dip.

INDIVIDUAL STOCKS
GLD  was hammered today.  The safety trade is leading the plunge and demonstrates why we don’t try to catch falling knives.  There are a lot of owners still hanging on and hoping for the bounce, meaning there are plenty of sellers left.

AAPL is down, but less than the broad market.  Failing to hold recent support is troubling and any disciplined long is already of out this stock.  If it bounces, we can easily jump back in, but there is no excuse to rid this stock lower.

Plan your trade; trade your plan