Stocks gave up early gains and slipped to the 50dma on below average volume.
Holders were not rushing to sell as indicated by the low volume, meaning weakness was driven by lethargic demand. Either we ran out of new buyers because everyone is fully invested, or prospective buyers are reluctant to buy this environment. The 90-point slide from previous highs mitigated much of the over-bought conditions, making it unlikely the crowd is overly bullish and fully invested. More likely this market suffers from reluctant demand due to pervasive expectation of further declines.
The biggest takeaway of the light volume is holders remain committed to this market and are not rushing for the exists at the first sign of trouble. Crashes are driven by irrational panic and so far this selling is orderly and restrained.
We are still holding support and every dip remains buyable until we violate these key levels. Orderly selling is a normal and healthy part of every rally. Do not fear periodic weakness because it is how markets heads higher. Traders remain on edge, but the longer we hold these levels, the more comfortable they will become, eventually leading to new buying.
I am just a few points away from being wrong. While I still believe in this market, I must respect the price action. We can easily break support and trigger an avalanche of stop-loss selling, sending us dramatically lower. While still expect a bounce, I must honor my stops. It is okay to be wrong, it is fatal to stay wrong.
We are at the lower end of the trading range making the market buyable with a tight stop under support. A short should wait for the selloff to begin before picking a fight with this resilient bull. And of course there is no reason to force a trade in this choppy market. Often the best trade is cash.
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.