After one of the most volatile weeks in a very long time, it was nice to wrap things up with some sedate trading on Friday. The moves this week were staggering and, despite the hopes of many market players, there isn't any compelling reason to believe more drama won't occur. However, some calm action after the big swings is what we need for the market to return to healthy.
Unfortunately, we have more chatter from government officials in China about how they intend to intervene to save the markets. In addition, Fed members have been chattier than a teenage girl with a new cellphone and haven't been nearly as astute. We still have no idea whether a rate hike is coming in September, although the market seems to believe it is highly unlikely.
Technically, there is no reason to sound the all-clear signal. Although the size of the moves was unusual, all that happened this week was a technical breakdown and an oversold bounce. This bounce has been a bit V-ish, but we haven't come close to moving back up into the trading range that existed before the swan dive.
The charts suggest we are due for some backing and filling and possibly even a failed bounce, but the bulls are looking at what happened last October and every bit of correction action in the last few years and have little doubt that this market will continue higher. Retests and things of that nature are quaint, old-fashioned phenomena that don't occur in a world ruled by central bankers and algobot computer programs.
It has been a market that is all about overall direction rather than stock picking. As things calm down, stock picking will come to the forefront again, but macro news events can easily come into play once again.
It has been a very interesting week. While it was easy to be caught on the wrong side of things, the good news is that we now have many more opportunities than we did a few weeks ago. We just need to keep working at it.
Have a great weekend. I'll see you on Monday.
Aug. 28, 2015 | 11:23 AM EDT
Whew! The Market Is Catching Its Breath
- · After all the recent action, this is what's needed.
After four wild days this week, the action is much calmer, which is exactly what we need. We've had a massive breakdown and a huge oversold bounce and now we are setting up for the next move. The big question is whether this bounce fails and we retest the lows, or do we find some support, attract buyers and work higher.
From a bullish perspective, the best thing that could happen is that we pull back slightly and quickly find support. Right now, key support would be around the 1950 level of the S&P 500. That would still be a very sizable downside move, but in the context of the recent volatility it would be a reasonable pullback as flippers and trapped bulls make their exits.
Breadth is running slightly positive and the one-way machines are pushing to keep the bounce going. The bears are becoming more interested in trying to time a reversal, but there still is support from folks who missed putting much money to work early this week.
I sold down some positions yesterday and am not waiting for charts to develop. As I discuss in my weekend piece, to be published tomorrow, we have been in a market where the main focus has been on direction rather than stock picking. Eventually, stock picking will re-emerge and that is when we can really make some money.
Energy Focus (EFOI) has been one of the best-acting stocks in the market lately and continues to attract attention. I've been bottom-fishing some Second Sight Medical Products (EYES) and that seems to have found some support now. This market action has created some great opportunities, and just because we already bounced big doesn't mean they have all evaporated. Keep on digging. There is money to be made.
Aug. 28, 2015 | 7:37 AM EDT
Action Like This Leaves Scars
- · The week has been good for the machines but bad for humans.
"The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew."
A fourth straight day of huge moves has the bulls feeling quite relieved, but despite the biggest two gains in many years we are merely back to where we were four days ago. We are well off the lows now, but we are still technically damaged.
The big rally of the last two days gives many people good reason to overlook and forget what preceded the action. The selling pressure was tremendous, and even the gigantic rally did not come close to offsetting it. While it is positive to see so much buying after the carnage, volume has been lighter and it still is nothing more than an oversold bounce in the context of a breakdown. What is different is that the magnitude of the moves recently has been so much greater. The bounce was very big, but the breakdown was even more massive.
The question of the day is, now what? We've had an oversold bounce that was strong enough to look like a V-shaped move, China stocks have found support, and even the Fed seems to be backing off from the talk about a September rate hike.
The bulls are telling us that nothing has changed, that this market is fine and that there is no reason for a major change in market character. What they are overlooking is that the character of the action has already shifted. Action like this leaves scars and it does impact the way that market players deal with the market going forward.
Prior to the Great Recession, technical traders would be looking at this action and talking about how long the bounce would last. It would be illogical to not expect some pullbacks following a major breakdown and a big recovery. These days it is different, because there is so much manipulation by computer programs.
The movement in the final hour last night was a classic example of computer programs at work. We had been chugging away most of the day and topped out in the early afternoon. Selling picked up and we had given back almost all of the intraday gain. As soon as we went flat, they flipped the switch on the buy program and we had a frenzied rally into the close. There was no fundamental reason for the move. It was simply an opportunity for the computers to extract profit by surprising market players that acted in an emotional manner after the big rally had faded.
Action like we had in the last hour makes traditional technical analysis almost futile. The action is purposefully random because it is the best way to keep trades out of step and to allow the high frequency programs to rack up a huge number of small gains as they push the market around.
This morning we are giving back about half of the big late gain so far as the machines stand aside and let the humans react. There are plenty of buyers who missed out the last couple days that want to put money to work. We will see how much support they provide. The chart is looking much like last October, and if history is a guide we won't retest lows. Putting money to work is the focus, and it won't be easy.
It has been a great week for the machines, and a very challenging one for humans.