PM: Another leg down

By Jani Ziedins | End of Day Analysis

Jun 05
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks continue sliding, down three of the last four trading sessions and are 80-points off the high set a couple of weeks ago.  The market closed just above support at 1600, the 50-dma, and the lower trend-line of the uptrend.  Is this the place for another routine bounce off of support, or is this the start of something bigger?

MARKET SENTIMENT
What goes up must come down.  This is the pullback everyone was waiting for, but now they are scared and predicting market crashes.  This is how it usually goes, we hope and pray for something, but when it happens we are too afraid to act.  People who wanted the market to pullback so they could buy more, are panicking and selling with the crowd instead.  But that is the way it has to be.  If this were easy, everyone would be rich and we clearly know that’s not the case.

From here the market can do one of three things, bounce off of support at 1600, dip under 1600 and trigger one last wave of stop-loss selling before rebounding, or continue the relentless slide lower.  It really comes down to the dynamic between buyers and sellers.  Will we exhaust the supply of holders easily spooked into selling for a discount?  Will prices become so attractive value buyers can no longer resist?  Better or worse we will have our answer in a couple of days.

For all the talk of doom-and-gloom we are only 5% off all time highs.  Obviously every 50% collapse starts with that first 5%, but not every 5% pullback leads to a 50% collapse.

TRADING OPPORTUNITIES
Expected Outcome:
Stocks are still a few point above support and we must assume the market will bounce until it proves otherwise.  The challenge with trading technical levels is they are better drawn with a crayon than a straight edge.  Sometimes we bounce early, sometimes late.  Each trader needs to pick a stop-loss level that balances their tolerance for risk versus desire to avoid getting shaken out.

Even if the market is topping, expect either a doubt-top or saw-tooth decline with multiple short-squeezes and sucker’s rallies along the way.  Bull or bear, look for the market to bounce in the near future.  The only thing up for debate is how sustainable the subsequent rebound is.

The most encouraging thing about all this selling is it is pricing in the end of QE.  Once we work through this episode, we no longer need to worry about it.

Alternate Outcome:
Markets are notorious for overshooting on both the low and high side.  This market will pullback like everyone before it and this easily could be the start of that move.  If nothing else, use stop-losses as a last line of defense.

Trading Plan:
There is no reason we need to be in this market.  The mistake many traders make is feeling compelled to always have a trade on, but most of the time that is when they give back all their hard-earned profits.  Making money in the markets is easy, the hard part is keeping it.  The ambitious can look for a buyable bounce off of support on Thursday with a tight stop under recent lows.

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.

LT June 6, 2013

Great article Jani as always. I think personally we are now in a trend downward but as you said in a zig zag up and down but a downward trend never the less. With how things look globally and economically its time for the market to correct however it will and bring it back to sanity based on fundamentals not a QE juiced up market.

    Jani Ziedins June 6, 2013

    That’s what common sense says, but the market and common sense are like oil and water. All we can do it follow the market’s lead, but no matter what I expect trade will be choppy.

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