A Spectacular Failed Bounce

 | Apr 10, 2014 | 4:18 PM EDT
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The question of whether the market could manage another V-shaped move like it had in February was answered today with a spectacular failed bounce. The optimists, who have been bailed out regularly, were trapped and added to the selling as they tried to escape.

There was nothing pretty about the action today. Breadth was terrible and volume increased, but Monday's lows proved to be minor support that was unable to withstand the onslaught of selling. Momentum stocks, particularly biotechnology, were slammed. Even the defensive names didn't offer much safety.

Many market players have forgotten that momentum works in both directions. It has been such a long time since we have had this sort of intense selling that many folks seemed stunned. The good news is that the dip-buyers didn't even try to catch a low until the final minutes, which means that we might see enough negativity for a fast washout.

My game is to carry a high level of cash in this environment and not be in any rush to time a bottom. I'll be happy to play countertrend bounces if we see panic-selling, but my main concern is not to buy without a chance for sustained positive action. Trying to time the exact point when the market makes a low is not the best way to make money, but it seems to be the primary obsession of market pundits during a downtrend. Just stay cautious and keep your cash levels high.

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

April 10, 2014 | 1:25 PM EDT

A Classic Bull Trap

  • It's hard to be fully prepared when the action shifts this quickly.

The two-day oversold bounce has turned into a classic bull trap. The folks who were looking for more V-shaped action were sucked in yesterday and had the rugged pulled out from them this morning. It is very ugly again, particularly in momentum names, biotechnology and small-caps.

I mentioned yesterday that rather than a V-shaped recovery, the more common scenario in the past was a failed bounce and a retest of lows. That is what we have now, but I sure didn't expect it to happen so quickly.

While this is painful action if you are holding long positions, it is refreshing to see the market act "normally" again. Action like this greatly benefits active traders who are wary of markets that never seem to correct. While we have plenty of broken charts that aren't buyable right now, they will eventually find support levels and build new entries. We just have to be patient while that process occurs.

Even though I was very skeptical of the chances of another V-shaped bounce, you can never be fully prepared when the action shifts as quickly as it has today. I'm going to continue to monitor potential buys, but I have no inclination to add positions right now. I'd much rather buy during an uptrend than worry about trying to catch the exact moment something has turned.

April 10, 2014 | 10:36 AM EDT

Smells Like a Failed Bounce

  • The folks who were chasing yesterday have backed off.

So far this morning we have the faint aroma of a failed bounce in the air. Momentum and small-cap stocks are relatively weaker, breadth is negative and the folks who were chasing yesterday have backed off. Even Facebook (FB) has reversed into the red after a gap-up open.

The last couple of days have started slow and gained traction around midday, but this morning the selling is a bit more aggressive. The better-than-expected jobless claims have given the bears ammunition in the form of fear that the Fed could be pushed to speed up tapering, but you have to be a bit naïve to think that the weekly claims numbers are that meaningful.

I'm not seeing much underlying support, and the weakness in momentum names has me worried. If traders start to think that a V-shaped bounce is not going to happen, they will bail out quickly. Technically, it makes sense to look for a retest of recent lows, but the standard technical patterns have been ignored for so long that a lot of people will probably be surprised when the old rules start working again.

I continue to see small-caps I want to buy eventually, but I'm doing very little now. This market doesn't have enough upside energy to give me confidence that it is time to do a lot of buying.

April 10, 2014 | 8:28 AM EDT

Watch for an Overall Theme

  • It's a good way to navigate earnings season.

Repetition of the same thought or physical action develops into a habit which, repeated frequently enough, becomes an automatic reflex. --Norman Vincent Peale

Will the pattern of V-shaped bounce continue or has the character of the market finally shifted? That is the question we face this morning after a pretty good two-day bounce.

The bears point out that volume was lackluster. Traditional technical analysis tells us that low-volume, oversold bounces should not be trusted to continue. The logic for that view is pretty straightforward. The lower volume exhibits a lack of conviction and is likely to invite trapped bulls to sell as they see recent losses reduced. Meanwhile, shorts should remount positions as their level of greed increases after some recent success.

While that thinking makes sense, the big difficulty is that it hasn't worked that way very often in the last few years. The pattern of action is for low volume, oversold bounces to turn into V-shaped recoveries. The lack of volume has actually been a positive for the bulls and overhead resistance seems to have no impact at all once the market starts one of these recoveries.

The V-shaped bounce in February is a classic example of how these things have played out. After a pretty good hit at the end of January, the indices found support and then ran off eight straight days of gains -- and then continued to work higher with little consolidation. If you look at volume in the SPDR S&P 500 (SPY), you'll see that it declined steadily almost the entire way up. In addition, resistance at the old highs mattered for just a few days before the buyers pushed it to new highs.

Are conditions right for that sort of action to occur again? I thought it was very unlikely back in February; obviously, I was quite wrong and was forced to adapt as the V-bounce played out again. I would be shocked to see this sort of action again but the key to trading is to make sure you are ready to shift your thinking if the market doesn't do what you think it will.

The big difference this time is that Fed just isn't the same driving force that it was previously. The market rallied in part yesterday on the Fed minutes, which indicated that they were in no big rush to increase interest rates. But tapering off of bond buying has begun and the only real issue is how fast it will proceed. We aren't going to be seeing any new stimulus. At best, we'll just have it withdrawn more slowly if the economy weakens more.

There are a number of macro issues that the sellers can use as justification for killing this bounce as well. China import/export data were quite weak again and the worldwide economic recovery is painfully slow at best. The market has managed to ignore those negatives for a long time but there are plenty of economic justifications for selling if the bears finally exert themselves.

Earnings season will probably have the biggest impact on near-term market movement. There are concerns that there will be plenty of misses blamed on the poor weather. This morning Family Dollar (FDO) blamed poor weather for a reduction in earnings per share (EPS) of at least $0.05 and Bed Bath & Beyond (BBBY) reduced its guidance.

The good news is that earnings season usually is good for stock pickers. There will be winners and losers we can trade, but we have to watch for an overall theme. If the theme is that corporate growth is stalling again, it is going to get rocky.

Futures are well off their early lows and we have a mild open on the way. Stocks such as Facebook (FB) continue to show there is an appetite to put some money back to work in the momentum names. If the bulls can put a big floor under this market again today, then the V-shaped bounce believers are going to be anxious to put more cash to work very quickly.

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