The best traders out there have a field day in markets like this, riding the wave, and pressing the trade. If 2013 was a market that made geniuses out of those who just bought every dip, then 2014 is likely to be the year where those newly crowned market wizards are gonna have to earn there stripes, and trade. In raging bull markets, with little recognition of macro uncertainty and very low realized volatility caused by central banks committed to doing “whatever it takes” to keep things afloat, buying until proven wrong was the trade to press.
So far this year, you can just throw out the 2013 playbook. Buy the dip could quite possibly be turned upside down for traders, with the new strategy to “sell the rip”. But first you need to get said rip. On Friday on a few occasions I found myself answering a similar question with: “after 3 straight down days, it’s a tough press right here on the short side, wait for a bounce….” Make no mistake, Friday’s price action was downright nasty, between the SPX barely seeing an uptick all day, closing on the dead lows, with the VIX up more than 30% on the day, it just didn’t feel like a great press, despite having the knowledge that global markets would sure be down in sympathy. For those who loaded up on the short side with the hope of a “Black Monday” of sorts, well, I just have one thing to say – that sort of follow through is rare, and trading is rarely different. Playing for that was playing for a very low probability event, at least on the open. Historically, gap down openings are born of crisis environments, and until there is evidence of a credit crisis somewhere in emerging markets, lackluster corporate profit guidance ain’t gonna be the enough to derail this train, at least not in one death blow.
For those who care about “levels”, there are 2 in the SPX that traders are eyeing for key support. First, looking at the one year chart below, is the December low of about 1768 (green line below). That is the next spot where things should pause on the downside. But the big kahuna is the 200 day moving average (yellow line below, circled in red) at 1700, which was a massive resistance level in the summer and fall.
1700, if we get there, will be an epic showdown, as the SPX has not been below its 200 day moving average since Nov 2012. That’s more than 13 months, the longest such stretch in the last 10 years! Without some sort of systemic rumblings, that’s likely to be a very nice level to pick at some stocks that you have been waiting to own, as there has been some fairly extensive damage done to some bellwethers in a very short time. A few quick charts on my radar, with earnings news out of the way that have seen fairly dramatic declines, but quickly approaching very attractive technical support levels (circled):
So buy relative oversold cheapness, and sell overpriced rips, maybe that’s the new playbook for 2014, as it should be.