Don’t fight the market…..yet

By Jani Ziedins | Intraday Analysis

Sep 12

S&P500 daily @ 3:15 EDT

The stalemate between bulls and bears continues for the 4th day.  So far the pattern over the last couple months has been strong up-days followed by consolidation leading to another sharp move higher.  This remains intact and bears who are shorting the rally are fighting the market.  A trend is far more likely to continue than reverse, so stick with what is working until it stops.

MARKET SENTIMENT

Stocks rallied at the open on a German court ruling upholding Euro bailouts.  This was the most recent headline that was supposed to make-or-break the markets.  But just minutes after the announcement, it was ancient history and the market is already obsessing over the next major news event.  This time the focus is back to the US and our Fed.  And after that it will be something else.  The market is a perpetual worry machine and the cycle of fear over the next news cycle, political speech, or data point is never-ending.  In many ways you have to be an optimist to invest in stocks otherwise all the fear mongering will drive you crazy.

After the strong open, stocks gave back those gains and traded down to break-even, but then rebounded just as quickly.  The market is indecisive again and the staring contest between bulls and bears is back.  But from my view, the skew of reluctant bulls and aggressive bears is still evident, although moderating some as the rally continues.  A trickle of reluctant money is finally dripping back into the markets.  The sign the spigot is flowing will be a steady increase in prices, but we’re not there yet as these sideways standoffs continue.

Supply and demand dynamics work in such a way it is often best to go against crowd.  This happens because the crowd already did their buying or selling according to their views and at that point are simply along for the ride.  When everyone is convinced we are headed higher, there will be few buyers remaining to drive prices higher because the larger bullish crowd is already fully invested.  And in fact, the large crowd fully invested creates the potential for a lot of selling pressure.  Crows create fuel for a move in the opposite direction and that is why contrarian investing works so well.  And always remember, contrarian trading is going against the crowd.  Too often people mistake contrarian trading as going against the trend.  What these people miss is often the real contrarian trade is going with the trend when everyone is doubting the sustainability, like where we find ourselves today.

MARKET BEHAVIOR

We are continuing the consolidation after Thursday’s surge higher.  The pattern still remains large steps higher followed by tight sideways trade.  Often the market breaks down sharply after an unsustainable breakout, but the last four days at the 1430 level show many investors are comfortable buying and supporting the market up here.

Sideways to slightly lower consolidation is a healthy part of moving higher and demonstrates there is plenty of fuel left in the tank.  What we need to watch for is breaking of support in a dramatic way, or alternately wedging higher.  Either of these will indicate  a new market personality coming out.

TRADING OPPORTUNITIES

Stay long the names that are working.  But do be careful of extended stocks too far above their 50dma and 200dma.  It is exciting to see a stock race for the moon, but eventually gravity will catch up.  FRAN, TFM, UNFI, and MLNX are just a handful of examples where high-flying stocks have been knocked back to their 50dam.  Remember, the goal of trading isn’t to own the best stocks, it is to make money.  Take worthwhile profits and move on.

INDIVIDUAL STOCKS

The big single stock story of the day was AAPL’s iPhone5 announcement.  The stock hardly budged after the announcement.  Seems the phone was exactly in line with what the market expected, mostly because the new phone matched the leaked photos.  Now the question is how customers will respond when it starts selling in just over a week.

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.