The zig-zag continues as we rebound from yesterday’s selloff.
It’s becoming clear neither side has control over this market as each directional move stalls and reverses. Markets only rise and fall when people buy and sell stocks, and people only buy or sell stocks when they change their mind. Right now bulls are confident in their positions, bears know we are over-valued, and everyone is waiting for the market to do what they think it should. When everyone stands around, markets trade sideways because no one is changing their mind. To get things moving again we need to spook bulls out of their positions or make bears fear being left out of a risking market. Will this stubborn standoff continue through summer? Only time will tell.
All this talk of QE ending is diminishing the impact of the actual announcement and eventual money tightening. Everyone remembers what a disaster Y2K was, right? While we can joke about it now, it was a serious matter at the time, but the reason it was a non-event is because everyone talked about it, feared it, and ultimately prepared for it. When everyone is adequately prepared for something, it passes without an issue. The more people talk about and fear the ending QE, the sooner we can ignore it. People trade their outlook and expectations. If traders fear the end of QE, they will move out of the market and that QE driven selling will be long behind us by the time it is actually announced. In fact it will likely lead to a sell the rumor, buy the news event. How crazy will it be if markets rally on the ending of QE? Crazy enough to work.
Until one side changes its mind, expect stocks to trade sideways as both bulls and bears stubbornly stick to their outlook. The market is incapable of standing perfectly still, so expect some up and down gyrations, but this is a swing-trader’s paradise; buy weakness and sell strength.
No one knows what the market will do and we simply trade probabilities. To protect ourselves we will watch for breakouts or breakdowns that show the market is ready for its next directional move.
Markets move sideways most of the time and that is what we should expect here. We need a rest after a strong directional move and the widespread expectation of a pullback mean mutes the downside risk. At this point, plan on buying weakness and selling strength until we make a decisive break either direction. Lower support is back at 1600 and sticking with round numbers, expect 1700 to act as overhead resistance. Breaking either of these levels forces us to evaluate the potential of a new directional move.
Plan your trade; trade your plan
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.