The market stumbled lower and undercut recent support at 1620. The next major level for bulls to defend is 1600.
We slide as buyers stay away and stop-losses trigger under widely followed support levels. The pain trade is clearly on for late buyers of the recent rally. There is no obvious headline driving the decline, but we know headlines are only loosely related to market moves. Traders are afraid to buy and the continued slide is forcing out weaker holders. When that happens, it doesn’t matter what the headlines say.
Recent weakness shows the value of selling into strength and taking profits. We are in this to make money and the only way to do that is selling our winners. It also highlights the risks of chasing a strong market. The best trade is often the hardest trade. That means selling an invincible stock and buying when everyone is convinced things are collapsing.
I still don’t believe in the selloff, but that’s what stops are for. At some point the rally will bounce because they always do, the only question is if it is a real rebound or bull-trap. As we discussed through May, a pullback following such strength is normal and healthy. 1600 has long been the line in the sand and retreating to this level is not alarming. How the market responds here lets us know what comes next.
The market is down nearly 5% from recent highs and that qualifies as a refreshing pullback. It is reasonable for the market to enter a trading range for the remainder of summer.
No matter what we think, we must respect and follow our stops. It is better to be out of the market wishing we were in, than in the market wishing we were out. Buyers remain reluctant to jump in and buy the dip. The longer they withhold their support, the further we slide.
Assume the rally is intact until we violate 1600. If the market falls under our stops, we must sell, no questions asked. It is easier to buy back in if we get out prematurely than it is to recover mounting losses by sticking around too long. As always, if we don’t feel comfortable, stay out of the market. It is easy to make money in the markets, the hard part is keeping it. Don’t force bad trades.
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.