How to trade the S&P 500’s latest wobble, plus what the FAANG stocks are telling us

Free After-Hours Analysis: 

Monday started off well enough for the S&P 500 with the index opening near Friday’s record close. Unfortunately, second thoughts overcame traders later in the afternoon and those pushed the index under 4,200 by the close.

Is the top already in? Bears certainly think so. Of course, they’ve been saying the same thing for the last several hundred points so we take everything they say with a huge pile of salt. But like a broken clock, eventually, they will be right. Could this be that time? Without a doubt yes…but in reality, probably not.

The key levels for this market are 4,200 on the upside and 4,120 on the downside. Get back above 4,200 Tuesday and all is forgiven and forgotten. Fall under 4,120 and last week’s bounce is dead and the bears might be on to something.

How do we trade this? Easy, keep holding until our stops get hit. And even if our stops haven’t been hit, there is nothing wrong with lightening up a little until this gets back above 4,200. It is always easier to think more clearly with a partial position and the reduced threat of loss.

While it is tempting to hold through a small dip, the inconvenience of trading around a whipsaw definitely beats the discomfort of holding a through “small dip” that turns out a lot bigger than expected.

But as has been the case all year long, if we get out, always be ready to get back in if/when this wobble proves to be yet another false alarm. Just ask all the people that failed to get back in following the dips at 3,300, 3,500, and 3,700.

This market is buyable above 4,200 and shortable under 4,120. Plan your next trade accordingly.

While the S&P 500’s 1% loss felt uncomfortable, that was quaint compared to the bloodbath taking place in the FAANG stocks. The best FAANG stocks, AAPL and GOOG, “only” lost 2.6%. The rest shed between 3% and 4%. Ouch!

While I’m not overly concerned with the S&P 500’s price action (yet!), the FAANG stocks are a different story. And unfortunately for the broad market, losing the best-of-the-best stocks is enough to take everything else down.

I’m giving the S&P 500 the benefit of the doubt but if this FAANG underperformance continues this week, it is time to get defensive and all bets are off.

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