Market trades flat after two-day rally

By Jani Ziedins | Intraday Analysis

Jul 30

I’m trying a new layout for these blog posts where I break it down into sections of Market Sentiment, Market Personality, Trading Opportunities, and Other Thoughts.

MARKET SENTIMENT

The markets opened higher this morning, but gave back those gains and traded slightly in the red for the rest of the morning.  Who knows what the news was, but it really doesn’t matter because the crowd is moving the markets, not the news.  Thursday and Friday’s strong rallies ran off all the bears in a powerful short squeeze.  Friday exceeded July 19th’s high, marking yet another higher-high.  You could see the last of the bears covering their shorts in the intraday chart as we surged higher after breaking through the previous high of 1380. These were the last of the weak-kneed bears running for cover.

With most of the bears already run out of the market over the last couple days, that source of enthusiastic buying will dry up.  To continue higher we’ll need bulls to step up and commit fresh capital at these levels.

On Friday IBD said the market started a new confirmed uptrend given Thursday’s powerful rally.  The interesting thing was reading the article’s reader comments to yet another change in the market pulse.  As I stated earlier, the harder it is to buy a breakout, the more likely it is to succeed.   Everyone was buying the earlier breakouts and they failed.  But here we are countless failed breakouts later on both the low and high side, and both bulls and bears are getting highly cynical and reluctant to be fooled yet again.  But the ironic thing is these breakouts going forward are far more likely to work than the earlier ones everyone was excited about.

MARKET PERSONALITY

The market has inched higher in a series of higher-lows and higher-highs.  While the ups and downs felt dramatic, the upward channel we’ve been tracing is only 40 points wide.  So far the best trade has been going against the market each time it reaches the upper or lower bounds of this channel.  But we are now working on our 5th swing in this channel and this pattern is becoming obvious to even the most inexperienced traders.  The market doesn’t like being obvious and chances are we are getting close to a change in personality, most likely represented by a breakout above or below the channel lines.

TRADING OPPORTUNITIES

If we are getting close to a change in market personality, that will create better trading opportunities than the 40 point chop we’ve been stuck in since mid-May.  The big question is which way will the market breakout, to the upside or the downside?  But as nimble traders, we can wait for the market to tell us before we commit our capital.

Plan A:  Being so close to a 52week high means there is a lot of air underneath us if some bad news comes along and surprises the market.  Most likely this will be a breakdown in the cooperation between the various European leaders trying to salvage the Euro.  A move lower could see a break under the 50dma, 200dma, 1300, and even June 4ths low of 1266.  Obviously this would be a bad time to be long stock, so it is a situation to be wary of.

Plan B:  The market could continue rallying in the face of all the uncertainty in the world.  In situations like this, it is said the markets climb a “wall of worry”.  This is because the markets are forward-looking in nature and are anticipating a positive resolution to the current crises.   It is this slow transition from a large group of worry-worts to a more positive outlook as the group slowly realizes the worst will not happen and bears turn to bulls one and two at a time. It is this slow transition from bears to bulls that causes the markets to rally.

Plan A & B are the two potential outcomes we need to anticipate and prepare to trade whichever one plays out.  We don’t know what the market will do next, but we can have a plan ready and jump on board the next trend.

OTHER THOUGHTS

Seems I struck a nerve with my criticism of gurus and systems.  The thing we need to remember is it doesn’t matter how much money WON makes in the markets, but how much money his students make.  If we are following his system, we need to evaluate the success of other followers in order to understand the capability of the system and the probability of our own success.  WON could very well have a 6th sense about the markets that lets him achieve all his success, but if he can’t teach that same intuition to his students, everyone else will fail to reach his same level of success no matter how closely they follow the system.

As always, stay safe

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. 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 manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, 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 young children.