PM: A bullish reversal

By Jani Ziedins | Intraday Analysis

Jun 03
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
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.

MARKET SENTIMENT
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.

TRADING OPPORTUNITIES
Expected Outcome:
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.

Alternate Outcome
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.

Trading Plan:
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

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About the Author

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.

Susan Mayo June 4, 2013

Question: I enjoy your posts and wanted to know -using the stop at 1622, what etf or stock would be easy to know this with? SPY has a stock price. Could you explain where I get the info on the S&P number and how to put this on a stop in a certain stock. Thanks! Susan

    Jani Ziedins June 4, 2013

    This directly applies to the SPY and other parallel S&P500 ETFs, such as the leveraged or inverse S&P500 ETFs.

    For stocks, this is tangentially related because most stocks tend to move with the market, ie a rising tide lifts all boats. If the market falls into a correction, we are better off getting out of all our positions and buying back when the market recovers. Even strong stocks have a hard time resisting a weak market. As individual investors we have the option and luxury of sitting through market volatility and weakness in cash.

    I think the market will bounce here, but if we keep making lower highs and break support at 1622 and 1600, moving to cash is a defensive trade.

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