Bouncing around the trading range

Intraday Analysis

MARKET BEHAVIOR
Stocks gapped lower at the open and slipped to 1,825 by midday.  The market is still above recent support/prior resistance near 1,810 and well within the 1,810 to 1,850 trading range.  The 50dma continues marching higher and is catching up to 1,810 support.

MARKET SENTIMENT
Headlines claim this weakness is driven by disappointing earnings and manufacturing data out of China, but take those explanations with a grain of salt.  Journalists are paid to come up with a fundamental reason for every gyrations, whether real or imagined, but the truth is markets often move for no discernible fundamental reason.  Over the last few weeks traders have been reluctant to buy new highs and demand dries up each time we approach 1,850.  So far this dip doesn’t appear to be any more than a continuation of that aversion to buying 1,850.

For a material decline to take place, the market needs to become inundated with excess supply.  That means currently complacent owners hitting the sell button.  So far they have proven unwilling to sell and every move lower stalls when supply dries up.  For the last 12-months each dip has been a buying opportunity and owners quickly learned selling weakness is a poor trading decision.  Now they confidently hold any and all weakness, keeping supply tight and making it easy for the market to bounce on modest demand.  To see more meaningful and sustainable selling, we need to shatter the confidence of holders and send them rushing for the exits.  If the recent announcement of Taper didn’t concern owners, I doubt some footnote about manufacturing in China will all of a sudden trigger a wave of emotional selling.

TRADING OPPORTUNITIES
Expected Outcome: Modestly Bullish – Inside Trading Range
Without a fundamental reason for the market to collapse, today’s weakness is likely another buyable dip.  This sideways churn is refreshing the market and setting the stage for the next move higher.  Unsustainable markets rollover quickly and holding this levels for nearly a month suggest higher prices are in our future.  But the market could dip under recent support at 1,810 in coming days, flushing out the last of the weak hands before bouncing higher.

Alternate Outcome:
Sometimes markets rollover before the crowd understand why.  This happens when the market is most bullish and everyone already owns all the stock they can hold.  Without new buyers, prices fall under their own weight.  If we slip far enough, previously confident owners turn into nervous sellers.  Major market tops occur when the crowd is most bullish and is how this one will likely end too.  While it is hard to know when sentiment gets too extreme, price will always let us know with a pattern of lower highs and lower lows.  Since we are less than 2% from all time highs, calls of a market top are clearly premature.

Trading Plan:
As long as the market stays inside the trading range, continue buying weakness and selling strength.  A dip under 1,810 presents an interesting buying opportunity if the market finds support.

Plan your trade; trade your plan