Stocks staged an impressive rebound off the 50dma on restrained volume. This was the second test of this widely followed moving average in the last couple weeks, but so far support is holding up.
Today’s gains caught shorts off guard as the obvious breakdown failed to breakdown. When the market doesn’t act as expected, we must reconsider our entire investment thesis. Bears are convinced this market is overly-bullish, but the contrarian trade isn’t about what we think, it’s about what other people think. Bears made the mistake of assuming strong prices means everyone is bullish, but what they really need to do is stop talking about how overly-bullish this market is and start listening to what everyone else is saying. When everyone says the market is overly-bullish, the exact opposite is true. People still want to debate me on this, but the inability for this correction to maintain downside momentum is a clear testament to just how bearish this market already is. The crowd was bearish, expected further weakness, sold ahead of it, there is no one left to sell, and we bounce on tight supply. Pretty textbook contrarian trade.
Any weakness fizzles at support showing there are few holders willing to sell. This keeps supply tight and prices strong. Expect shorts to keep getting squeezed over coming days, but don’t get greedy and take profits in the upper half of the 1600s. The market is likely entering a trading range between 1600 and 1700. Buy weakness, sell strength.
Watch for a failure to hold support because this means we ran out of buyers. This market will top like every one before it, so we must be prepared.
Holding above support gives us the green light to own this market, but only for a swing trade up to 1675. If this market fails to hold 1600, that will finally be a valid short entry with a tight stop above 1600.
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.