PM: What comes next?

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Dramatic turn of events as the market briefly penetrated 1600 following a sharp, midday slide, but rebounded decisively and finished up  0.9% for the day.  Volume was average, but slightly less than the recent down days.

MARKET SENTIMENT
With the expected bounce is behind us, we need to figure out if this is simply a temporary reprieve before further selling, or just another bear-trap on the way higher.   The problem for us is it easily could be either.

The selloff was becoming obvious, a little too obvious, as both holders and shorters anticipated a larger correction and sold preemptively into the weakness.  This proactive selling took much of the supply out of the market and made this bounce inevitable as selling exhausted itself.

We violated widely followed support, but failed to trigger an avalanche of selling.  That is an extremely revealing piece of information when it comes to evaluating how other traders are positioned and what they think.  Breaking the 50dma and 1600 was the point where everyone should have rushed for the exit at the same time, yet they stayed in their seats, leading to the bounce higher.  This shows most holders are not spooked by the dip and their resolve (or stubbornness) caused today’s bounce.

The interesting thing about this bounce is blunted all the momentum bears built up over the last two weeks and now puts bears on the defensive.  As far as sentiment goes, this is potentially a game changer.  It brings confidence back to nervous bulls and makes bears doubt themselves.

Friday we have the monthly employment report that will be good for some early volatility, but after a couple of hours it will be long forgotten and we will resume trading the supply and demand skew that lead to the recent selloff and today’s rebound.

TRADING OPPORTUNITIES
Expected Outcome:
The ball is in the bull’s court following today’s bounce.  Expect the rebound to continue for a couple more days as we squeeze shorts that overstayed their welcome.  From there it will be a a coin-toss if we continue to the upper end of the range or retest the lows.  Either way we are likely heading into a range bound market for the remainder of the summer and the best trade is buying weakness and selling strength.

Alternate Outcome:
Once the short-squeeze runs its course, the market could collapse due to a lack of demand if buyers continue avoiding this market.  It makes no difference what the fundamentals or technicals say, if we cannot find new buyers, the market falls under its own weight.

Trading Plan:
Buy the bounce with a stop under today’s low.  Shorts should lock-in profits before they evaporate.  We are moving into a choppy market and if we don’t capture profits early and often, they will likely disappear.  1600 is still the line in the sand.  Retreating under it over the next couple days shows buyers cannot support this market and we are likely headed lower.  But if we hold 1600, look for a move to the upper end of the range.  Until this market breaks-out/breaks-down, buy weakness and sell strength.

Plan your trade; trade your plan