AM: Volatility continues

S&P500 daily at 1:50 EDT

AM Update

MARKET BEHAVIOR
Stocks recovered most of yesterday morning’s plunge and are just shy of 1590.  Obviously the market is volatile and that trend will likely continue.

MARKET SENTIMENT
The market hates being predictable.  The obvious bounce off 1600 fizzled and collapsed another 40-points, but not long after the obvious breakdown bounced right back.  The market has no allegiances will and humiliate both bulls and bears any chance it gets.    This behavior isn’t vindictive, simply a function of supply and demand.

When everyone anticipates the bounce off support, they keep holding, knowing it would be foolish to sell just before the market rebounds.  When it doesn’t, they rush for the exits at the same time as their stop-losses under support are triggered.  This wave of selling sends the market sharply lower.  But just when everything looks the most hopeless, the market bounces back because everyone already sold ahead of the expected market crash.  Once that wave of impulsive selling passes, there are few sellers left and the market bounces back.

Volatility will continue for a while as those paralyzed by fear and indecision during the previous plunge sell every bounce as the market recovers to levels they wish they sold at on the way down.  This entire process goes back and forth over a period of weeks with the amplitude diminishing with each whipsaw until stability and sanity returns and we continue the prior trend.

We might still see lower lows, but holding in this area for another day greatly mitigates the probability of a market crash.  The end of emotional selling and coming to terms with Tapering is what will let this market settle down, building the base for the next leg higher on improving economic news.

TRADING OPPORTUNITIES
Expected Outcome:
Holding 1560 through Wednesday is an encouraging sign the wave of selling is abating.  While the coast is never clear and there is no such thing as a safe time to invest, it shows much of the emotional selling is behind us.  Tomorrow could bring something new, but stability here shows the market is coming to terms with Tapering.

Buying the dip with a stop under yesterday’s low is not a bad trade if someone has an itchy trigger finger, but for the average person, trading the sideways chop is an exercise in futility.  Stay in cash, but if you have to trade, take profits quickly.

Alternate Outcome:
While the market might be coming to terms with Tapering, volatility in Asia is waiting to take us down.  No matter what we think, we initiate all new trades with defense in mind.  We cannot get it right every time and stop-losses are what keep us out of trouble.

AAPL daily at 1:50 EDT

Trading Plan:
Volatility will persist and we must lock in profits when we have them because they will likely be gone days, even hours later.  Yesterday’s 30-point dip didn’t even last 24 hours before most of it was reclaimed.  This applies to both bulls and bears.  Buy weakness and sell strength with stops just on the other side of support/resistance.  We must trade this market proactively, anyone reacting to the whips is going to give money away.

A dip under 1560 over the next two days likely means this market is pushing toward the 200dma, but barring that, assume the market put in a bottom.

INDIVIDUAL STOCKS
AAPL is not enjoying the broad market’s rebound and is just a few cents above $400.  This level is a major psychological milestone and expect many of the recent dip buyers to call it quits if drop much further.  The optimistic swing trader could trade the bounce off of $400 with a tight stop, but this is just a trade.  The stock is acting like the selloff is not done and look for a dip to $350 before all the hopefully are finally driven out of this name.

Plan your trade; trade your plan