PM: Expect the unexpected

PM Update

MARKET BEHAVIOR
Stocks gave back yesterday’s gains, but stayed above recent lows at 1635.  Volume was modestly higher and greater than Tuesday’s bounce.

MARKET SENTIMENT
Last week’s obvious breakdown ended in a short-squeeze on Tuesday, that ended in a retreat back to the lows today.  In spite of all the drama and excitement, the market simply traded sideways the last two-weeks.

Both bulls and bears are beating their chest and convinced the market is clearly on their side.  While it is easy to find bulls and bears, where are the ones saying we will settle into a trading for the rest of the summer?  Why is that not a possibility people are considering, especially since the market goes sideways far more often than it goes up or down?

Everyone expects the market to breakdown after such a strong run, but people trade their outlook, meaning most of the cautious are already out of the market.  Declines in six of the last nine sessions also cleared most of the weak owners and replaced them with confident buyers willing to hold in the face of this uncertainty.  This market had every chance to break wide-open but here we stand, just 2% from all-time highs.  Between the recent selling and pervasive negative outlook, further selling seems unlikely since most have already sold.  The key to understanding the market is not found in charts, economic reports, or complex formulas, but understanding what other traders think, how they are positioned, and what moves they have available to them.   Recent selling is more bullish than bearish because it is building the next pool of buyers.

TRADING OPPORTUNITIES
Expected Outcome:
From a pure contrarian viewpoint a trading range seems the most likely outcome because no one is talking about it, but that is not unusual.  Most traders are opinionated by nature and expect the market to move one way or the other.   Stepping higher is the next most likely outcome due to the recent wave of selling and pervasive negativity.  And finally collapsing is least likely because it is the obvious trade everyone is waiting for.

Alternate Outcome:
Markets work exclusively on supply and demand.  It makes no difference what anyone thinks or how they are positioned, if we run out of buyers there is nowhere to go but down.  The uptrend is not broken yet, but we need to watch for real signs of weakness and get out before everyone else.  Lower-highs and violating major support shows the widely expected selloff is finally upon us.

Trading Plan:
1635 is the level to watch.  As long as we hold it, the market remains buyable.  Violating this level makes us more cautious, but the more meaningful support is at 1600.  Since the market is entering a consolidation following recent gains, the best profits will come from swing-trading weakness and strength.

Plan your trade; trade your plan