Although many market players root for stocks to go straight up every day, it is refreshing from a trading standpoint to have some periodic bouts of weakness. Pullbacks allow charts to form more favorable patterns and it relieves the overbought conditions. In addition, it is helpful to have some bears and skeptics that prevent the action from becoming too frothy.
This morning we finally have some January 22. The main justification for the pressure is a cut in European economic growth that I mentioned in my opening column. There was one good intraday bounce so far which has been the pattern lately but what will be key is if intraday lows are breached and the indices do not rally in the last hour. If that occurs then there will be a change in market character.
Many of the bears are looking for the market to go straight back down but I believe that is very unlikely. We have gone straight down and then straight up over the last few months and I believe it is more likely now that we see trading range action. Eventually that will resolve itself in another strong directional move but in the near term I'm looking for inconsistency rather than trending action.
The indices are hitting new intraday lows on headlines that Larry Kudlow is saying that there is a pretty sizable distance to go in the China trade talks. That is no big surprise and I expect to see some positive comments as well which will keep the action choppy.
Breadth is running 2 to 1 negative but I like how some of the small caps are pulling back to support. For example NIO (NIO) , which broke out yesterday, has pulled back sharply and I am looking to add into the weakness down to $7.75 support. Intelsat (I) reversed hard yesterday and is now back to its 50-day simple moving average support. Pyxus (PYX) , my stock of the week, is basing nicely in the $16 area.
Weak action is a refreshing change and it doesn't mean the market is going to collapse. Think opportunistically while you navigate this action.