The indices are well off the lows they hit last week, but there still is not good reason as yet to trust this market. There is a strong desire to believe the recent corrective action has come to an end as we head into earnings season, but the technical action remains problematic and the response to earnings reports so far is not encouraging.
Technically the indices hit a low a week ago and then there was a solid day of upside this past Tuesday, but it is not sufficient action to correct the damage that has been done in the last few weeks. At this point it is nothing more than just an oversold bounce. It was a strong bounce, but not strong enough to push the market back into an uptrend.
Another problem is that there simply aren't any good long setups right now. I can find hundreds of potential shorts as stocks have broken down and bounced into resistance levels, but there are very few individual stocks with solid bases that are showing signs of breaking above key levels off resistance. When I do find something coming off a key support level, such as Viking Therapeutics Inc. (VKTX) , the upside follow-through fizzles fast and recent buyers are flipping rather than chasing.
Next week we have hundreds of earnings reports rolling in and we'll have a better sense of the market mood. So far earnings season has seen lackluster responses. The financials primarily sold off on their reports, IBM Corp. (IBM) was a bust and Netflix Inc. (NFLX) failed to gain any momentum on solid numbers. Sentiment right now is not good for a favorable response to earnings, although many stocks have seen lower expectations develop during this pullback.
As a technical trader who uses a reactive approach, I see no reason to do much buying right now. There just isn't any strong momentum and there are few good charts.
Many pundits make this much more complicated than it needs be. They keep trying to guess what is going to happen next rather than dealing with what is in front of them. Right now the odds do not favor buying. It is simple as that.
My game plan is as follows:
- Hold a high level of cash. I'm well over 50%
- Keep tight stops on positions I have left
- Stay patient
- Maintain a shopping list of stocks I want to buy when the action improves
- Make only minimal buys of favorite stocks as they find support levels
- Be ready to move aggressively as conditions develop
It is not a particularly exciting plan, but the name of the game right now is to protect capital and avoid losses. When better conditions develop we will be ready to roll.