The reaction to Apple’s earnings last night has carried over into this morning’s session, as the Nasdaq Composite is clearly leading the market higher. Materials are strong, while Goldman Sachs and the financials are lagging. Unless you have been perfectly positioned for each of the twists and turns that the market has taken in recent weeks, the better play has been to move to mostly cash and let the dust settle. Indeed, overnight gaps in either direction are much more common in corrective markets than in trending, healthier ones. The crazy price action can summons raw emotion from even the most stoic of traders, which is all the more reason to focus even more on capital preservation during these types of swings.
At issue now is whether we have seen the end of this broad market correction. Distinguishing between a reactive bounce (to the past few days of selling in the high momentum names) versus a tradable bottom is much easier to do in hindsight. Since hindsight trading does not yield any actual profits, though, I am focusing on whether stocks firm up and tighten their daily chart patterns, presumably as big money places a strong bid underneath them. Until that happens, I am somewhat reticent to embrace the idea that the market has bottomed in conjunction with Apple’s earnings report.
When the party gets crazy with big bounces in either direction, it is very easy to give in and start making huge bets to try and time the random gaps. I am at my best as a trader when I stay close to my style and not allow myself to drift. If we have bottomed, then by definition there will be time to get in as charts improve and prepare to break higher.