Regardless of whether this selling proves to the nothing more than the late-stages of a bull market correction before we bottom out, large opening gaps lower are still not fun to ride down while heavily long. Accordingly, the weakness of the overall market needs to be respected by playing strong defense as a trader. Clearly, this remains an unhealthy market for breakout players to be swing trading a plethora of stocks on the cusp of making new highs.
That said, it is not exactly a great big, fun party for bears either, as dip-buyers have almost a Pavlovian response as they keep attempting to buy these opening gaps lower, despite not making any progress while doing so last week. As an example, the key, multi-year 2,900 level on the Nasdaq held like a champ, once again, this morning. The low-1340’s on the S&P 500 also marked firm support back in February and early-March of this year. So, that becomes the current level observe for signs of seller exhaustion.
The overnight gapping nature is not only a hallmark of a corrective market, but makes it that much more difficult to pinpoint quality entry points for shorts. Thus, cash continues to be a viable position, despite how boring it may seem. At the end of the day, trading to survive over the long run entails playing defense at various junctures. To think of trading as a glamorous profession can be a very dangerous thing. Until the price action shows some actual signs of firming up, all of those contrarian surveys, indicators, and instinct traders amount to nothing more than a passing whim on the direction of the market. Best to side with concrete evidence, in this market.
