PM: Weakness persists

By Jani Ziedins | End of Day Analysis

Jun 12
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks gave up early gains and slipped to the 50dma on below average volume.

MARKET SENTIMENT
Holders were not rushing to sell as indicated by the low volume, meaning weakness was driven by lethargic demand.  Either we ran out of new buyers because everyone is fully invested, or prospective buyers are reluctant to buy this environment.  The 90-point slide from previous highs mitigated much of the over-bought conditions, making it unlikely the crowd is overly bullish and fully invested.  More likely this market suffers from reluctant demand due to pervasive expectation of further declines.

The biggest takeaway of the light volume is holders remain committed to this market and are not rushing for the exists at the first sign of trouble.  Crashes are driven by irrational panic and so far this selling is orderly and restrained.

TRADING OPPORTUNITIES
Expected Outcome:
We are still holding support and every dip remains buyable until we violate these key levels.  Orderly selling is a normal and healthy part of every rally.  Do not fear periodic weakness because it is how markets heads higher.  Traders remain on edge, but the longer we hold these levels, the more comfortable they will become, eventually leading to new buying.

Alternate Outcome:
I am just a few points away from being wrong.  While I still believe in this market, I must respect the price action.  We can easily break support and trigger an avalanche of stop-loss selling, sending us dramatically lower.  While still expect a bounce, I must honor my stops.  It is okay to be wrong, it is fatal to stay wrong.

Trading Plan:
We are at the lower end of the trading range making the market buyable with a tight stop under support.  A short should wait for the selloff to begin before picking a fight with this resilient bull.  And of course there is no reason to force a trade in this choppy market.  Often the best trade is cash.

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.

mark June 13, 2013

I think most of time your “analysis” is pretty good, but the last few weeks seems you have become part of the “herd”, You keep citing “pervasive bearishness”, BUT it seems that the majority view is that the pull back is just that a pull back, which means everyone is BULLISH ie looking to buy. Not many people expected a move to 1600, and even less people expect a significant drop lower, even from here. It seems that EVERYONE still is a dip buyer..
Obviously 1600 is now support, but it would not surprise me to see a final shake out down to 1575/1550 before the next up leg begins?

    Jani Ziedins June 13, 2013

    Entirely possible. There are always two sides to each market and no one has a monopoly on the truth. Your estimate of 1575/1550 is close enough to 1600 to largely be considered a similar trade since we both expect the market to bounce soon. Picking exact tops and bottoms is next to impossible and the best we can do is trade regions. Sometimes markets bounce above support, other times they dip under before rebounding.

    A different view is expecting the 5% decline is just the start of a bear market and we have at least another 250-point decline to go.

    As for my views on the market, I suggested taking profits in mid-May and looking for us to enter a trading range through the summer. I don’t believe a big correction is around the corner and the best trade is buying weakness and selling strength. So far its worked out fairly well.

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