Up until the month of May, the dip-buyers had arrived on the scene to each pullback ready to enjoy the riches of sticking with a strategy that had worked marvelously since the very beginning of 2012. However, last month proved to be a change in character for the market, as the buy-on-the-dip crowd changed from making tons of money with each support buy into merely celebrating “moral victories” for small losses or breaking even on busted trades.
The issue for this market then became that we were churning sideways, with dip-buyers not completely demoralized to the point where we could see a cathartic wash-out to, in my view, arrive at a true bottom. Eventually, though, the rubber meets the road. When dip-buying bulls see a psychological shift away from having success with most trades to suffering losses and/or getting chopped to pieces, they become increasingly reticent to step in and try to save the day again.
Currently, the S&P 500 broke below its lows from two weeks ago, and is attempting to stabilize at the 200 day moving average. As I noted on my video recap yesterday, we had a better-defined range to work with, and you could expect a sharp move in whichever direction we broke. As I write this, 1284 marks today’s lows, as well as the rising 200 day moving average. We are currently sitting on that price now. Should we break it, I expect an ugly close to the week.
I also see that the VIX is only at 25, which is a bit concerning. Usually, if we are at a major bottom you will see a huge spike higher in fear. Thus far, consistent with my analysis above, the dip-buyers seem like they are just slowly walking away from the market, rather than screaming and yelling as though they were in a haunted house. Also note, as I said yesterday, that the alleged topping candle in TLT is proving to be trap to lure in top-callers to Treasuries. The more important issue there is the major breakout bonds have seen, even taking out those 2008 bear market highs.
Cash is still my only position, as we work through this high-risk environment. At some point, we will get that snapback rally and it will be a vicious short squeeze that goes on for a week or two. However, when more traders are focused on the counter-trend bounce than on the actual corrective trend, it is a recipe for the frustrating grind lower we have seen. The good news is that today’s action is starting to smack of a final slide down, and we should be getting closer to a bottom, especially if the VIX spikes higher.
Keep that powder dry and those cogent watchlists ready.
(not exactly on above topic, but relevant to the general market action).
The action yesterday and today reminds of one of my solid rules, from day/swing trading: don’t ever make swing-timeframe trades based on what I see intra-day. yesterday’s close was awesome, on an intraday basis, but meaningless on swing basis. I feel for anyone who might have chased that close, hoping for more upside today (very similar to what I saw back in Aug of last year, on the Fri before S&P downgraded the US debt, and the day where we bounced hard from Obama’s speech, when @gap made 20% in an house, I believe 🙂 ).
Listen to @chess, guys, if you’re doing swing trading, and don’t let great looking intraday action push you into swing trades… It’s a mind field out there…
(in an hour, not house 🙂 )
more like Hari-Kari for Bulls..as Da Bears break dance across the boards..
http://youtu.be/nKxyoud_c-E
Yo Chess, Fly’s comments on your market calls this year were spot on. I would have replied to your detractor directly, but, alas, I’ve been banned (agism?) from Fly’s blog. We should all have the cool and discipline that you project.
Thanks, purdy. Very kind. If you want to appeal the Fly ban for whatever reason it was, I believe you can appeal to Jeremy – [email protected]
Chess, yesterday you made a comment to the effect that CAT closing below $86 would call into question the rally from the 2009 lows (classy reply, BTW, in keeping the discussion civil). Is this because you see CAT as a bellwether due to key emerging market sales, or is there another purely technical reason?
@Bozo – Yeah, I think you could argue CAT is kind of like the IBM for industrials, a bellwether to observe. I don’t like seeing it break $86.