Today we saw the importance of sticking with a thesis instead of chasing the headlines. If you didn’t abide by your strategy and buy when the S&P recaptured the 200 or the weakness on Friday with the reversal set up, then you had no business chasing the high created by the gap up. The market had an outside day—it pushed through the high and closed on the lows—so the market fully rejected the pre-market S&P high’s of $134.20-134.70 and never gave us an opportunity to buy. The SPY also had an outside day, as it pushed into the $134 pivot and got immediately rejected.
In the end, the S&P finished almost 40 handles off its overnight highs, down 1.3% on the day after it looked like we were headed for a huge rally. The Nasdaq was hit even harder, finishing down 1.7% in a stunning reversal.
This was the general theme of the market today. A lot of investors hyped the news out of Europe and the subsequent climb in the futures, but in reality, there were signs that told me to avoid buying until stocks could pass their key levels of resistance. Apple (AAPL) was in a nice channel between $588 and $584 during the morning trading session and held the 50-day moving average after its first small fall. The key was waiting until after the hype from the developers conference was over. There was no talk of an iPhone 5 and there was a swift move down to $580. It retested the $584 figure and failed, dropping cleanly down to $576.
Stocks with less volume faced more immediate drops. Most of the banks faced severe drops following the quick gap ups, but there was just no bounce back. It is hard to buy into strength, as we saw with JP Morgan (JPM) today. It opened up into resistance, failed, and fell all the way down to $38.83. We see a similar pattern with other banks like Goldman Sachs (GS).
Small, tactical trades were the lucrative trades today. Investors saw the Spanish solution, much like the gap ups, as temporary fixes. Those caught in long positions or those chasing the quick buck were the ones who were harmed, as we did not see the bounce backs we normally see after such severe drops.
Disclosure: Scott Redler has no positions