PM: The 2% crash

PM Update

MARKET BEHAVIOR
Stocks finished at the lows of the day and continued the streak of consecutive down days.  The market closed under 1700 for the second day, but for all the bleeding, the market is only down 2.1% from all-time highs.  The market seems attracted to the 50dma and the 1680 level that provided resistance and support stretching back as far as May.

MARKET SENTIMENT
This selloff feels scarier than the numbers indicate.  Five consecutive down days is the biggest losing streak of the year, but the damage is only pushing us back to levels first seen last week.  Emotion driven selloffs are swift and breathtaking.  The only breath this dip is taking is from all the people talking about it.  It is crazy the number of naysayers that are promoting the end of the world and pointing to a 2% decline from all-time highs to prove their point.  Sure this weakness is making recent buyers uneasy, but that is how hot markets cool off before continuing higher.

All the media coverage is focusing on the impending govt shutdown, but we’ve been down this road before and anyone who reactively sold that weakness came to regret that decision as the market bottomed and resumed the uptrend weeks or months later.  Complacency is the accusation bears are constantly throwing around, but I hear far more talk about a Debt Ceiling/Taper collapse than bulls talking about buying the dip and 1800 here we come.

While I agree complacency is creeping into the market as every dip this year has been buyable, but complacency by itself is not a fatal flaw and is more often a bullish catalyst.  Complacent owners continue holding through thick and thin, keeping supply tight and allowing smaller demand to keep pushing us higher.  Complacency isn’t the enemy here, but lack of demand.  So far there has been enough better than expected news to force bears to buy back their shorts and win over some of those sitting on the sideline.  That is why this “complacent” market keeps making new highs.

Many are waiting for all these scary headlines to pass before believing in this market, but by then it will be too late and they will be buying the top.

TRADING OPPORTUNITIES
Expected Outcome:
The market keeps looking for a bottom and might dip to 1675ish before this rebound finds its footing and resumes the climb higher.  We will bounce on some constructive debt ceiling headline and everyone will credit that random news story for the surge to new highs, but the recent pessimism flowing into the market is the fuel that will propel the bounce.

Alternate Outcome:
While the market is uneasy approaching the Debt Ceiling negotiations, most traders expect a compromise to be reached within a reasonable timeframe.  If both sides dig in, refusing to budge and threatening to default on debt payments, that nuclear option isn’t priced in and could lead to a swift 10%+ selloff.

Trading Plan:
If the market regains 1700 on Thursday and holds it through the close, it appears like the selling is drying up and all it takes is one optimistic headline to launch another leg higher.  If we continue sliding, that means buyers are shying away and the lower we go, the closer we get to the tipping point of emotional selling.  Holding 1700 is buyable and accelerating through the 50dma is shortable.

INDIVIDUAL STOCKS
BBRY is proving that something that looks too low often keeps going lower.  Anyone who bought the dip is learning first hand the dangers of catching knives.  It will ruffle a few feathers, but can we identify any similarities between the ubiquitous “crackberry” and the unmatchable iPhone?  BBRY failed to keep up with an evolving market.  Is AAPL falling victim to the same tech turnover?  Looking at the nonstop slide in market share for the iPhone and iPad, it sure is hard to argue “this time it’s different”.

Plan your trade; trade your plan