Choppy Action Ahead

 | Feb 19, 2014 | 4:17 PM EST
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An intraday reversal and the first poor close since Feb. 3 had market players taking defensive action. The way to play this market has been to stick with upside momentum until a change in the price action, then hit the eject button. If you had gains, today's close was a signal to lock them in.

Does this mean the bounce is over and the market is heading straight back down? That has not been the pattern of action after a big V-shaped bounce like the one we just had, but it usually kicks off lumpier action. It is important to make sure you don't let things slip too much.

It has been my contention that 2014 was unlikely to be a repeat of 2013. The big V-shaped bounce caught me by surprise, but comments today from the International Monetary Fund and the Fed minutes make me believe that choppier action is ahead. This bounce has many bulls believing in some sort of permanent underlying support, but a reversal like today's is a reminder that the mood can shift fast.

The sharp dip at the end of January started with a day like this, followed by strong downside follow-through the next day and then a couple of failed bounces before bottoming and flying back up. I'm prepared for more selling but I'm not confident enough to do much on the short side.

Have a good evening. I'll see you tomorrow.

Feb. 19, 2014 | 1:07 PM EST

A Profit-Taking Pause

  • Market players are locking in some gains after a big run.

Comments from the IMF about uneven global growth and risk to the downside are giving market players a convenient excuse for some profit-taking. In addition, Fed dove Lockhart is sounding a bit hawkish, as he anticipates that tapering will continue and interest rate hikes will commence in the second half of 2015.

Neither of the things are surprising or even very newsworthy but they do give market players a catalyst for locking in some gains after a big run. We have gone from oversold to overbought in a blink. Many things are extended, but market players don't want to back off from buying until there is a reason to do so. I'm not predicting that this is anything more than just a temporary selling squall, but we'll see how much support there is under the market as trading winds down this afternoon.

Many traders end up rooting for the market to reset after a strong V-shaped move so that they can find a new set of opportunities. These straight-up bounces are like hopping on a speeding train, and it is tough to jump on board. In most cases, we just need a day or two of mild selling to reset some charts and give us better entries.

I sold a few things on this quick reversal and may sell down some more if we have a weak finish. This intraday reversal may be nothing more than a healthy rest, but I'm happy to close out some trades and look for some new ones as the market consolidates.

Feb. 19, 2014 | 10:38 AM EST

Reflex Reaction

  • When the market gaps down, the buying commences.

This morning is a great illustration of how reflexive dip-buying has become -- the market gaps down and buying commences. The S&P 500 went straight up by about 13 points from the early lows and underinvested bulls are being forced to chase again.

There's mixed action under the surface, with NYSE breadth running 1,700 gainers to 1,100 losers and Nasdaq has 1,030 gainers to 1,260 losers. Biotech is weak while defensive pharmaceuticals lead.

Most interesting is strong speculative action in China names such as ChinaCache (CCIH), YOU On Demand (YOD) and (WBAI). Other small-caps I've mentioned lately, like my stock of the week Super Micro Computer (SMCI) and Novadaq (NVDQ) and BioTelemetry (BEAT), continue to act well.

Too many traders look for reasons not to like the market. The media are always looking to call turns, but doing that misses the very good action that develops in a trending market. There will be weakness in this market eventually, but the key is to make money while you can rather than sitting on the sidelines waiting for conditions to shift.

Feb. 19, 2014 | 8:13 AM EST

Major Tops Take Time

  • It takes a while for psychology to shift again.

There is virtue in work and there is virtue in rest. Use both and overlook neither. --Alan Cohen

After another remarkable V-shaped bounce are we finally due for a rest?

The S&P 500 and Nasdaq are on a eight-day winning streak that has taken them to new-high territory, but it has happened so quickly that many stocks have gotten ahead of themselves and are badly in need of some consolidation.

Yesterday, some of the bigger-cap names consolidated while money rotated into smaller-caps that have lagged slightly. The Russell 2000 has not recovered as quickly as the senior indices, so many traders were looking at that group for a stock that offered more attractive entry points. It was basically a session for stock pickers, which is always nice to see.

This morning, things look a bit soft as the market contemplates the worse-than-expected housing number we saw yesterday and continued economic fallout from the rough winter weather. The market has been willing to excuse the weak economic reports lately, but you have to wonder if the weather is really the only thing that is wrong. We have PPI and housing starts coming up this morning.

The minutes of the FOMC meeting from Jan. 29 will be issued at 2 p.m. ET and while it is old news it can still move us around. The Fed seems to be pretty clear that it anticipates to keep paring back its bond buying unless there is a major change in the economy, but the market is still highly sensitive to every little nuance. I don't think the Fed matters all the much anymore, but it is helping to give the market some underlying support so far.

The main thing to keep in mind as you contemplate this market is that we usually don't just reverse and go straight down after a move like this. The bears like to try to call a top and they may get some slight dips, but major tops take a while to play out. There is too much underlying support right now, as many folks are anxious to buy the first few dips. It takes a while for psychology to shift again. Right now the buyers are feeling safe and secure and are hoping for some weakness to buy.

My game plan is to simply manage my positions closely and to keep looking for pockets of action. I'm not going to worry about trying to time a market top. You can waste a lot of time and energy worrying about the big picture while it is the individual stock picking that is going to make you money.

Tesla (TSLA) reports tonight and will be an interesting test for some of the big-cap momentum names. I do not plan on holding any shares for the report.

Watch for the dip buyers if we have a gap-down open.

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