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Measuring a Potential Bounce

Scott Redler

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Markets got hit again yesterday taking the S&P about 4.6% off the highs of the year from May 22 of 1687, which is the same day the index saw the major outside reversal that has controlled the market ever since. World markets quieted down a bit from recent volatility as European markets are up small, while China and Japan are down 1% and 0.85%, respectively.

Today S&P futures are bouncing back 6-8 handles as the oscillator reached some oversold levels that make it tricky to be short. Most traders would have liked to see a down open this morning to trade the bounce, but the market never makes it easy. What we will be watching now is how much power the bounce has. Yesterday the S&P broke the 1622 pivot low, now let's see if that turns into resistance. The bigger area to watch is 1635, which is also the area where the 8- and 21-day moving averages are curling down.

If this up open gets sold off early, use yesterday's low of 1607 as your action pivot. The next level to watch would be the 50-day MA, which stands at 1604. I would love to see a Red Dog Reversal type set-up show its face today, which means they would sell this up open down through yesterday's low, and then the market would rally back up through that level. On that hypothetical trade, you enter on a break back above 1607, and place your stops at the low of the day for a nice calculated entry.

The last two times in 2013 that we have seen this type of volatility, there were rolling corrections in sectors under the surface, but the S&P held up better and never corrected 5% off highs. During those pullbacks some other groups were down 5-12% and hit their 100- or 200-day MAs. Pullbacks provide a great opportunity to identify relative strength, which reveals the real quality in the market. When the market finds its footing, you could have success turning to those sectors and stocks first.

Yesterday was a decent day to cover some shorts, now the question is, from the long-side do we take a purely short-term tactical approach, or could we put on new swing-type trades? I think you start out by employing some day-and-a-half type strategies and watch to see the composure of the bounce. After initial bounces, if they happen, you could take off a portion of the position and then hold some for a bigger move.

In each sector use yesterday's low as the action pivot and make adjustments around them. I tried to list them from strongest to weakest. If you are looking to short through yesterday's lows, take a bit of care as we are oversold. I would wait to see if they bounce back above for a tactical long.

S&P 500 (SPY): Yesterday's low is $161.13 (50-day at $160.47).

Financials (XLF): Yesterday's low is $19.28 (50-day at $18.90).

Industrials (XLI): Yesterday's low is $42.66 (50-day at $42.21).

Retail (RTH): Yesterday's low is $51.29 (50-day at $50.93).

Transports (IYT): Yesterday's low is $109.35 (already below the 50-day, the 100-day is $108.39).

Homebuilders (XHB): Yesterday's low is $29.48 (already below the 50-day, hit 100-day yesterday, the 200-day at $27.53).

Real Estate (IYR): Already at 200-day, use $67.21 for actionable spot.

Tech remains mixed with opportunities.

Apple (AAPL) is struggling to hold this area. Use $440 as a stop. If it gets back above $450 it could look better.

Amazon (AMZN) has a really nice pattern. If the market finds footing, a buyable spot could be $272-275.

Netflix's (NFLX) range is getting tighter. A move above $228ish could provide a good tactical long, but below $218 you could perhaps short.

Google (GOOG) has been correcting since breaking $900 area, now it's struggling to hold on to $854. Use that level as support, and under that a big zone is $844-836. If we get some type of bounce, a GOOG move above $870 would have it looking much better.

Musk watch

Tesla (TSLA) showed relative strength again and continues to be a great trading vehicle. Micro resistance is $98ish then bigger resistance is $102. Support sits at $88.25.

Solar City (SCTY) had a nice Red Dog Reversal at $36.50 after recent weakness. If it gets above $40ish, the next resistance is $42. Remember the big IPO lock-up expiration is next week, but the stock has already come down a lot.

Metals still hang around but the range is getting tighter. Gold (GLD) could provide a cash flow trade if it gets a move higher through $136.60-137.20, but these moves sometimes happen quick and then fail so take care. Support is $134 then $130.50.

*DISCLOSURES: Scott Redler is long SPY put spread, AAPL call spread.