After some reluctance yesterday, the market finally reclaimed the 1400 level. There is more psychological significance to this round number than anything else, but since the market is all about what other traders think, it is just as important as any other technical level. Back in the spring the rally stalled out after hitting the 1400 level in March and late April. But the market often works in forward steps and retracements; ie two steps forward, one step back. If that is the case here, then we have the opportunity to hold and then move past 1400.
The low volume continues to show a lack of support by major players, but if these big money guys are wrong, their performance will suffer and they will have to chase the market this Fall. This desperation to catch the market will lead to big money buying regardless of price or fundamentals. Remember, the market tries to humiliate the greatest number of traders at any given time. With the abundance of bearishness and skepticism, it is little wonder why the market is rallying.
The reason the market moves opposite of the crowd is because the crowd has already made their move, either buying or selling, and are now simply along for the ride. All the bears are out of the market, or short, and if all their selling couldn’t push the market lower, then there is good support and it will rally once the bears have completed all their selling. And that is what we are seeing here. The bears and swing traders have leaned on this market with all their strength to no avail. So even though bears out number bulls, the bears are exhausted and have little left continue the fight.
Today’s rally above 1400 is pushing us through the upper end of the summer trading channel. This is showing another break of pattern. There have been a number of hints at a changing character, meaning we need to keep our eyes peeled for what comes next. The best way to profit in the market is to identify and trade new trends early while they still work. It is too early to identify a new pattern because we are in the middle of the transition, but we can use sentiment and history to guess at what is ahead.
Summer is typically listless and we get more directional moves in the Fall as all the senior traders come back from vacation and get serious about meeting year-end performance benchmarks. And lets not forget Fall is a popular time for major market sell-offs. At this point we could go either way, but we should expect some movement out of this trading channel. This should be good news for most breakout traders who have been getting jerked around by this summers volatility.
The best opportunities continue being on the long side as many leading stocks are breaking out or finishing their bases. We are still late in a bull market so don’t be expecting everything to double and triple. Most of the time take your 20% gain and move on except in the most rare of circumstances where a stock is showing exceptional strength. If we see a rally, it will probably peter out late in the year after the election and Euro stabilization are priced in. Remember, bulls make money, bears make money, and pigs get slaughtered. We’re in this to make money, so always be prepared to take your worthwhile profits.
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.