AM: On the ninth day we rested

S&P500 daily at 2:02 EDT

AM Update

MARKET BEHAVIOR
Stocks are lower, flirting with near-term support at 1675.

MARKET SENTIMENT
We know the market cannot go up every day and a few down days here and there is a healthy part of continuing higher.  The question for traders is if this is simply a test of support, or the start of another swing to the lower end of the trading range.

Today’s weakness is an invitation for swing-traders to short the market and pressure the few remaining paranoid holders that haven’t locked-in profits.  If this selling cannot build momentum to the downside, it shows bulls still have the upper hand and most of the proactive profit-taking and short-selling is already behind us, clearing the way for a continuation higher.  On the other hand, if this rally is built on a weak foundation of little more than short-covering, we could see the rebound collapse past 1650 and challenge the 50dma at 1635.

Four-days is the magic number for holding a big advance.  The first three-days is propped up by short-covering and breakout buying.  While this group of speculators is small, they heavily influence near-term moves when they plunge in and out of the market simultaneously.  Once that tsunami of short-term trading comes and goes, we see how the longer-viewed investors trade the market.  These are the big-money guys with deep pockets and they steer the larger trends.  Failing to hold 1675 today shows larger investors are not supporting this advance and we will likely drift lower until we reach a level they are willing to buy.  Maintaining 1675 shows the big guys are believers.

TRADING OPPORTUNITIES
Expected Outcome:
The next few days will tell us a lot about the sustainability of this rebound.  Finding support in the face of early weakness suggests new highs and 1700.  Failing 1675 and closing materially under it shows big money is not a believer in these levels.  Right here the market is largely in no-man’s land and could break either way.  The best way to trade situations like this is wait for the market to make its move.  Continued weakness is an invitation to short, recovering gives the green light to buy.

Personally I’m a big fan of selling into strength because it gives me the mental clarity to evaluate situations like this without the emotional baggage of fear and greed.  No one can consistently top-tic the market, so traders must decide between selling early or selling late.  I’m an early kind of guy, but there is no wrong answer and it largely depends on a trader’s personality and trading plan.  As long as we stick to our plan, both strategies work well.

Alternate Outcome:
While we sit here waiting for the market to show its hand, we must prepare for the inevitable head fake.  Often the market will crash through support and trigger a wave of stop-loss selling before exhausting supply and bouncing.  That is the biggest problem with trading the obvious technical levels everyone else is watching.  Tight stops are the best way to deal with head fakes and if we get caught in one, be flexible enough to do a 180 and go the other way if the market clearly refutes our initial expectation.  When the market has a perfect setup to do what we think it should do, but it goes the other way, that is a powerful trading signal and we need to exploit it.  The 1560 bounce in June is a perfect example of this type of counter intuitive reversal.

Trading Plan:
Wait for the market’s next move.  Holding 1675 is bullish.  Stalling and closing materially under it means we ran out of buyers.  The market remains volatile and is still in the trading range, so keep harvesting worthwhile profits early and often because they will likely be gone days later.

TSLA daily at 2:01 EDT

INDIVIDUAL STOCKS
A wild and crazy ride in TSLA, down nearly 20% since yesterday morning, but that is par for the course in these hugely speculative names.  A downgrade by GS is the excuse for this selloff, but obviously the stock was frothy and needed to blow off steam.  For the TSLA bull, analysts ratings are nothing but personal opinion and rarely have a sustainable impact on stock prices.  This stock will tumble like every other high-flyer before it, but it will happen on a major sentiment shift driven by changing fundamentals in the company, most often a deceleration in sales and earnings.

Plan your trade; trade your plan