The good news is that the indices did manage to close near the highs of the day, which provides some hope that we had a washout and a good low. The problem is that we still ended up with substantial point losses and cracked some support levels.
The most important technical level, which I mentioned this morning, is 2,000 on the S&P 500. We breached it intraday and triggered stops at that point, and then rebounded, which is a good sign. We may now be able to produce a bit of an oversold bounce, but the overhead resistance becomes very heavy as we move to 2,025 or so.
Another piece of good news is that there was some bounce in energy stocks. Natural gas had a good move, and oil made a higher high for the first time in a while. Some stabilization in that sector would be quite helpful. However, the bad news is that the big banks are acting very poorly, and we still have issues with many 'old' technology names.
Market players are very hopeful that this corrective action is over, but there really is nothing solid to base that on. The bears have some downside momentum, and the risk of another failed bounce is quite high. Of course, the bulls are looking for another good old fashioned V-shaped move, and you can bet they are going to give it a good try.
Have a good evening. I'll see you tomorrow.
JAN 14, 2015 | 1:35 PM EST
Let the Weakness Play Out
- Rather than bottom fishing, develop your new shopping list.
The bad news is that the dip buyers haven't been able to produce much of a bounce. The good news is that the market is holding above the lows of the day, although it is looking extremely precarious. The longer we hold without a breach of the lows, the better the chance of some end-of-the-day buying. However, my confidence level in this intraday support is pretty low.
While market action like this causes a lot of pain and frustration, it always makes me feel a bit more optimistic because of the potential for better trading in the future. The only way to ring out some of the artificiality in the market is to undergo corrective action.
I've heard quite a few market players express optimism for the potential of good stock picking in small-caps. I'm not counting on that, but it certainly would be a refreshing change. That is what made me interested in the market in the first place and it still is the most enjoyable aspect of trading, in my book.
For now, let this weakness play out and start developing some new shopping lists. We are very close to another leg down and I'm not going to engage in any bottom fishing when there is falling knife action.
This is downright ugly action, but we need the bad to lay the foundation for the good.
Jan. 14, 2015 | 10:53 AM EST
Dip Buyers Are Slowly Moving In
- But keep an eye on those lows to see if they hold.
The gloomy open was an invitation for the dip buyers, who are slowly moving in. We are well off the overnight lows and now the key is that we don't break below the early lows. If we can hold above the 2000 level of the S&P 500, that will start to attract more bottom fishers that are waiting for stabilization.
While the market action is quite messy, with two-to-one negative breadth and poor action in retailers, banks and oil, I do like the fact that things are being shaken up. This is the sort of action that eventually provides a new crop of opportunities. Negativity is increasing, and we are seeing some shifting in the patterns of trading. While those things can be frustrating in the short term, they eventually will help to produce better trading down the road.
While I'm not inclined to be an aggressive buyer while this corrective action plays out, I am finding some selective buys that are working. Tower Semiconductor (TSEM), my stock of the week, continues to act well and recent Sharkfolio buy Radware (RDWR) is looking for a breakout. I bottom-fished a little Second Sight Medical Products (EYES), which isn't my typical trade but it's a victim of thin trading rather than anything fundamental.
One stock I'm slowly building is Facebook (FB). It has two target increases today, and would probably be significantly higher in a better market. I believe it is a good candidate for a run into its earnings report at the end of the month. I'm averaging in as it bounces around.
A few other things like ZELTIQ Aesthetics (ZLTQ), Tarena International (TEDU), Sucampo Pharmaceuticals (SCMP) and OvaScience (OVAS) are acting well, but this market prevents doing much with them.
Keep an eye on those early lows. If they don't hold, dip buyers are going to be very quick to hit the eject button and it is going to scare out some other folks as well.
Jan. 14, 2015 | 8:00 AM EDT
The Action Is Highly Random
- Central bankers remain the market's best friends.
"If you expect life to be easy, challenges will seem difficult. If you accept that challenges may occur, life will be easier."
― Rob Liano
While the indices ended up with fairly mild losses after the sharp intraday reversal yesterday, it did have a strong impact on the mood of the market. The increased volatility and the failure of recent bounces have sapped the confidence of traders who have grown used to quick and easy recoveries after shallow pullbacks.
The big question we face is whether this time it really is different or are we just experiencing a lot of short-term messiness before the inevitable V-shaped bounce and move back to all-time highs?
Typically, it has been the central bankers that have been the main catalyst for the V-shaped bounces. As soon as it we start to struggle, some Fed member or the ECB or the Bank of China will make some comments about more bond buying. The irony is that here we are, years after the QE programs have started, and economic growth is still anemic.
Overnight the World Bank cuts its 2015 growth forecast to 3% from 3.4% and reduced projections for both Europe and Japan. In addition the price of copper get slammed 8.7%. Copper is widely viewed as a good measure of global economic demand, and its weakness is seen as reflected worldwide economic woes. When we combine the collapse of oil prices with this slow growth, it isn't surprising that we hear so much talk about deflation.
One piece of good news is that courts in Europe did clear most of the obstacles to a QE program by the ECB. It is highly likely that they will announce something next week. Anticipation of this program is very likely to keep a bid under the market and give dip buyers some security.
While it is likely that central bankers will remain this market's best friend, that doesn't make the current trading much easier. I've heard more traders comment lately about how hard this market is than I have heard in years. The problem is that they are finding the action to be highly random and that good stock picking isn't helping much.
Many market players have grown so used to V-shaped moves that they don't know how to trade when volatility is high. The recent swings aren't that unusual, but we are so used to buying dips and riding rips, that many market players think there is something essentially wrong with the action.
My major concern about the overall market has been the issue of good leadership. We have had biotechnology lead for a while, but very little else. Home builders were ok until yesterday, and some restaurants and retailers are benefiting from lower gasoline prices, but overall there aren't many themes or pockets of momentum.
Good markets typically have a core of leading stocks that gradually broaden out and drag other stocks up as well. Perhaps earnings season will help in that regard, but right now we simply lack clarity.
The bulk of earnings season is fast approaching, and the ECB decision will probably be made next week, so it is likely we'll see some underlying support. The technical condition of the indices isn't terrible, but if we take out the lows from last week and mid-December then the downtrend will be on.
My approach here is to keep very tight stops and to be highly selective with new buys. I have quite a bit of cash and would love to load up, but the opportunities aren't there right now. If we play strong defense right now, we will be in great shape for aggressive offensive when conditions improve.
Futures are red but well off overnight lows. I suspect dip buyers are lurking and would love to see a bigger gap down.