The market continues trading sideways for a third day. This demonstrates strength since we are at the top of the obvious trading range and many technical traders are expect a pullback. Holding strong in the face of that expectation means there is support behind this market and we could see a breakout to the upside. Many swing traders are shorting the market in anticipation of a pullback, but the market is refusing to budge. Any positive news will have these shorts rushing to cover and the market will surge higher due to their buying.
The big news events on tap are comments from the Fed on Wednesday and the ECB on Thursday, but we shouldn’t expect anything surprising form either of these. They both know the market is on egg shells and will be very careful with every word because saying one wrong word will crater the markets and make their jobs even more difficult.
The market has traded withing a tight 40-point ascending channel since May, but we should be prepared for the market change its character soon since patterns usually change after they become obvious to everyone. We are already seeing a slight change with this three-days of tight trade after a run up. Past rallies reversed quickly, so by that measure we have already broken part of the pattern. The other interesting thing to note is that over the last few months sideways trade always preceded a move higher. This sideways consolidation could be building a base for another leg of this rally.
Plan A: Both market sentiment and personality indicate there is more upside left in this rally. At the very least a swing trader should be reluctant to short the market here. The more adventurous should be buying these strong breakouts in leading stocks.
Plan B: While a move higher seems more probably the way the market is setting up, an unexpected news event could sent the market sharply lower and paranoid holders will run for the exits and bears will pile on the shorts. Given the strong potential for a move higher, any weakness will invalidate this thesis and we should then look for a market breakdown and an extended move to the lower end of the range.
In the markets no one can know for certain what will happen next. The best way to approach this uncertainty is to have a multiple plans ready for various outcomes and always be prepared for whatever the market gives you. In addition, anticipating multiple outcomes helps mitigate the dangerous tunnel vision that occurs when a person spends too much time thinking about a single outcome.
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.