As I've written numerous times in the last few months, the key to the market is dip-buyers. As long as they provide support, you can't fight the uptrend. But when they disappear, the character of the action can change quickly. That's what's happening today.
We gapped down substantially, which normally produces reflexive dip-buying, but not today. So we still haven't seen any real interest in buying this dip. The big problem is when dip-buying suddenly disappears, it traps many market players leaning the wrong way. As they try to reposition, they produce additional selling pressure. Since dip-buying isn't working, buyers stay on the sidelines.
That is how a trend shifts, and today we have a clear illustration of a change in market character. As I discussed in my opening post, this market has had a tendency in the past few years to regain its footing just when it looked like it was in trouble. I suspect that is due in large part to the power of computerized trading. But when the market acts the way it has today, we have little choice but to take defensive measures.
The most important thing we can do as traders and investors is protect capital so we can prevent further erosion when the market acts poorly. Even if you believe the selling is unwarranted and may reverse soon, it's far more important to guard against the possibility of substantial losses than to position for further gains.
This market hit another new low for the day this afternoon and when that happens this late in the day, it does not bode well for a snap back. I'm staying defensive. I see no reason to do much other than minor bottom-fishing.
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