Thursday started ugly when the S&P 500 gapped 0.7% lower at the open. The Fed disappointed investors Wednesday afternoon when it revealed they could start tapering bond purchases later this year. While not a dealbreaker by itself, it reminded investors this free-money gravy train isn’t going to last forever.
Wednesday’s disappointment spilled over to Thursday’s open, but as is often the case following large gap opens, supply dried up almost immediately. And within hours, the market was back in the green. So much for that ugly start.
Lucky for regular readers of this blog, they were prepared for the market’s sharp dip and bounce. As I wrote Wednesday:
Maybe the selling continues Thursday, but this has been an incredibly confident market all year long and chances are good this dip will stall and bounce like all of the other dips that came before it.
But as good as things appeared in midday trade, the rebound stalled and the index ultimately closed only a handful of points in the green. While it is usually hard to get excited by a 0.1% gain, context is everything. More important than the trivial gain, the market tried to break this bull market and very few owners took the bait.
This continues to be a confident market and no matter what the cynics say about complacency, the one thing they always forget to mention is just how long complacency lasts before the fall.
While it would have been nice to see Thursday’s rebound close near the highs, the most important thing is the selling stalled and reversed. Confident owners still don’t want to sell and as long as the market isn’t pressuring them, these confident owners will continue holding for higher prices. Close green on Friday and this week’s tumble is already old news.
As for how to trade this, hopefully, you were using sensible stops and were able to lock in some nice profits Wednesday afternoon. Thursday morning’s gap and bounce gave us a very attractive entry point with a stop just under the early lows. Now we simply wait to see what happens next.
Stay above 4,370 and everything looks good. Close above 4,400 Friday afternoon, even better. But if the selling resumes Friday afternoon and we fall under 4,370, all bets are off and we wait for the next buyable bounce.
Amazon is ugly and getting uglier
This larger pullback in Amazon (NASDAQ:AMZN) was kicked off by disappointing earnings last month. It is hard to avoid a big earnings gap like that and it happens to the best of us. But the inexcusable mistake is holding the subsequent dip under $3,300. That was our clear signal to get out and for the most adventurous to initiate a short.
These tumbles are rarely a one-day events and AMZN is proving that there is still downside left in this move. If $3,200 doesn’t bounce soon, then $3k is coming up. On the other side, a dip and bounce back above $3.200 is a buyable entry with a stop just under this level. This is acting like it wants to go lower, but it always does just before the bounce. In this case, have a trade ready for either way.