Building the foundation for a move higher

By Jani Ziedins | Intraday Analysis

Sep 19

S&P500 daily @ 3:11 EDT

Stocks hold the 1460 level for the 4th day, showing solid support for this price level.  Most selloffs after an unsustainable rally happen quickly and dramatically in the day or two following.  That is not happening here and the market is building a foundation for another move higher.  Any masochists still shorting the market are going to get smacked around again.

MARKET BEHAVIOR

Indexes are treading water around 1460.  The anticipated mass exodus has yet to appear and the price-action is supportive of these levels in spite of all the “experts” predicting a move lower.    Looking back at previous selloffs this summer, they started quickly and decisively after marking a new high.  This pause at 1460 shows buying is not drying up and selling isn’t flooding the market.

MARKET SENTIMENT

Bears still think the market should head lower, but they have been burned several times and are becoming more reluctant to stick their neck out and fight this rally.  Some bears are beginning to question their resolve and are finally warming up to the bull side.  But this shift in sentiment is just starting and has a way to go before it gets overdone.

The recent short covering and increasing reluctant to fight the tape means the spring is less compressed.  Upside short-squeezes won’t be nearly as pronounced or dramatic as we’ve experienced over the last few months.  Most of the fast money on the upside has already been made and we are transiting to a grind higher mode.  Former bears and reluctant buyers will start dribbling into the markets and buying every dip, putting a solid floor under the market.  From a supply and demand point of view, this new buying and decreased selling is the recipe for a move higher.

We’re not there yet, but the rally will get to a point where it is so slow and steady traders become complacent.  And that of course is the foundation necessary for a reversal lower, but that is still a ways out and we’ll cross that bridge when we get there.

TRADING OPPORTUNITIES

It is getting harder to find new breakouts as most of the strongest stocks already made their move and are becoming extended.  The most powerful stocks tend to make their move early in a rally and late breakouts often don’t perform as well.  If you find yourself underinvested, don’t chase, wait for a pullback to the 50dma and buy the high volume bounce.  Being smart about your buy and don’t be the sucker left holding the bag when the party ends by.  Money is made by buying right.  If you missed this, don’t fret; there will always be future profit opportunities.  The one thing you don’t want to do is put yourself in a precarious situation by chasing stocks because while there will always be future profit opportunities, losses are forever.

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.