Breaking the logjam

By Jani Ziedins | Intraday Analysis

Nov 01

S&P500 daily at end of day

Nice rally in the market today, finally breaking us from the 1410 logjam.  But be careful of the bull trap and wait for further confirmation before plunging in.

MARKET BEHAVIOR

Nice upside breakout from the 1410 consolidation.  Who would have thought we simply needed a hurricane to flatten a quarter of this country in order to get the market rolling.  But the market is notorious for doing the least expected thing, and that is exactly what it did here.

Technically we are just under previous support at 1430 and we will know by tomorrow if this level has become resistance.  If not, we could smash through it and vault above the 50dma.

MARKET SENTIMENT

No doubt a lot of shorts got caught up in this rally and had to run for cover.  But that leaves us asking if there was real buying behind this pop or if it was mostly a short-squeeze?  What we need to see is follow on buying Friday to prove this is the real deal.

The jobs report will be the excuse for the market to move one-way or the other.  And honestly, regardless of the number, the market could run in either direction.  Obviously a big number means the economy is gaining strength and the market could rally.  A weak number demonstrates the opposite and could send the markets lower.  But a strong number could also tank the markets because it might mean an easy reelection for Obama and it gives an excuse for Bernanke to tighten the purse strings.  On the other side, a poor result could cause the market to rally because it improves Romney’s chances and will keep the spigot of easy money wide-open.

This means the market has a blank check Friday move in whatever direction it is most inclined.  If people want to buy, they will find the excuse to buy.  If they want to sell, they’ll have a reason to sell.  To get ahead, we need to figure out what the market’s mood is.  Do people want to own stocks here, or would they feel more comfortable watching from the sidelines?  Are they going to buy the jobs report, or sell it?

TRADING OPPORTUNITIES

Last week I mentioned the best way to humiliate everyone would be to trigger a short-squeeze before turning lower and falling under 1400.  We are halfway there with today’s short-squeeze.  The question remains if the market will turn around and head lower tomorrow.  It largely depends on if it will hurt more people to continue rallying or to reverse lower?  Since we are in the middle of a range, it is less clear.  The trend is lower, but the market is not selling off on bad news, which is bullish.

There are only a couple of trading days left before the election and no doubt the outcome will play a big role in the market’s psyche.  That easily could be the catalyst that leads to the next directional market move.

As I’ve shared before, I remain bullish over the medium term, but we could see some weakness over the next few days.  But either way, be on the lookout for the right point to buy stocks, not short them.  While I don’t have a lot of confidence in today’s rally, a couple more supportive days will be enough to win me over.  Even more attractive, a drop under 1400 makes for an easy buy point.  But please don’t short this market.  If we do turn lower, it will be just a dip before rebounding.  If you absolutely must lean into the market, be nimble and take your profits quickly.

Stay safe

If you found this post interesting, consider retweeting it on StockTwits.  You’d be amazed at how many additional people find this from each retweet.  And if you don’t have a lot of followers; discovering, tweeting, and retweeting interesting content is the best way to build a following.  Thanks, Jani

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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.