Wednesday, August 26, 2015

Hopeful Opens and Scary Closes

We are now in the looking for a bottom market.  You get an awful close like you had on Monday and Tuesday, and you get monster gap ups the following morning.  The bottom pickers eschew risk overnight, but are more than willing to take risk during the day, even with a 50 SPX point gap up open!

This is a fear based market now, you have crushed the market so that the fund managers are well into the red on the year.  And when fund managers are negative on the year, this far into 2015, they get nervous.  They fear for their jobs.  So they go into shell mode, and try to minimize losses at the risk of minimizing gains.  Even though the market is only down about 8% on the year, that is a big number in the land of relentless bull markets and short memories.  It is now the land of panicky irrationality.  How else do you explain a dump down to ES 1850 and a run up to ES 1914 in the overnight session?

This is a tough market, I didn't expect this big drop over the past few days but with it comes opportunities to trade the volatility.  You have to buy the fear and sell the hope.  It will be a choppy market over the next 2 months.  Do not expect a repeat of earlier selloffs in 2012, 2013, and 2014.  I see no V bottom here.  The technical damage has just been too great, similar to what happened in 2011.

Monday and Tuesday did a lot into forming the boundaries of the new trading range.  No, I don't think we will pull off a V bottom like October 2014, or even in July this year.  There is a real fundamental scapegoat here in China, not some scary Ebola headlines or Greece in July.  That being said, you have gotten to a level where you will get bottom picking and it is still a bull market, although it doesn't feel like it at the moment.  Hedge funds were underexposed to US equities, before the panic, so I don't expect that much unwinding.  I am looking to be a buyer on any dips today down to the lower end of the trading range, SPX 1860-1870.  The rips should be sold near SPX 1940-1950.  We may get a run higher to 1970-1980 by the end of the week/early next week, but that would be a selling spot, not a point to look for a continued V move higher.

P.S. - These are the markets that ES traders live for.  Take advantage of the opportunity while it is here.  Sell the hope and buy the fear.  That is the mantra to live by for the next two months.

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