Is it too easy to buy this dip?
Believe it or not, this week’s 1% loss is the biggest weekly drop since the start of the year. That shows what a good first quarter we had and how easy it was to hold. Daily charts are full of noise and head fakes, but it is much harder for the market to hide its tracks in weekly charts. This is why they are such valuable tools for seeing what is really going on in the market.
Friday’s selloff bounced back and gave bulls something to calm their nerves. Every dip this year rebounded to new highs and obviously this one will too……or will it? It’s really easy to buy this dip and that’s what makes it feel so wrong. We are over four-months into this rally and even the most casual observer expects the market to keep going. And therein lies the problem.
To figure out where the market is going we need to understand what other traders are thinking and how they are positioned. Everyone long forgot about the worries and fears of three-months ago. It is amazing how calming and reassuring a strong market is. Most naysayers have long given up and joined the rally bandwagon. Even the worst employment report in nearly a year was glossed over after the market bounced off the lows. What does it all mean?
The rally bred complacency as every holder was rewarded for sitting through prior weakness. Anyone who sold a dip almost immediately regretted it and they won’t let the market fool them again. The steady climb higher sucked in most of the skeptics as fear of a selloff was replaced by fear of being left behind. At this point no one wants to sell because they are holding on for bigger profits. This lack of supply is a big reason volume has been so light the last few weeks.
Most rallies end in a double top or a head-and-shoulders. It is always easy to spot these months after the fact, but it is far more profitable to identify them in realtime. The market formed a potential left-shoulder in February and is working on the head right now. A dip back to, and bounce off of 1500 would form the right shoulder. There are no guarantees this is what we are seeing, but there are enough signs to be extremely cautious.
It’s been a great run since the start of the year and easy money for anyone with the courage to ignore the headlines. But that was then and this is now. Markets are the safest when they feel the most dangerous and most dangerous when they feel the safest. Every bounce brings us one step closer to the one that doesn’t bounce. While Friday’s dip might result in another bounce, that doesn’t make it a good trade. The risk/reward shifts dramatically the longer and higher this rally goes. What was easy money two-months ago is playing with fire here.
Anyone still in this market that cannot bring themselves to sell proactively needs to set hard stop-loss limits. We bounced off of 1538 on Friday and a second test of this level is unlikely to bounce again.
Friday’s selloff and March’s choppy trade cleared out many weak holders and could be setting the stage for a continuation. We need to recover 1560 and hold this level through mid-week to prove buyers are still willing to support this market near all-time highs.
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 has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees 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.