On Monday the indices saw their most severe corrective action since Oct. 8. The action has been amazingly lopsided to the upside since then and the selling was relatively minor in view of the recent gains. Two days of weakness put the S&P 500 back to where it was before Thanksgiving Week.
The question now is whether the bears can build further on this corrective action or whether the bulls rush to buy the dip one again.
Reuters reports that President Trump said at the NATO summit there is no deadline for a China trade deal and that it may be better to wait until after the 2020 election to complete the deal. No mention was made of the planned increase of tariffs on Dec. 15.
The market is still reacting to these constant headlines but seems to take them in stride. The potential for positive news has helped to keep a bid under the market, but if the planned Dec. 15 tariff increase goes into effect then optimism about a deal will continue to recede.
This is a market that has been looking for an excuse to sell off and consolidate, and the China news is convenient. There is still the potential for something positive, but it doesn't look like it will happen in the next few days so that allows for some deeper corrective action to occur.
Technically this is bullish action. The market needed rest at this point and a pullback now will create better conditions for some strength to end the year.
Of course, there are bulls that seem to think the market must go up every day in order to be healthy, but they are buy-and-hold investors rather than strategic traders. For traders, this corrective action is a great relief and eventually will lead to a better set of opportunities.
It is possible this action may develop into topping action and produce a significant change in trend, but there is nothing in the action so far to suggest that is the case. At this juncture this is just some routine corrective action, but that does require some defensive moves just in case it expands. The best course of action is to stay disciplined in honoring stops and to error on the side of selling.
The best form of defense is to sell. It is very easy to reverse and it helps to clear your mind when you are sitting on a high level of cash. There is no reason to fear a market breakdown if you are disciplined in your trading.
We have a weak start with trade worries being a convenient excuse.
