Stocks continued the rebound into the start of earnings season and by midday are within a couple of points of recovering all the recent Fed selloff.
Easy come, easy go. Many traders that rode this Spring’s surge higher, likely held too long and were chased out by the recent Tapering selloff with little to no profit to show for their effort. Adding insult to injury, the market bounced back shortly after they sold. Such is the life of a reactive trader.
Much of the recent strength is driven by dip-buying and short covering. These are temporary phenomena and the persistent uncertainty will likely keep a wider pool of buyers from chasing this market to new highs. The market trades sideways far more often than it goes up or down, so it seems likely the recent rebound will stall as it approaches the upper end of the range.
Bears had their chance to crack this market wide open a couple of weeks ago and could not get the job done. The Tapering selloff was the perfect opportunity to send the market sharply lower on fear and uncertainty. But once the weak and emotional jumped out of the market, we ran out of sellers, found a bottom, and rebounded. With most of the weak holders already out, new lows driven by emotional selling are less likely.
The volatile trade will continue and it is anyone’s guess how high this bounce will go before it runs out of steam, but clearly June’s Fed collapse is dead. There are plenty of hidden mines to sink this market, but we largely came to terms with Tapering and redounded in the face of this threat. This is another example how we can safely ignore what everyone is worried about, because anything the crowd is talking about is already priced in.
The market could surge on a shockingly good earnings season, but that seems unlikely. It is more reasonable is to expect the Summer trading range to continue and we should look for opportunities to lock in recent gains before the rebound stalls and rolls over. Either we sell into strength, or use trailing stops to protect recent gains.
Markets rarely go straight down and usually have multiple suckers-rallies on its way lower. Maybe the lows are already in, or maybe we still have more room to fall. For the opportunistic trader it doesn’t matter. We lock in profits and wait for the next trade. If the market is unable to recover 1655, we could see a pullback to recent lows, and if we exhausted the supply of dip-buyers, the market will stumble into new lows.
We still have the green light to hold the break above the 50dma. We might pullback to this level, but if we hold it, look for the market to continue to 1670+. Failing to hold the 50dma so soon after reclaiming it means we ran out of buyers and a test of recent lows near 1560 is likely.
In choppy markets, don’t fear missing upside by selling too early. In fact what we need to be afraid of losing profits from holding too long. When we lock-in profits too early, take comfort in knowing most traders are reacting to these whips and buying and selling at the exact wrong time. I’d gladly accept smaller profits over losing all my recent gains any day.
We can own this market with a stop under 1625 and take profits above 1660/1670. If we break 1655, look for a short squeeze to continue the move higher and we will move our trailing stops to 1650. Breaking under 1625 is shortable with a profit target near 1570.
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.