Pause at 50dma giving false sense of support

By Jani Ziedins | Intraday Analysis

Oct 13

S&P500 daily at end of day

The trend lower continues and we are now sitting on the 50dma.  But the selling isn’t done because we haven’t had the high volume down-day yet.  Complacent holders are still holding and we need to shake them out before the uptrend can resume.

MARKET BEHAVIOR

Bottom-pickers keep lifting the market at the open, but follow-on buying never materialized and prices declined through the day.  This is the 6th day in a row the markets finished near the bottom of the day’s range.  We are sitting on the 50dma and just under prior support at 1430.  So far this decline has not triggered an avalanche of automatic sell-orders, but that day is close if we fall much further.

There are clamors of double-top or double-bottom depending on who is speaking.  One will be right and one will be wrong.  Unless of course both are wrong.  Or both are right.  Funny how that works.  In the market timing is everything and in cases like this, both a bull and a bear can make money depending savvy entry and exit.  The short-term trend is lower and the intermediate and longer-term trends are higher.  If all three of these trends remain intact, we have a little left on the downside, but will resume the uptrend shortly.

MARKET SENTIMENT

Any bull should be hoping for a panic moment in the market that triggers a flurry of selling and shorting.  All that selling creates the fuel necessary for the next rally.   Without that frightful plunge forcing participants out of the market, there will be far fewer buyers available to push prices higher and most likely that weaker rally will fizzle, returning to these levels where it will finally plunge and create that fuel necessary for the real rebound.

No matter what anyone says, the markets operate strictly on supply and demand.  After a purge of sellers, the number of available sellers dries up and with and increased number of people out of the market, the quantity of available buyers goes up.  Low supply and high demand.  That is the recipe for increasing prices.

Of course this is just one possible outcome, but it plays out time and time again.   If you are bullish and want to see a sustainable rally, start rooting for confidence shattering down-day.

TRADING OPPORTUNITIES

Shorts should start to cover and longs should look for entry points.  But remember, buy late and sell early.  That is the key to making money in the markets and sleeping at nights.  Anyone who sold strength over the last couple weeks is confidently waiting for the next buying opportunity.  Anyone who held too long is nervous, wondering if the bounce will happen or if they should sell before all their profits disappear.  Do the smart thing and always take the easy way out for your sanity’s sake.   We’re in this to make money, not own stocks.

Stay safe

Follow

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.