Stocks closed in the red, but held yesterday’s low of 1622 and finished above the intraday lows. Volume was above average, but off of the elevated levels seen on Friday and yesterday.
Holding 1620 through Wednesday’s close shows sellers just don’t have what it takes to push this market any lower. No matter what anyone says about too-far, too-fast, overbought, overly-bullish, etc, this market remains cautious, hesitant, even bearish. The most common mistake people make is assuming the trend represents popular sentiment, but in fact they have it exactly backwards. Sustained trends are only possible when the crowd expects the opposite will happen; overly-bearish markets rally and overly-bullish markets slide.
The only reason the current market rallied this long and far is because of how overly-bearish it was following Obama’s reelection and the impending Fiscal Cliff. Even seven-months and 350-points later it refuses to breakdown because people still don’t trust it. StockTwits maintains a sentiment indicator and right now users are 68% bearish and only 32% bullish. That is anything but overly-bullish. Over the last two-months the indicator has only been above 50% for a couple of days, yet the market rallied 150-points in that same period. This market rallies because it is overly-bearish and as long as the cynics continue fighting it, it will keep going.
The silver lining to all this volatility due to speculation over the future of QE is this selling is removing that overhang. The more scared the market is now, the less of a big deal it will be when it finally happens. Everyone who fears QE ending is selling to buyers unafraid of it. When QE finally ends the fraidy cats will be on the sidelines and the confident will continue holding. Just another time to sell the rumor and buy the news.
Everything I see shows this market remains overly-bearish and the recent selling chased out weak holders. With most of them out of the way, selling will dry up and the market will bounce. Strength on Wednesday is buyable with a stop under 1620.
I’ve been wrong before and without a doubt I’ll be wrong again. The goal isn’t to be right all the time, but to minimize the cost of being wrong. If the market slips under 1620, expect a dip to support at 1600. While we will assume every dip is buyable, failing to hold 1600 shows we need to reconsider the viability of the rally.
Plan your trade; trade your plan
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.