Really strong rally on the abbreviated, post-Thanks Giving trading session. Obviously volume was ridiculously light, but it was real money exchanging hands and low volume profits are just as real as their higher volume counterparts.
I didn’t expect today’s strong rally, but at the same time it didn’t surprise me either. The press is attributing it to strong Black Friday sales, but that is baloney. All of the decision makers were out of the office and today’s trade was nothing more than tripping autopilot buy orders. Most of them were stop-losses from shorts, but there were also some breakout buying as we easily cleared resistance at 1400. But rather than traders sitting in front to their screens making decisions to buy or sell, last week traders placed tripwires above and below the market as a risk management technique to prevent them from being caught with their pants down while they were on vacation.
The thing we have to be wary of with today’s trade is people are not as committed to these gains because most didn’t actively chose to buy these levels. Instead it was automated risk management that triggered this pop. Shorts were protecting against larger losses and longs were buying the breakout so they don’t risk being left behind.
This setup makes for an awfully fragile rally and we covered a ton of ground in five trading sessions. There is no way the rate of this rally, mostly driven by a short squeezes, can continue. The point of maximum pain for shorts is where the market will peak and turn lower. Decisively breaking 1,400 could be that point. Or we could regain all the post-election selloff and test the 50dma to fully humiliate bears before turning lower. But either way we are far closer to the end of this thing than the start.
Longs should lighten up after this strong run. It is possible we’ll see a little follow-on buying when the market opens on Monday, but the smart money is taking profits here, not buying the breakout. The goal isn’t to top tick the market, but to make the easy money and let someone else shoot themselves in the foot by holding too long. We’re currently in a swing trader’s market as the pendulum swings back and forth between bears and bulls. Expect some turbulence in the near-term intended to demoralize both bears and bulls before the market finally reveals its true intentions.
I expect a continuation of the current bull market because there is nothing new and unexpected lying in front of us. It is the fear of the known, not the unknown, that presents the best profit opportunities for the savvy trader. Everyone already knows about the Fiscal Cliff, Debt Ceiling, European Debt Crisis, Middle East conflicts, and slowing China. The fact that everyone is already talking about, even obsessing about these issues means we can safely ignore them. Their fear is our profit opportunity and it is the crowd’s reluctance to buy that creates the asymmetric trade.
For the time being, lock-in swing trading profits and anticipate for the impending pullback. But over the medium term, plan for an upside breakout from this consolidation.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. 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 engineering at Fortune 500 companies, small business consulting, 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 children.