The market staged a positive reversal after falling to 1622 in early trade. Volume was well above average as the morning dip flushed out another round of stop-losses.
While it is premature to say this bounce is the real deal, it clearly overcame early weakness and prevented it from cascading into wider selling. Bears had the perfect setup and failed to deliver for the umpteenth time. Early stop-loss selling quickly fizzled and didn’t spread because most of the potential sellers sold last week.
Success in the market is not found in the charts or the fundamentals, but understanding what people think and how they are positioned. Many traders anticipated a correction and bailed at the first signs of weakness. This lead to steep declines on the 22nd and last Friday, but all that selling consumed the bulk of available supply, meaning there was little downside left. When we run out of sellers there is nowhere to go but up.
Most of the nervous selling is behind us, so expect the market to continue rallying on tight supply. This will lead to a near-term short-squeeze as aggressive bears are forced to cover, but the wider pool of buyers remain nervous, so don’t expect them to climb over each other to continue pushing this market higher. Buy strength and sell weakness until the market indicates it is ready for the next directional move.
Further weakness and undercutting 1622 invalidates the thesis most weak hands are already out of the market. The next key level is 1600 and failing to hold that puts the rally in jeopardy.
The dip is buyable with a stop under 1622. Look to take profits near the previous highs as the market stays range bound through summer. Seeing the market break 1600 on the low side or 1700 on the high side means the market is ready for its next directional move and we will trade that when 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.