AM: Stalling at the 50dma

By Jani Ziedins | Intraday Analysis

Jul 02
S&P500 daily at 2:37 EDT

S&P500 daily at 2:37 EDT

AM Update

MARKET BEHAVIOR
Stocks were up for the fifth out of the last six sessions before an afternoon selloff took us into the red.  We remain under the 20dma and struggle breaking above this widely followed resistance level.

MARKET SENTIMENT
Clearly this market ran out of sellers last week and no matter how bearish the headlines or outlook, markets rally on tight supply.  We reclaimed 60-points of the Fed Meeting selloff on the backs of dip-buying and short-covering, but buyers remain reluctant to chase this market above the 50dma.  Lack of sellers and reluctant buyers leave us at this 1620  stalemate.

Major market selloffs occur on a drip of unexpected bad news.  It is hard to say the Fed’s tapering is unexpected or unquantified.  The only thing the market is fretting over is a few months here or there when the Fed starts tapering its bond purchases.  This is completely different from the 2008 meltdown where almost no one understood the risks the financial markets faced and we continued sliding as those vulnerabilities came to light.

Recent high-volume selling purged the market of weak holders afraid of Tapering and replaced them with confident buyers willing to sit through near-term weakness and volatility.  These value buyers’ courage actually reduces downside volatility because they keep supply out of the market during weak periods, making it far easier for buyers to lead a rebound.  While this largely mitigates the risks of a market crash, expect near-term volatility to persist as buyers remain reluctant to chase this market higher.

TRADING OPPORTUNITIES
Expected Outcome:
The sideways chop continues.  The best trade remains buying weakness, selling strength, and taking profits early and often.  In periods like this we cannot sit on profits and watch them accumulate because they will evaporate days later.  Often we will get out too early, but at least we are making money in this chop that is chewing up most traders reacting to these swings.  We rallied 60-points from last Monday’s lows and a pause here is not unexpected.  The nimble trader is taking profits and looking for the next trade.  Maybe that is breaking above the 50dma, maybe it is being turned back by it.

Alternate Outcome:
If the expected trade is sideways chop, then the alternate is a directional move.  We are in a mini-range between 1600 and the 50dma.  Whether it is a swing trade, or a breakout trade, we can trade a move outside this range.  The swing trader would take worthwhile profits proactively while the directional trader would use a trailing stop.

BBRY daily at 2:38 EDT

BBRY daily at 2:38 EDT

Trading Plan
A little something for everyone.  A bear can short stalling near the 50dma, the bull can continue holding support above 1600, the swing trader that bought the 1560 bounce can lock in profits, and the cautious can sit out this summer volatility.  A break above the 50dma is buyable and should make shorts cover.  A dip under 1600 should stop-out longs and let bears add to their shorts.  No matter what, continue taking profits and avoid sitting through the yo-yo.  Worst of all, don’t react impulsively to these whips by buying strength and selling weakness.

INDIVIDUAL STOCKS
BBRY‘s slide continues as the obvious over-reaction keeps over-reacting.  People buying Friday’s plunge were hoping for a bounce, but clearly the larger pool of value investors remains unimpressed and is not snapping up “discounted” shares.  This stock will bounce at some point, but that is nothing more than an opportunity for those that over-stayed their welcome to get out at less of a loss.

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.