Markets opened slightly lower Thursday morning. There was news, some of it good, some of it bad, some of it indifferent. But there is news every day; what matters to us is how other people trade. We’ve had a steep run the last three days and obviously that can’t continue indefinitely. Today seems to be the day the market pauses to catch it’s breath. But where do we go from here?
We are a few points from an upside breakout, or we are a few points from the ceiling of a trading range, or we are peaking before a correction. Up, down, or sideways. How insightful of me. But we have to look at the ammunition each side has so we can determine which outcome is more likely than the others. Trading with the odds in our favor is how we make money in this game.
Is there fuel for a move higher? A lot of bulls are invested, so we need to get other people to buy into this market to continue the move higher. Are the undecided ready to commit? Are the bears ready to give up and go long? We’ve had a good move higher and a lot of the undecided have already committed to this market. The recent short squeeze flushed out a lot of bears. So who is left to prop up this market?
On the other side, bears have been getting killed and many have given up. They might not believe in this rally, but they can’t stomach getting in the way of this steamroller rally any longer. The recent three-day short-squeeze flushed out another handful of bears. There is a market saying, don’t fight the tape and I expect many undecided and bears are being won over by the strength of this market regardless of the fundamentals and headlines.
Looking at those, it seems like there is more long bias in the market than short bias. We are not at extreme levels that skew the probabilities clearly one way or the other, but there seems to be more slightly fuel for a move lower. But on the other side of the equation, momentum is higher and often these things go further and last longer than most people expect. This is because many people wait for that pullback, so the buying is initially restrained, but these tardy traders start buying every dip and that props up the market for an extended period of time.
What I’m really saying is momentum is higher, but sentiment is setting up for a move lower. Momentum can carry us for a bit longer, but that just skews the sentiment imbalance even more. This is how the markets work. Tide comes in, tide goes out. Markets go up, markets go down.
Start looking for longs to lock in profits on and watch for weakness to short. Don’t get in front of this steamroller by trying to pick a top, but if weakness forms, jump on the short and ride it through the 50dma.
I will be traveling and won’t be able to post on Friday. Have a nice weekend.
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.