Rev's Forum: Market's Big Money Ignores Headlines, Focuses on Price Action

 | Aug 10, 2017 | 7:16 AM EDT
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"To anticipate the market is to gamble. To be patient and react only when the market gives the signal is to speculate."

--Jesse Livermore

On Wednesday, the market had a good reason for some correction action but barely managed a hiccup following the drama over North Korea. The S&P 500 closed flat while the other major indices suffered only mild losses. Small-caps were the laggard and breadth was poor, but overall the market was unconcerned about the headline news.

The irony of this market is that there is more likely to be a selloff when there isn't any specific bad news. The two biggest reversals in recent weeks occurred following good earnings news on July 27 and then on Aug. 8. In both cases trading started strong and then reversed to the downside later in the day.

Whenever there is obvious negative news and a gap down, it invites dip buying. The market never really cares about the news; it simply views the price action as an opportunity. The buying is nearly automatic and there doesn't seem to be a news event that will scare away the computer algorithms that so aggressively pursue this trade.

The obvious conclusion is that this market is far more likely to sell off when there isn't any specific news. The bears keep thinking that their long list of negatives will be the catalyst that causes some significant corrective action, but it simply never happens because every time one of those negatives comes to the forefront the dip buying kicks in.

If you want to navigate the market you must change your thinking about the cause-and-effect relationship. "Bad news equals a market selloff" doesn't work. Bad news is simply a trigger for algorithmic trading, which consistently has been a positive.

If you are trying to play the downside, you need to focus on price action rather than news flow. Recent selloffs are occurring following frothy, positive action. Buyers are not chasing to the degree they were earlier, and when they falter the reversals occur.

The focus must be on price action rather than news. Pundits don't like that because it renders all their brilliant insights meaningless. All those stories about valuations, the economy, politics, central banks and so on just don't matter. The big money in this market is focused on price action, not headlines.

There have been some warning signs recently that price action is shifting, but we are now in the slowest time of the year and we are seeing very suppressed volume and momentum. The S&P 500 has closed in an extremely tight range for more than three weeks now. There have been a few attempts at breakouts and breakdowns, but by the end of the day the S&P 500 is right back in the range around 2470 to 2480.

When the big selloff finally does come it probably will occur on no obvious news event and probably will not start with a big gap down in the morning. It will be sneaky and won't trigger the routine algorithms that automatically buy certain setups.

We have a negative start this morning on no obvious news. Watch for the early dip buying to occur. If it fizzles out and there are lower lows intraday, then stronger defensive action will be necessary.

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