The SPX made a new multi-year closing high Monday, recovering all of last week’s sell-off. As encouraging as the price action was, the low volume is hinting at a lack of conviction among market participants. But, as we’ve seen over the last six-months, the market can rally substantially in the face of lackluster volume.
While Monday was not a definitive buy signal, it does indicate it is time to watch closely for convincing price action indicating there is substance to this rally and time to move back into the market. Part of the goal of selling early is to move on and look for the next opportunity. If that opportunity presents itself this week, then we need to jump back in when the original bear thesis is violated. In the market, it is okay to be wrong, but it is suicidal to stay wrong.
A close higher in strong volume Tuesday would send a strong bullish sign. But on the other hand, lackluster volume and price action could signal the current bounce is running out of steam. My inclination is to believe the last couple days have been a bounce preceding a move lower, and the buy-the-dip crowd is about to run out of gas, but I am not stuck on this position and will be ready to get long when the bulls show they have control. But if we do move higher, I will still be cautious because we are on thin ice with such a long move behind us and a relatively high distribution count.
As always, stay safe and remember there will always be future profit opportunities, so don’t force a bad trade.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.