You Might Just Want To Avoid This Dilemma

Random Thoughts

The market bounced a bit from oversold on Tuesday.

It will be the nature of this bounce that will be important.

If it is anemic and the market rolls back over, then that would be cause for concern.

If the bounce becomes more than just a bounce and the market makes it back to new highs, then we can all breathe a collective sigh of relief.

That’s what I’m hoping for. I know, hope in one hand and…..probably applies more to trading than any other business out there.

In the Quack, this could be plausible. The index has been in a strong trend for over a year. And, each sell off has been met with buyers. With the chart backed way out, the recent slide only looks like yet another pullback to the 50-day moving average—something that we’ve seen several times over the last year or so.

Unfortunately, that’s about where the good news ends.

The Ps have taken on a First Thrust appearance (email me if you need the pattern) and internally things are getting a little ugly.

Transports, Manufacturing, Durables, Insurance, and Chemicals, to name a few, have formed First Thrust patterns down—i.e. they were at new highs, sold off hard, and have now begun to pull back. This could be setting up for the next leg lower.

Areas that were weak coming into the overall side such as Retail and Consumer Non-Durables remain in downtrends.

Hardware, led by Apple, has begun to slide.

Many other tech areas (and not so tech areas for that matter) are on the cusp of their pullbacks becoming more than just that.

Speaking of which, Drugs and Biotech have pulled back deeply. Based on the number of stocks within that have already been hit hard, one has to wonder if these stocks might be priced for perfection.

About all that’s glimmering out there is Gold. The stocks here appear to be in the process of putting in a major bottom. Notice I said “process.” So far, it’s been more of a process than an event.

The overall market remains oversold.

Buying oversold markets works great until it don’t. It’s a great way to have a very brilliant but brief career on Wall Street. Don’t believe me? Try it and then call me in a few years to let me know what cardboard box you’re living in so I can visit you.

So what do we do? There’s a dilemma when it comes to oversold markets. If you try to buy them for the bounce, the bounce never materializes—oversold becomes even more oversold. If you try to anticipate the next leg down, they bounce from oversold. My thinking here is to let things shake out a bit. The danger outweighs the potential opportunity. If the market goes straight back up, then I’ll start buying again. If the slide continues, then I’ll add on the short side. Now, check back tomorrow. I’m a one-day-at-a-time kind of guy. I do think the Golds still have potential (we have 2 on the radar for today—I know, I’m such a tease!). Everything else just seems a little (more) dangerous. Regardless of what you do, just make sure you have picked what you think is a really good setup. If the setup(s) is so good that you just can’t walk away and be okay, then take it. A good offense sometimes can be your best defense. As usual, just make sure you wait for an entry.

Futures are weak pre-market.

Best of luck with your trading today!

Dave