Where is the Breakdown?

End of Day Update:

This morning stocks continued Friday’s late-day sell off and undercut recent support at 1,990. This was the lowest we’ve been since mid-December and the technical weakness triggered a wave of stop-loss selling. But it didn’t devolve panicked rush of the exits and we quickly bounced off 1,980, ultimately closing higher by a very respectable 1.3%.

Today’s wild, 120-point intraday ride continues the wide and loose trade. While volatility is rarely good for markets, the inability for threatening headlines and dramatic price-action to trigger wider selling leads me to believe we are close to a near-term bottom. The market’s given us plenty of reasons to sell, yet owners and buyers have stubbornly hung on to this 2,000+/- region.

I remain fairly pessimistic, but when the market isn’t doing what I think it should, then I have to reevaluate. Resisting so many opportunities to breakdown tells us there is more support than most assume. I continue to be wary of the market’s medium-term prospects, but when it doesn’t want to go down, then we cannot fight it. Even if this is just a bull trap that stalls near the 50dma, it is best for shorts to take profits and step aside.

Part of what makes me reconsider my negative outlook is how pessimistic traders have become. Stocktwits’ SPY bullish sentiment dipped under 40%, a fairly reliable buy signal recently. Many of the gurus on TV also expect us to continue sliding. But if the pessimists have already sold and those still holding are hunkered down and prepared to sit through bigger declines, then who is the incremental seller? When we run out of supply, then it doesn’t matter what the headlines are.

Jani