It may not be much comfort, but what we are seeing in this market is textbook corrective action. We had the big breakdown, an oversold bounce and now the retest is playing out. Because there are so many market players who have become used to the V-shaped bounces after a breakdown, the action feels much worse. There are more trapped bulls as a consequence of past V-shaped moves and they add to the downside pressure as they try to escape.
The big issue now is finding a bottom. It is probably best to simply admit that we don't know. We have some wild volatility and momentum is to the downside. As I discussed in the prior post, the chart of the S&P 500 doesn't offer much support beyond the lows of last week.
In a market like this, we hear quite a bit about sentiment. The general view seemed to be that while it was quite gloomy, there wasn't much panic. We had a few minutes at the open and in the final hour when we hit air pockets, but it wasn't classic capitulatory action where there is a big washout that clears the air. The selling is ongoing and we can't conclude that the pressure has been relieved.
Prior to the corrective action that began a little over a week ago, I had written quite a bit about how the average stock is already in a bear market. Obviously, that is even more so now. More than 82% of stocks are already under their 200-day simple moving average, and some measures of selling pressure in individual stocks are at levels last seen in 2009.
In many ways, the indices are just catching up with what has been developing for a very long time. That suggests it could play out a little faster than a normal correction, but I see no reason to start trying to predict when we will bottom.
This sort of action has been a long time coming, but we have needed it and ultimately the market will be better for it. That may be cold comfort if you are trying to ride some long positions, but there is a silver lining in the gloom.
Have a good evening. I'll see you tomorrow.
Sept. 1, 2015 | 12:54 PM EDT
Market Is Suffering From Lack of Support
- · It's important that we not close at the lows today.
At midday, the indices are barely holding support. We have been bouncing around in a range, but each time we test the lows, the market weakens. It is extremely important that we not close at the lows today. That would trigger greater downside momentum.
The big problem the market faces here is that support is so limited. As the chart below shows, there is some support at Fibonacci levels, but there isn't much of anything until we start to hit last week's low. We can still find some support at levels higher than that, but it is going to take some basing action to do so.
At this point, the best thing you can do is to have a buy list and track the stocks you'd like to add. If you are doing any buying at all, it should be incremental and on a small scale. The idea isn't to be the exact low but to buy when stocks have the best chance of some sustained upside. Current conditions don't support anything other than short-term oversold bounces.
Sept. 1, 2015 | 10:44 AM EDT
Is This the Retest of Last Week's Lows?
- ·Sentiment is more important than points, right now.
Dip buyers bought the opening weakness, but a worse-than-expected China manufacturing Purchasing Managers' Index report is putting the kibosh on the bounce. Dip buying is almost reflexive these days, but the problem is that lately, the buyers are flippers -- and aren't sticking around for long. They have lost confidence in the V-shaped moves and are happy to flip for some fast gains, instead.
It is downright ugly out there -- with breadth running 700 gainers to 4750 decliners. Precious metals and some energy names are up, but momentum stocks are all red and biotechnology is having issues, again. There is obviously no good leadership right now.
The big question is whether this action is the retest of last week's lows. We have only retraced about 50% of the bounce so far, which leaves quite a bit of downside for a full retest, but the emotions associated with another big pullback are more important, right now, than the actual points. We needed to kill the bullishness produced by a V-shaped bounce in order to get a better washout.
Overall, the screens don't look that bad. Energy Focus (EFOI), BioTelemetry (BEAT), Lexicon Pharmaceuticals (LXRX) and Second Sight Medical Products (EYES) are all green. I am interested in a few other names, including Ixia (XXIA) and Inotek Pharmaceuticals (ITEK) as sell, but I'm in no hurry. The important thing, right now, is to have some cash to work with and to deploy it strategically.
Sep 01, 2015 | 06:50 AM EDT
Stay Vigilant and Be Ready to Move
-- This could be an ugly open, but also a chance to bargain hunt.
"If somebody is gracious enough to give me a second chance, I won't need a third."
Yesterday morning, market players could hardly wait to buy the early weakness. Hopes of yet another V-shaped bounce were strong, and fear of missing out as the indices moved straight up was in the air. We did have a good bounce that took things back to even, but we faded in the afternoon and closed just slightly off the lows.
Overall it was healthy action after a good three-day bounce. We needed to consolidate gains and form a foundation if we were continue to work higher, but we have major problems this morning as the weak economy in China grabs the headlines once again.
China manufacturing PMI fell to 49.7, which is the lowest reading since August 2012. Anything below 50 indicates a contraction, which in view of the growth projection of economic officials is more than a bit disappointing. Stocks in Shanghai fell nearly 5% but bounced back to finish down 1.2%
Stocks around the world were spooked by this report and it is causing some real worry about a failed bounce and a test of last week's low. A the moment we are set to open below the lows of last Thursday, which is a key technical level I mentioned yesterday.
A failed bounce at this point cements the idea that the market has undergone a major change in market character. The big hope of the bulls is that another V-shaped bounce would occur and that we'd quickly be on track. The problem is that macro conditions have undergone a major change. Not only is China a mess, but the International Monetary Fund sees slower worldwide growth as consequence of the spillover from China.
To complicate matters further, we no longer have the Fed willing to keep interest rates low to battle these issues. Fed members appear to be on a mission to raise rates sooner rather than later. They are trying to maintain some credibility as they claim the economy is strong enough to justify a rate hike.
We have some problems this morning and it is going to be particularly interesting to see if the dip buyers, who were so anxious yesterday, are willing to step up and act when the mood is much more negative. Buying into weakness becomes much more difficult when there is some panic in the air.
Despite the big drop that is going to occur at the open, we are still significantly above the lows we hit last Monday. This open is not going to produce the retest that technicians will be looking for. We will need quite a bit more downside momentum to move down to the 1875 level that is key support.
Buying these sorts of opens has worked well for traders. They may need to flip fairly fast, but buying into the teeth of a decline is often aided by computer programs and the fact that it is a consistent pattern that we have grown used to. What we have to watch for is that the early lows hold and we see some new support levels emerge.
One of the positives right now is that the way this market has moved recently has not produced many good setups. It has been extremely hard to put money to work unless you chased bad charts that were overbought on light volume.
This is going to be an ugly open, and we'll need to stay patient, but all the folks that have been lamenting their lack of aggressive buying into last week's weakness will have another chance to do some bargain hunting.
Although we may not hit last week's low, this may be the technical test that many are looking for. Stay highly vigilant and be ready to move. There are some great opportunities developing in this very poor and messy action.