Stocks struggled for a second day. We opened higher, but slipped under 1620 by midday. Failing support set off a brief wave of stop-loss selling, but the market quickly regained its footing at 1615.
Stocks had another invitation to breakdown as we dipped under previous support, but arresting the slide so quickly shows there is not a lot of sellers with tight stops at levels. We are always looking for clues to what the market thinks and how it is positioned. Bouncing at 1597 last week, 1622 yesterday, and 1615 today shows there is little excess fuel to propel a major breakdown. Obviously any bull would like to see the market climb instead of consolidate, but recognizing the environment we are in makes it easier for us to identify the next high-probability trade.
An analogy is a prairie in the middle of fire season. Sometimes the fire danger is extreme, other times low, it all depends on the environment. At 1687 the fire danger was high because there were so many new buyers with weak resolve. The resulting 90-point selloff swept through the market and burned most of the excess brush. The ground is still smoking and we have dips like yesterday and today, but the fire danger is actually quite low simply because there is so little fuel left since most of it was consumed in the previous fire. Today’s and yesterday’s flare ups didn’t go anywhere because there was nothing left to burn.
Obviously the market is more opaque than a prairie, so we are only guessing on how much fuel is remaining, but seeing perfect selling opportunities stall shows there is not a lot left to catch fire. This doesn’t mean the risk is zero and we must always defend ourselves, but success in the markets comes from trading probabilities and right now a bounce is more likely than a continued selloff.
The rebound is struggling, but is not surprising given how nervous buyers are. The encouraging thing is holders continue holding these dips under support and shows they are committed to their positions. Continued selling seems unlikely and this is the safest place to own the market in over a month. Keep buying dips and selling rips.
No matter how resolute a trader appears, everyone has their breaking point and nothing crushes a holder’s will like seeing the price move against him. While current holders are comfortable with a 10 or 20-point selloff, anything bigger could unleash a new wave of selling. As long as we stick to our stops we will avoid getting caught up in the ensuing panic.
There is no reason to sit through this summer’s chop, but if someone is compelled to trade, the better position is long this market. The new low to watch is 1615 and major support is at 1600 and the 50dma. We need to be increasingly defensive under 1620, but at this point the risk reward does not work for shorting. Failure to hold support changes things and we will evaluate that situation if we get there.
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.