AM: Buy the dip or sell the weakness?

AM Update

MARKET BEHAVIOR
Stocks dipped under 1700 in the biggest test of this young breakout.  Early weakness pushed the marked down to 1693 before it found a floor in mid-morning trade.

MARKET SENTIMENT
Is this the start of a larger selloff or just another head-fake designed to shake out weak hands and humiliate bears?  We will likely have our answer by the end of the day.  It is no surprise the market tested support and triggered a wave of stop-losses clustered under this psychologically important round number.  What we do not know yet is if the selling will quickly exhaust itself and bounce back, or accelerate lower as weakness shakes loose previously confident holders.

Without a material catalyst driving this selloff, this adjustment is simply balancing supply and demand.  These moves tend to be far more tame than headline driven events that send panic through the market, such as June’s frenzied Tapering selloff.  This rally’s days are numbered, but it will be an unexpected headline that sends everyone running for cover, not generic weakness.

TRADING OPPORTUNITIES
Expected Outcome:
We know markets cannot go up every day, yet it still catches us off guard every time it dips.  Everyone wants a rally to pullback so they can buy more, but when it does many end up selling the weakness instead of buying it.  If this game were easy, everyone would be rich and we know that is not the case.

This morning’s dip under 1695 shook out many disciplined holders, but just because we sold defensively does not mean we cannot buy back in if the market finds support near levels we were watching.  Technical levels are better thought of as regions instead of lines.  The market is an inexact science and support at 1693 or 1695 is close enough to 1700 that if we recover early losses this will count as holding prior support.  Only time will tell, but not seeing losses accelerate after slipping under 1700 shows selling is slowing, not picking up.

Alternate Outcome:
We always need to be careful when the market tests support because the best signs a market is selling off is to see it selloff.  We found a nice bottom at 1693 if it holds, but if the bounce doesn’t hold, we need to get out.  This failure also signals a decent short entry.

Trading Plan:
It is okay to buy/hold the bounce off 1693, but be wary of further weakness and sell/short a violation of today’s low.

INDIVIDUAL STOCKS
AAPL made a new relative high as it broke $470 for the first time in half a year, but if failed to hold these levels for very long.  No doubt profit-takers and short-sellers are hitting the stock following these new highs.  The question is who has the larger war chest, the momentum crowd or the swing-traders anticipating a reversal.  To me this looks like a good place to lock-in profits and buy back in if the stock retakes $470.  We are in this to make money and the only way to do that is selling our winners.

TSLA continues its rout of shorts as it passes the $145 level.  I would be nervous holding this through earnings tomorrow since so much positive news has been priced in over the last three months as the stock more than doubled.  The goal isn’t to own the hot stock, or to pick the top, but to make money.  At some point we need to say enough is enough and take profits.  While the trade is not over, we will likely get a chance to buy this stock at lower levels in coming weeks as it pulls back and consolidates recent gains.

GLD rebounded to the 50dma recently, but is unable to reclaim this widely followed moving average.  Many claims the stock market is climbing on the Fed’s reiteration of support for QE, but the gold and Treasury market tell a far different story.  All the evidence points to Tapering getting priced in and anyone waiting for a Tapering selloff in equities is going to be disappointed.

Plan your trade; trade your plan