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Gary Kwapik

Gary’s entry into the trading realm began in 1986 as a Registered Rep. Over the 18 years that followed, he helped his clients navigate many market swings such as the ’87 crash, Asian Crisis, two...

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A Change In Market Dynamics -- Or Just Another Chance To Buy The Dip?

The recent drop in the market, and in the share prices of high flyers from Apple to Google, has many investors wondering if "this is it" for the indexes.

We’ll take a look at the technical picture in a moment, but let’s first list some of the issues working now in the averages:

  • At the beginning of earnings season, some professionals were questioning if the estimates might be too high.
  • Many large tech stocks have broken down or may not recover to old highs.
  • China's economic numbers have been showing a marked slowdown.
  • Fed tapering is easing off, leading many to believe the party may be over.
  • And some institutions selling by virtue of higher volume on down days.
  • The general market psychology, meanwhile, is shifting to a more defensive mode -- as evidenced by the rotation into capital goods type stocks such as ADM. Any or all of the above issues could move the averages lower than anyone expects.
  • On the bright side, the economy and jobs are slowly recovering -- giving the Fed reason to ease back on the  bond buying.
  • Related: Sector Rotation Points To A More Defensive Stance

Now to our technical look.

elow is a chart of the Dow Industrials. On the positive side the index is still in its channel range, even as it heads to the lower end.

 

 

The 200-day moving average looms just underneath at around 15,700, which could lend support as it did the last two times.

However MACD has formed a negative divergence by tracing out a lower high, with the market hitting new intraday highs recently.

Volume declining on rallies shows a lack of conviction in the up moves.

Many indexes and ETFs, along with some stocks, show a similar pattern. A trader could buy call options near the channel bottom, with a tight stop underneath to play a bounce back into the middle of the range, or wait to see if it breaks thru -- and go short and buy puts looking for a further drop.

Many indexes' and ETF's implied volatility has increased relative to the past six to 12 months, which helps to make option premiums richer. A trader looking for a trading range may elect to sell Iron Condors. Whichever you chose if you decide, to go long or short, play the rallies and dips for the short term and keep an eye on the volume.

As always, these are suggestions for more research and study and not trade recommendations. Risk is always a factor in these setups, so size your trades to your own personal risk tolerance.

Posted in: Education Long Ideas Short Ideas Options Markets Trading Ideas ETFs General