The first week of the second quarter gave us our first real taste of selling in 2013. Is this a preview of things to come?
Stocks stumbled into the biggest loss of the year. For all practical purposes this was the only losing week since the two prior ‘down’ weeks ended essentially flat.
We follow weekly charts because they filter out the daily noise, allowing us to see what is really going on. The first quarter saw a relentless march higher with very little selling as pessimists were scrambling to catch up. The first week of the second quarter is the only real selling since December. One week doesn’t make a trend, but we need to watch for a shifting mood because market personalities often change from quarter to quarter.
Friday’s gap at the open was a wakeup call, but bulls were placated by the intraday rebound. The smart move was sitting through every other dip this year and holders were sticking with what they know. The problem is every dip bounces until it doesn’t.
The thing about dips is the early ones bounce. This is when everyone doubts the sustainability of the young rally and cynics are resisting the temptation to chase. Ironically this pessimism is what fuels the rebound and continuation higher. But the later we go in the rally, the more the sentiment changes. Rather than calling for a pullback, everyone is rushing to buy the dip. This is what happened on Friday. The obvious rebound was obvious, and as any veteran traders knows, the obvious things rarely work.
Without a doubt we could continue higher here. There are no absolutes in the market, only probabilities. The longer this market lasts and the higher it goes, the safer it feels, but the riskier it becomes. The best times to buy are after a big selloff and the worst time to hold is after a huge run.
To prove itself, the market needs to reclaim 1560 and hold it through Wednesday. While the market might bounce early in the week from continued dip-buying, if this support dries up by mid-week, it shows bulls are running on empty and lower prices are likely.
If the market holds support and traders continue buying at these levels, look for a surge higher, finally taking out the all-time high at 1576. This is a show-me story. Don’t get sucked into buying the obvious dip until after it demonstrates real demand from buyers at these levels. It is better to be a little late than a lot sorry.
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.