Dip-Buyers Save the Day

 | Jul 10, 2014 | 4:22 PM EDT
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The bulls are claiming a moral victory as the market bounced strongly following the gap down open, but it still was a clear victory for the bears. The indices were solid red with iShares Russell 200 (IWM) leading to the downside. Breadth improved from nearly a 10 to 1 negative reading to start the day but still saw only 1,600 gainers to 4,120 decliners. All major sectors except precious metals were negative.

Although the market recovered during the day, the fact that Wednesday's bounce failed so quickly and completely is a concern. That is a shift from the normal pattern of a couple of days of selling followed by an easy and complete recovery. The fact that there is still such strong dip-buying is a major positive, but they are using up their ammunition on days like this and slowly losing energy.

While many momentum and small-cap stocks have suffered lately, the major indices still haven't seen a major break of the uptrend line. They are definitely under pressure and another push down is going to do damage, but they are still holding key levels.

We do have more earnings reports rolling out next week, which should add catalysts, both good and bad. Typically, a theme emerges during earnings season, such as "buy the bad news" or "sell the good news," and we will have to watch that carefully.

Dip-buying saved the day for many, but this market is providing major challenges, and it is easy to take a hit if you aren't careful.

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

July 10, 2014 | 8:01 AM EDT

An Ugly Trap

  • Overnight news slammed the market lower.

Although Nasdaq breadth is still better than 4-to-1 negative most stocks are well off the early lows and selling pressure has relented. The indices are still solidly red and the only group in the green is precious metals, but the dip buyers did their thing once again and that always improves the mood quickly.

Buying a gap down open like we had this morning has consistently worked and I suspect that there are plenty of computer algorithms that are implemented when these conditions occur. The fact that there are still people who are impacted emotionally and sell into the weakness is the reason that this works. The programs are designed to exploit human emotion and they do a good job of it on a day like this.

So, is the worst over? Was this just another little blip that will be quickly forgotten or will the dip buyers take their gains and roll the market back over? The bulls were definitely caught by surprise this morning, but the tendency of this market has been to recover quickly. As I mentioned yesterday, we typically start seeing the underinvested bulls keep the bounces going. But some of them may be a bit nervous now after this surprise action today.

Despite the bounce off the lows this morning the uptrend is still under pressure and a higher level of caution is warranted. Many momentum and small-caps have already corrected quite severely, which has moved some of the hot money to the sidelines. Like this past March, much of the damage is not reflected in the senior indices.

At this point I'm staying with quick trades and a high level of cash. There are stocks I'd like to buy either on further pullbacks to resistance levels or on strong moves through overhead. At the moment, we are in the middle zone and there isn't too much that can be done.

July 10, 2014 | 10:22 AM ET

An Ugly Trap

  • Overnight news slammed the market lower.

After two days of intense selling in momentum stocks and small-caps, the bounce Wednesday gave market players comfort. Those bounces have often turned into reversals that have performed well. This time the bounce turned into an ugly trap as a variety of overnight news developments came together to slam the market lower.

European stocks are down big and in the early going in the U.S., breadth on the Nasdaq is running 2,700 gainers to 2,200 decliners. We have big point losses and only a feeble bounce attempt so far. I suspect the dip-buyers will try again later in the day but they are feeling a little uncertain right now.

What is particularly tricky is deciding how to handle stocks that you are still holding that have suffered severe technical damage. Often our response is that it is too late to sell and that a bounce should develop soon. That is always what seems to happen when we quickly sell, but it is a difficult problem and there is no easy solution. Typically, I'm make partial sales and looking for further reductions later if the action doesn't improve.

The only bright spot this morning is precious metals. Gold gapped up strongly this morning and I've used the strength to cut most of my gold mining positions substantially, including the Direxion Daily Junior Gold Minors Bull 3X Shares (JNUG). Gold is always tricky trade and I'm happy to lock in gains in the group.

The market is starting to inch back up as I write, but a retest of the early lows wouldn't surprise me. Be very careful out there.

July 10, 2014 | 8:01 AM EDT

Buckle Up

  • But don't panic. There'll be some good trading opportunities.

Always mystify, mislead and surprise the enemy if possible. --Stonewall Jackson

Early indications point to a sharply lower market this morning, and the media have offered a number of explanations regarding the poor action. Disappointing industry-production news in Europe, banking issues in Portugal and lower-than-expected exports in China are all receiving blame. Some news stories also attribute the selling to Wednesday's Federal Reserve minutes -- specifically, the mention that the quantitative-easing program will come to an end in October. Fed member James Bullard also commented that interest-rate hikes may come earlier than expected.

The likelihood is that the problem is rooted in a combination of all these things, in conjunction with a technically vulnerable market. The technical breakdown on Monday and Tuesday exposed some cracks in the market's uptrend. We saw a routine bounce Wednesday that many, myself included, expected might last another day or two. The quick rollover after yesterday's bounce is catching plenty of folks by surprise Thursday morning.

The key thing in all this is to make sure we are protecting our capital. Defensive action has become a lost art in this market, and that can cause some real pain when we do see these surprise selloffs.

Typically it is not a good idea to sell into a downward spike at the open. The dip buyers are likely to be quite active, but if they don't hold at the early lows, that is when bids can disappear quickly and when downside momentum can build.

If you are trapped in some long positions you want to exit, it is usually a good idea to wait a bit to see if the market can bounce back and then make some partial sales. Hitting the "sell all" button at the open is an emotional reaction that generally doesn't pay off. Even if this is the start of a sustained downtrend, there should be some opportunity for better exits along the way.

The bulls are going to try hard to shrug this off. They have been rewarded well for staying optimistic, so they are not going to give up easily. Playing defense has felt downright ridiculous at times -- but the market did give us a slight warning this week, and it is now time to be careful.

Gold is gapping up and will be viewed as a safe haven. I've been talking about Direxion Daily Junior Gold Miners Bull 3X Shares (JNUG) for a while, as it has developed very nicely, and I expect to see that action continue.

Buckle up. It is going to be a very bumpy ride today -- but don't panic. There will be some good trading opportunities.

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