The Action Has Shifted

 | Jun 11, 2013 | 4:07 PM EDT
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The market put together an impressive bounce after gapping down on worries about the Bank of Japan's more hawkish view, but unlike so many of these bounces, it failed to hold and the market closed poorly. Not only do we have a problem with the V-shaped bounce attempt, but also the dip-buyers turned into flippers and returned to the safety of cash.

To put it bluntly: The character of the market action has shifted. It isn't regaining upside momentum as quickly and easily as it did a few weeks ago, and is working on the first real failed bounce of the year. Each time it pulled back earlier this year it went straight back up with barely a pause. The action today was a major shift in the pattern of action and the poor close put an exclamation point on it.

The good news is it's still far above last week's lows, but you have to wonder about the chances of a retest. The bullish spin is a trading range is setting up as long as it holds recent lows, but it is premature to adopt that view.

The bottom line is this is poor action. The failure of the big intraday bounce is not something that ever happened during the uptrend. We need to be more cautious and accept the fact that a retest of the recent lows is a possibility.

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

June 11, 2013 | 1:41 PM EDT

Keep an Eye on the Close

  • An intraday bounce could fade late in the day.

The market's ability to come back from a poor open remains impressive. Conditions were ripe for selling momentum to pick up, especially since Europe closed fairly week, but dip buyers have been trained by this market and they automatically hit the buy button if they see early red. Whether it is justified is another question, but it continues to work and that is why they do it.

The market is starting to roll over now and it will be interesting to see how it closes. The market's tendency has been to keep running up, but the gap down this morning was a shift and it would be consistent if the intraday bounce fades late in the day.

Like yesterday, there have been individual stocks working, but breadth is quite poor with about 1300 gainers to 4000 decliners. Just because you have a few stocks that are working doesn't mean that it is healthy action. Even the best stock picker will have a tough time if they are trying to fight the trend.

I've been selling down a few things into this afternoon strength. The action has shifted enough lately to make me more concerned that we aren't going to keep running straight back up. We still have dip-buying support, but it isn't as steady or as consistent as it was a few weeks ago. The market is still above key technical levels but the chances of a retest of recent lows have gone up today.

June 11, 2013 | 10:59 AM EDT

Buying Is Improving

  • But keep an eye on 1620 on the S&P.

Over the past few years the market tendency has been V-shaped bounces and immediate buying of a big gap down open. Both those tendencies are being test today.

As I discussed in my opening post, we have almost never retested lows once we start to bounce. We are still significantly higher than the lows of last week, but even that sort of selling is quite unusual. Those times when we have dipped like this we almost always recover very quickly. We'll see the lows near the open and they will usually hold. If we take out the early lows today it will be another change in market character.

I'm not too heavily invested at this point and my stops are loose, so I've been a net buyer so far.

A couple things I've mentioned lately, such as Revolution Lighting (RVLT), Celldex Therapeutics (CLDX), Novadaq Tech (NVDQ), L&L Energy (LLEN) and Immersion (IMMR) are acting well. I also added to a position in Vertex Pharma (VRTX) I've been holding for a while. A move through $85 is going to put that on the momentum screens once again.

The buying is improving as I write and as long as we don't take out the opening lows the buyers should continue to inch in. Just make sure you keep an eye on the 1620 level of the S&P 500. If that holds we should have some trading-range action which is good for stock pickers.

June 11, 2013 | 08:10 AM EDT

The V-Shaped Bounce Is Failing

  • And market players are flummoxed by it.

Winners are not afraid of losing. But losers are. Failure is part of the process of success. People who avoid failure also avoid success. --Robert T. Kiyosaki

I don't know how many times over the past few years I have written about the market's tendency to produce V-shaped bounces back to recent highs after suffering a technical breakdown. The pattern has repeatedly been to immediately shrug off whatever worries or concerns caused the recent bout of selling. Typically, reassurance that the Federal Reserve has no plans to cut its bond buying has helped the market to regain its footing.

This morning we have something very different: The V-shaped bounce that began Thursday and Friday is failing. The market faltered a bit yesterday when the indices were mostly flat, but today there's severe downside pressure and the market is already close to giving back Friday's gains in the premarket.

Technically, a failed bounce or a good-sized pullback makes sense. One of the things that technicians always look for are retests of key levels. This market has almost forgotten what that means. Massive liquidity created by central banks has changed the normal behavior of stocks in many ways; pullbacks, retests and failed bounces have become much less common.

Given that central bankers have been the main catalyst for all these V-shaped bounces over the years, it shouldn't be a big surprise that they are causing the failed bounce this time. The Bank of Japan is citing strength in the economy for not delivering more of its version of quantitative easing. The obvious fear is if Japan can cut back, then can't other central bankers, like the Fed?

That is causing the softness this morning, so is this a pullback that will produce a lower low and a downtrend, or is this just a bit of retest that allows recent buyers to flip and new dip buyers to seize good entry points?

It looks like market players are flummoxed by the idea that a bounce may actually falter. It hasn't occurred very often and many traders have been trained to buy the bounce and then hold on as it continues straight up. The idea of volatility and failed upside is a new one and it is going to take a mental adjustment to trade it effectively.

Probably the biggest negative for the market is that so many folks are confident that the pullbacks will stay shallow and end quickly, like last Thursday and Friday. There seems to be little fear that a more sizable downtrend may emerge.

If a downtrend does start to build, there is going to be no doubt about the cause. It will be because there are worries that the Fed is going to start tapering off its bond buying. There is nothing more important to the market than the support of the Fed, and if there is even a faint sign that they are starting to back off it is going to have a major impact. Because of that, it shouldn't be surprising that a more hawkish Bank of Japan is sending shock waves this morning.

The key is to see if recent support levels hold. By far the most important are the recent lows of the major indices, such as 1600 of the S&P 500. As long as those levels hold, we can see trading-range action, which would not be unhealthy. We had good stock-picking action yesterday in a flat market, which is always a good sign.

We are at an interesting juncture as we see how this market deals with a failed bounce. It is change in character, so we must adapt as it develops. Stay flexible and open-minded as market conditions change.



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