Stocks bounced between 1600 and 1615 as the market searches for its next move. We are currently stuck in the middle of support at 1600 and resistance at the 50dma. Since both are widely followed levels, watch for a wave of breakout/breakdown trading when we move out of this range.
Trading sideways at first glance looks like a draw between bulls and bears, but in reality, stemming the selloff and holding recent gains is supportive of this market. Selloffs are swift and rallies grind higher. Trading sideways following recent gains is grinding and more consistent with a continuation than a breakdown.
Why did we bounce? Most will point to comments by policy makers, but the only time words move markets is when they change people’s minds. Remember, prices only move when people buy and sell, and people only buy and sell when they change their mind. The question we must ask ourselves is if recent comments from Fed members changed OUR mind and outlook? I expect most who were bears last week remain bears, and bulls are still bulls here. The market didn’t bounce because someone reassured us, it bounced because after the emotional panic selling exhausted itself, no one else was changing their mind and we returned to equilibrium.
This is a difficult concept for many to grasp because it is so different from how we were taught to trade the markets. We crave logical reasons behind market moves. We want to read the news and understand right away how it will affect the market. We want to see the market break key technical levels, setting up an easy momentum trade. But any experienced trader knows the market doesn’t move reliably on technical or fundamental indicators. That’s because the only thing that changes prices is buying and selling. Nothing more, nothing less. Focus on what people think and how they are positioned. From there it is easier to understand these seemingly irrational moves. Focus on the crowd and the pieces start falling together.
The selloff fizzled and bounced because we ran out of sellers in what remains an overly-bearish market. If it was as overly-bullish as most claim, we’d still be falling. And beyond the price action, there is other evidence showing just how bearish the market remains. A poll on Yahoo Finance today shows 64% of respondents are either out of the market or selling here, while just a third is putting money to work here. People claiming this market is overly-bullish are a dime-a-dozen while it remains difficult to find a real bull in the flesh.
While this market isn’t overly-bullish, we could still collapse on lack of buyer confidence. From there, emotion and panic consumes previously confident holders and they rush for the exits. We saw that last week and could go through round two next week. No one has a crystal ball and even the best often get it wrong. The only thing that protects us from the emotional turmoil is our discipline and stops.
There are several ways to trade this market here. A bull can buy and hold the break above 1600 with a tight stop under this level. The bear should short falling to reclaim 1620 with a stop slightly above it. The swing trader could lock in profits and wait for the break above 1620 or below 1600. No matter what way we come at this market, expect volatility to continue and buy strength and sell weakness. Keep taking profits early and often because they will likely evaporate days later.
Of course the easiest trade here is avoiding the summer chop all together. We don’t need to participate in every market and too often we give back all our profits when we force trades in volatile markets.
The big trade of the day is BBRY‘s collapse. I haven’t followed the stock closely, but I know it is a cult favorite and routinely challenges AAPL for the most tweeted stock on StockTwits. The concern I have for any BBRY holders just how stubbornly bullish they remain. Reading the $BBRY stream on StockTwits, it is really hard to find anyone with a negative outlook. Everyone claims this is an overreaction that will bounce. Others say new products are just around the corner and ready to make the stock surge. But all I see is unbridled hope and optimism. Where are the pragmatists? Where are the doubters? And to back up my observations, StockTwits sentiment indicator shows their users are 91% bullish and only 9% bearish. I don’t recall ever seeing any other stock’s readings so heavily skewed and helps explain today’s 28% plunge. One of the more insightful posts, even thought it was from a raging bull, said this stock will either go to $50 or $0. Well, today’s price action is likely telling us which one. Stay away from stocks everyone loves because that means there is no one left to buy.
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.