Market Will Probe For Support. Watch For Buying and A Sharp Rebound Off of A Low. Buy This Dip.

May 29, 2013

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Here is a quick play-by-play recap of the last week. Wednesday morning “Fed speak” sparked a massive rally to new highs. The market got overextended and the FOMC minutes spooked traders when they were reminded of the “great unwind”. Thursday morning flash PMI’s weighed on the market. A low was established at SPY $164 and we bounced off of that level. When trading resumed yesterday, the market gapped higher on central bank comments. That move was reversed and stocks slipped the entire day.

Here is my point. We can dissect every little news item and we can try to explain every wiggle and jiggle. The bottom line is that the market is a little frothy and it needs to consolidate. We are in a news vacuum this week and post-holiday trading will result in choppy, light volume price action.

Today’s “spoiler” came from China. The IMF lowered growth projections for 2013. This is nothing new.

The market got ahead of itself and bullish speculators need to be flushed out. Yesterday’s reversal has resulted selling this morning. We need to let it run its course and I still feel that we will probe for support.

Ideally, Asset Managers will pull bids and we will hit an air pocket. Bullish speculators will puke out of call positions and the market will test support at SPY $164. Last week’s low represents horizontal support and it is also the 20-day moving average. I would also like to see a snapback rally off of that level. This would be an ideal scenario and it may not materialize.

The bid is strong and we might not get that low. Asset Managers still want to buy and any decline will be brief. I would be surprised if this soft patch lasts more than a few days.

Consequently, I suggest scaling into call positions. We know this dip will be a buying opportunity and we don’t want to miss it. Know that you might take a little heat along the way.

Earnings season was decent, the Fed will remain accommodative, job conditions are improving and credit concerns are low.

I am particularly interested stocks that are in an uptrend and have broken through horizontal resistance recently. During this small market decline they might be testing that breakout. If support holds and the stock wants to move higher I will buy calls.

I am still day trading but I want to add to my call positions. I plan to take my exposure up from 25% of my normal size to 50% if I get the price action I’m looking for.

If we make a new low late this morning, hold off on purchases. See if we hit that air pocket. If we do and you see an instant bounce, you can buy with confidence.

Be patient and look for opportunities to get long.
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