Stocks stumbled at the open, slipping to 1683 as the lethargic summer trade continues.
Everyone knows markets fall faster than they climb. A few day selloff can wipe out months of profits and is why we fear them so much, but can we use this typical behavior to figure out this market’s next move? We spent most of the last month above 1680. If selloffs occur over a few days, holding these levels for so long strongly suggests this market is not on the verge of crumbling. In fact, if we look at the other side where rallies take time and are drawn out, a month-long consolidation suggests a continuation is more likely.
Over the last four-weeks we’ve seen plenty of profit-taking, defensive selling, and aggressive shorting, yet the market continues holding near all-time highs. We’ve gone through modest weakness and had countless ominous headlines regarding QE, yet most holders refuse to sell and that tight supply is propping up prices. Once we exhaust the supply of proactive sellers, the market will continue higher like it has every other time this year following widespread calls of a top.
There are no guarantees in the market and successful trading is a game of probabilities. Without a doubt the market could implode any moment, but the fact it resisted selling off for so long suggests the next move is still higher. We are still stuck in the listless summer trade and should continue taking profits early and often. Most big money institutions are in a holding pattern until the senior decision makers come back from vacation. Seeing how strong the year’s been, this fall could be interesting. Will this be another brutal September, or is the least expected trade, a 12-month rally, the most likely outcome?
While it is encouraging the market is holding near all-time highs, where are the buyers needed to breakout to new highs? Markets top for one of two reasons, panic selling following an unexpected development, or exhausting the supply of buyers on bullish headlines. The clearest sign the market is breaking down is violating key support levels. Right now 1680 is the level to watch. Beyond that is the 50dma, quickly approaching 1660.
There is not a lot to do while we hide out in this 1680 to 1700 range. A bull can keep holding and bear can stay short, but at this point they are fighting over loose change. Often the hardest trade is to sit on cash and wait for a better opportunity. We come to the market to trade and it gets boring real quick when we don’t have money at risk. (I’m as guilty of this as the next guy) The real money will be made waiting for the market’s next directional move. The longer we consolidate, the larger the resulting move will be.
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.