As we know last week US market suffered its worst selloff in four years. However, some are saying there was no panic in the market. And this is good news. They are saying bargain hunters will be out there on Monday buying their favorite stocks. So do you want to do some bargain hunting on Monday and seeing same stocks falling further by the time Friday comes?
My observation is that if market closes at the lows on Friday then selling continues on Monday till afternoon and then selling dries up and bargain hunters step in. They do some light buying. Then the buying continues till Wednesday morning and then all buyers are gone. Then fresh selling begins on Wednesday afternoon which continues till Friday and the market on weekly basis closes at new lows.
Unless top class stocks such as AAPL, FB, NFLX starts moving up dollar-wise (relative to their ATR) it is a good idea to not be a hero and buy any rally. Instead look for those hero stocks which despite market sell-off stood tall. These hero stocks will be the one to tumble on next wave of selling. Identifying these hero stocks and getting ready to attack them via Puts will pay off good.
Since mid-June 1.8 trillion dollars have been wiped out from stock market. I am sure Fed and their friends such as Goldman Sachs, Morgan Stanley must be up whole weekend and figuring out what to do to support the market from falling further. May be print more money and inject in the stock market. Who knows QE4 may be coming instead of rise in interest rate. And FED dare not raise interest rate in September otherwise we have seen nothing yet in terms of market fall. It could be just free fall and we all are not old enough to have seen it before. It could be worst than 2008, 2000 or 1987. It could even be worst than 1930s.
It all started when Chinese devalued their currency. It is being talked that more devaluation by Chinese is coming. May be another 10%. Stocks market just do not drop suddenly. It is not like someone shot the bullet on his head and it just died. Markets show signs of weakness from early on and then finally news comes out and it just tumbles. There are two ways to analyze the market. Top-Down approach where you analyze the indexes and then determine which stock could fall. Or another way is bottom-up approach. In bottom-up approach we analyze individual stocks in the indexes such as S&P 500 and see where they are in terms of their cycles and whether on week over week basis most of these stocks are rising or declining. Even if they are rising how much they are rising on any given day. If these are just rising 50 cents or a dollar or so then there is no strength in the stocks. It is like tumor eating stocks away slowly. It is like cancer setting in.
On Friday S&P closed at 1970.89 and must hold 1965 this week. Otherwise we could see 1890-1875 in near future. On the upside S&P has to go above 2045 and then above 2070 to say that market has recovered. These figures are dynamic and changes as we move forward in the trading week.