AM: 1400 bounce

By Jani Ziedins | Intraday Analysis

Dec 05

 

S&P500 daily at 12:57 EST

AM Update

Markets tried to selloff and no doubt hungry bears piled on the early weakness.  But just as quick, the market bounced off 1400 and sent late bears running for cover.  Did this rally correct enough to refresh itself and is resuming the uptrend, or was this simply a false bottom on our way lower?

MARKET BEHAVIOR

Wild early trade.  Markets opened higher, then slid through he first couple hours before bouncing off the 1400 level and jumping back to new highs.  AAPL was pounded and no doubt contributed to the index’s early weakness.  The market flirted with 1400, a level that provided support multiple times going all the way back to August, before surging back above 1410.  Is this another legitimate bounce off 1400, or just a fake rally to suck in premature bottom-pickers and flush out aggressive shorts?

MARKET SENTIMENT

Last week everything was looking up and now everything is falling apart.  It is maddening how the market switches personalities like this, unless you understand how the market works and then these swings become profit opportunities.  As anyone who has been reading this blog for a while knows, we try to get ahead of these moves, not whipped around by them.

Everyone gets to contribute their ideas about what the market does, and they do this by buying or selling stocks.  But unlike the traditional one-person one-vote, in the markets some people’s opinions count a lot more due to the size of their trading account.  But the interesting thing about voting in the stock market, once you place your vote, you no longer have a say and are just along for the ride until you buy or sell more shares.  It is this ‘along for the ride’ period where interesting things happen.

This phenomenon was on display the last few weeks.  The markets sold off hard after Obama’s reelection as a mass of disappointed Republicans voted with their money and pulled out of the market in droves.  But after a certain point all these disappointed Republicans sold and they were no longer influencing the market’s direction.  At this point other investors saw an opportunity to buy heavily discounted shares on the heels of an emotional selloff.  These new buyers poured money into stocks, but after a couple of weeks they also ran out of money and after all the buyers bought, demand dries up and markets fall under their own weight.

While it seems like the market is changing personalities, it is simply reflecting the opinions of the traders actively buying or selling at that moment in time.  Recognizing what actually makes the markets move brings you one step closer to figuring out how to win at this game.

TRADING OPPORTUNITIES

Selling has modest to this point and we’ll most likely continue lower until we drop where it rattles some of the more confident traders.  But expect the market to saw tooth its way lower as bottom pickers and late shorts create these rallies.

Of course the market can go either direction and regaining and holding above the 50dma would signal this rally is back on.  We have the November employment report this Friday and that might be the catalyst to nudge the market one direction of the other.  Since we have rallied strongly the last couple weeks, expect and upside move to be more limited than a move lower that still has lots of room to run.

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.