AM: Challenging the 50dma

S&P500 daily at 2:18 EDT

AM Update

MARKET BEHAVIOR
The S&P500 reclaimed 1620 in early trade and held this level through midday.  The market is sitting on the 50dma and a wave of breakout buying and short covering could hit the market if we break this widely followed level.

MARKET SENTIMENT
The market is proving far more resilient than most expected.  It swallowed QE uncertainty and is back within 4% of all time highs.  It encouraging and supportive to see it already coming to terms with the eventual end of QE.  As scary as the last couple weeks felt, the recent selloff is healthy and constructive.  It deflated some of the euphoria and flushed out many of weak traders fearing the end of QE.  People that sold the emotional wave down were replaced by more confident holders willing to buy in the face of QE uncertainty.  These new buyers demonstrated a willingness to own weakness and are comfortable with the idea of tapering on a gradually improving economy.  This churn of ownership ahead of a widely expected event means the actual announcement will be priced in long ahead of time.

It is funny how the cynics try to have it both ways.  Last year they insisted another round QE would never work.  Now they say the markets cannot survive without it.  Most likely the truth lies in-between these extremes.  QE helped some, but it was also backed up by a gradually improving economy and strong corporate income statements, balance sheets, and buybacks.  If we believe the Fed, Tapering will be accompanied by a further improving economy and reduced government deficits (fewer bond sales).  The Chicken Littles want us to believe the market is on the verge of collapsing, but the widespread doubt and cynicism is what makes further selling less likely.  With all the weak hands already out of the market, where is the next wave of selling going to come from?  All the buyers who entered this market over the last few weeks demonstrated a willingness to hold weakness and their resolve will keep supply tight.

TRADING OPPORTUNITIES
Expected Outcome:
Its been seven trading days since the market put in the 1560 bottom.  We reclaimed two-thirds of the Fed meeting selloff and the sharp rebound indicates much of the selloff was overdone.  While recent stability largely takes a market crash off the table, that doesn’t automatically mean we are off to the races again.  Markets trade sideways more often than they move directionally.  This market remains uneasy and expect volatility to continue.

Alternate Outcome:
The recent bounce could be nothing more than a bull-trap sucking in the last of the dip-buyers before exhausting itself and collapsing on a lack of demand.  Currently we are pausing at 50dma resistance and have a trend of lower-highs and lower-lows in place.  Using stops will keep us out of trouble if we end up on the wrong side of the trade.

Trading Plan:
The best buying opportunities are during the scariest periods.  There is a lot wrong with this market, but that is also what creates opportunity.  Bulls can hold here with a stop under 1600.  For bears, between stop-losses at 1600 and the 50dma, most should already be out of the market.    At this point the best short entry is failing to hold 1600.  But no matter what our outlook, expect volatility to continue and keep buying weakness and selling strength.  Take profits early and often because they will likely evaporate days later.  And of course the safest trade remains sitting out this sideways chop and waiting for the next directional move.

AAPL daily at 2:18 EDT

INDIVIDUAL STOCKS
The inevitable bounce in BBRY has yet to materialize.  There are a lot of dip-buyers rushing in here, but expect that flow to dry up and the selloff to continue.  These stories are rarely one-day events, so expect the pain to continue for the desperate and hopeful.  We could see a relief rally, but wait to buy Friday’s high near $11.  This is a sick company and few institutional investors are willing to put their neck on the line for a company whose best days are behind it.  Most of those still in this name reassure themselves that it cannot go any lower, but usually what is too low usually keeps going lower.

BBRY’s younger cousin, AAPL, is having a good day, reclaiming $410 as late shorts are getting squeezed.    This does nothing to change the direction of the stock and it still looks like the stock wants to continue lower after this bounce fizzles.

Plan your trade; trade your plan