Gyrations continue

End of Day Update

MARKET BEHAVIOR
Stocks took it on the chin as they crashed through the 50dma in early trade, but just managed reclaim this widely followed technical level by the close.  Thursday broke the string of apathetic trade and finished in above average volume.  This is the third time we tested the 50dma in recent weeks and up to this point buyers have come to the market’s rescue.

MARKET SENTIMENT
The 1,850/1,900 trading range is alive and kicking despite repeated attempts to depart it.  Neither bulls nor bears built the critical mass necessary to sustain a move out of this range.  Every time demand evaporated near 1,900 and supply vanished near 1,850.  Today’s move pushed us into the lower half of the range where dip buyers snapped up shares and stopped the selloff just under the 50dma.  For bulls it is encouraging to see selling stall instead of accelerate after violating an important moving average.  That shows many traders are more willing to buy and hold these levels and few were rushing for the exits.  But selling pressure is only half the equation.

While most owners are content holding stocks at these levels and their confidence prevents days like today from turning into a stampede for the exits, the bigger concern is those with cash remain reluctant to buy 1,900.  Tight supply is always helpful, but lack of demand trumps it every time.  If bulls cannot persuade those with cash to buy these highs, eventually the market will crumble under its own weight.

TRADING OPPORTUNITIES
Expected Outcome:  Falling back into the heart of 2014’s trading range.
While stocks might bounce temporarily off the 50dma as a small contingent of eager dip-buyers dive in, larger pools of money remains reluctant to chase these record highs.  This is further compounded as we move into the slower summer season.  Without buyers, expect this dip to continue.  But don’t mistake these normal market gyrations for a crash.  So far there is nothing to suggest this is the 10 or 20% correction bears have been calling for.  If we cannot hold 1,850 we will likely test the 200dma, but that would be a better place to buy stocks than press a short.

Alternate Outcome:
Every dip this year has been a buying opportunity and each time the size of the selloff shrinks as buyers rush in sooner and sooner.  It was a 100-point dip in January.  April saw a 75-point selloff.  And so far this one has gone 40-points.  If the selloffs continue getting smaller, we likely saw the worst of this move.

Trading Plan:
Expect dip buyers to temporarily prop up the market near the 50dma, but few value investors will be seduced by a 1.6% discount from all-time highs.  We likely need to fall further before those with cash find deals too good to resist.  If the market bounces Friday, it is a better place to close out long positions than buy the dip.

Plan your trade; trade your plan