For the third day in a row the market is bouncing off a gap-down open but hasn't fully recovered its losses. Traders are well trained to buy these pullbacks but they are not producing sustained momentum The last two days the indices have closed near the highs which helped to keep sentiment positive but today is going to be a major test.
Traders tend to stick with what is working until it actually fails a few times. When the first failures of a pattern occurs, it can result in a big move as there is a rush to try to reposition. That is why it is important for the bulls that the indices close near the highs of the day. A weak close changes the current dynamic and will push many traders to move to the sidelines and wait to see what happens next.
There is still some pockets of momentum out there with Netflix (NFLX) being one of the most visible. Biotechnology is acting rather well after some strong data from Sarepta (SRPT) , and Coherus BioSciences (CHRS) is one small biotech name I am watching today.
From a trading standpoint the best thing that could happen to this market is that we have a failed bounce try today and that shakes things up. The dip buyers have become overly confident and we would see a good surge in volatility if their trade didn't work this time. Some downside momentum would create some better opportunities especially if it scared some of the bulls that are reflexive dip buyers.
I'll be working harder on developing my shopping lists but we need more weakness before I'll be putting much money to work. These opening dips make for good trades but they encourage flipping rather than holding.
A weak close today will have an impact on sentiment and that would not be a bad thing for opportunistic traders.