AM: The whipsaw continues

S&P500 daily at 3:18 EDT

AM Update

MARKET BEHAVIOR
Stocks rebounded from yesterday’s weak close, but still remain under the 50dma as the battle between bulls and bears rages on.  The market is less than 4% from all-time highs and so far predictions of doom and gloom seem premature.  Of course every 50% selloff begins with that first point lower.

Interesting developments in the NASDAQ as they were forced to halt trading midday.  This appears to be a computer glitch and trade should resume normally, but big moves in TSLA and AAPL prior to the shutdown could lead to unexpected trade when, or if trade resumes this afternoon.

MARKET SENTIMENT
Wednesday’s swings frustrated and humiliated anyone with an itchy trigger finger.  Breaking recent lows sent longs running for cover and seduced bears into shorting the obvious collapse, but minutes later the market reversed sharply, turning the tables on bears and forced them to run for cover.  But the market wasn’t done, when bulls were finally breathing a sigh of relief, the rebound collapsed under their feet.  This is a choppy, sideways summer market and reacting to these moves leads to buying high and selling low.

Wild swings purge the market of impulsive traders who react to price moves instead of acting deliberately and thoughtfully.  Those that bought or held the volatility demonstrated calmness and confidence in their outlook.  Replacing impulsive traders with thoughtful owners is always good for stability and typically favors price increases.  The objective of every shakeout is getting rid of weak holders before resuming the uptrend.  Violating the 50dma and recent volatility moves us toward that goal.  The thing we are left wondering is if this shakeout was big enough, or if we need to cut deeper first.

TRADING OPPORTUNITIES
Expected Outcome:
The market recovered most of yesterday’s losses but failed to find buyers willing to push it back above the 50dma.  The market price is the exact balance point where you have equal numbers of bears and bulls on each side. Traders were willing to buy yesterday’s weakness, but demand tapered off as we approached the 50dma.  I want to buy 1655, but only if other traders are willing to follow me in and that is not the case today.  I still believe in the rally and am looking to buy the dip, but I would rather be a little late there than a lot early.

Alternate Outcome:
Sideways trade is constructive for a rebound, but only if traders are willing to buy the rebound.  If buyers continue stepping away every time we approach resistance, the market will eventually fall under its own weight.  Shorts can continue holding, but keep tight stops and take profits proactively because they will likely evaporate days later.

Trading Plan:
Either we bounce here and resume the uptrend, or the shakeout takes another leg lower.  It is hard to know for sure so we wait for the market to show it’s hand.  Breaking above the 50dma will send shorts running for cover and their buying will start the rebound.  Of course further weakness will turn currently confident holders into nervous sellers.

No matter what it feels like, the up-trend is still in tact, so we can hold positions in the direction of the trend longer and should capture counter-trend profits more proactively.  We are still in the tail-end of the summer trading season and expect the indecisiveness to continue until big investors start moving money around in preparation for year-end.

INDIVIDUAL STOCKS
Not much to talk about since the NASDAQ halted trading.  This will be a non-issue assuming they resolve it tonight.  If it carries through tomorrow and the weekend, it could lead to larger gaps when trade finally resumes, but we made it through the Sandy shutdown and this will be much of the same.

Plan your trade; trade your plan