Third day in a row we’ve flirted with the 50dma. As with everything in the markets, there are two ways to interpret this price action. Half the money in the market thinks we’ll head higher from here and the other half thinks we are headed lower. The market price is the exact balance point between these two points of view and it is always moving up or down from day-to-day or even minute to minute as traders change their minds. This is what moves the markets.
For the bulls, holding solid above the 50dma shows strong support at these levels as we are building a base to launch the next move higher. But for the bears, failing to bounce off of the 50dma in a meaningful way shows lack of conviction from buyers to sustain a rally from these levels. Both sides are exceptionally smart, savvy, and informed in their logic. That is what makes trading one of the most difficult ways to make a living in the entire world. We are attempting to outsmart and take money from people far smarter and better informed than we are. That is the brashness required to be a stock speculator, but this is the game we chose to play, so lets try to figure it out and see if we can get an edge on everyone else.
If we bounce off the 50dma, that will continue the pattern of higher lows, a very constructive and positive pattern showing strength and health in this market. But dropping a couple more points will trigger a wave of automatic selling at the 50dma, the July 12th low, 200dma, June 25th low, and 1300 level. There are a whole truckload of landmines waiting for investors between here and 1300. If we break through the 50dma, it could get ugly if we stumble into that minefield.
Three days hanging out near the 50dma concerns me because it shows a lack of follow-on buying that we’ve seen in recent sell-off recoveries. This could indicate we are not ready yet to bounce. IBD’s big picture is saying the market is in a correction and the conservative play is watching this unfold while sitting in cash. I don’t foresee a big crash, but we could have some weakness ahead. But this is a great thing for a CAN SLIM investor because it creates attractive prices for us to get in on some of the best quality stocks. The summer is wearing on and we are getting closer to the next rally, so start looking for stocks showing unusual strength in these summer doldrums. Many of these will be the next big stocks that show the best gains in the coming bull market.
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.