Challenging the 50dma

By Jani Ziedins | Intraday Analysis

Sep 06
S&P500 daily at 2:39 EDT

S&P500 daily at 2:39 EDT

We opened higher on marginal employment, but gave up 20-points minutes later as Obama reiterated his resolve to bomb Syria at the G-20 summit.  Nearly as quickly as we fell, we bounced back, erasing all early losses by late morning.  While headline volatility persists, moves either direction quickly stall, leaving us in this persistent, choppy sideways trade.  We remain under the 50dma and recent resistance at 1670, but are inching higher.

Employment numbers missed the mark, but  were close enough to avoid a major move either way.  Syria remains a wildcard and will continue driving volatility, but to understand where this market is headed, it helps know the different traders in the market.  The easiest way to segregate traders is by their holding period.  We have the buy-and-hold-forever crowd.  Most big money managers hold for approximately one year because of the difficulty building and unwinding positions.  Then comes smaller and more nimble swing- and day-traders.

Most of us recognize only traders buying and selling in the present affect prices, while everyone else is simply along for the ride.  No matter how big a trader, once they are fully invested, there is little they can do to actively steer market prices.  This is why day- and swing-traders play a much larger role in the day-to-day price moves.  Over the course of a year, someone who trades 10x per day has 2,000 the impact as the one who trades 1x per year.    But this isn’t the whole story.  Nimble traders have to be small by nature because that is the only way they can effortlessly enter and exit positions.  So while they have huge influence, they also have limited strength.  These are the skittish traders that drive volatility as they react to every headline, but because of their limited size, they cannot push the market more than a few percent either way before their influence fades.  Only buying and selling by larger groups can sustain a breakout move.

Taking this concept to the present, we have lots of intraday reactions to headlines, but most of these moves stall as the larger pool of longer-term investors sits on their hands.  Most significant is the masses are not spooked by scary headlines driving this choppy volatility.  The lack of wider selling keeps tight reigns on supply and puts a floor under this market.  The only way for this move lower to continue is if it convinces larger investors to bail and so far it hasn’t done that.

Expected Outcome:
The extended selloff remains MIA.  We are lower by a few percent, but if we were standing on a trapdoor, early weakness would have triggered an avalanche of selling, something we haven’t seen.  At this point it looks more like stalled selling than anything else.  Traders are watching the 50dma and 1670 closely and look for a wave of breakout buying and short-covering if we cross these levels.  If we don’t see a decisive breakout, that means the market struggles to find buyers and bulls need to tread lightly.

Alternate Outcome:
Sucker’s rallies only work because they look real.  If tops and bottoms were obvious, this game would be easy and everyone would be rich.  Clearly that’s not the case, so we must watch every move with suspicion.  The market remains under the 50dma and until we cross this barrier, bears remain in control.  If we see buying dry up as we break through this technical level, short the break back under.

Trading Plan:
The market remains volatile and choppy.  Anyone trading this market needs to be confident in their positions and give them more room to move around or risk being shaken out at the exact wrong time.  This adds to the risk and makes for a poor risk/reward.  Every time we hold stocks, we expose ourselves to risk.  Owning or shorting a sideways market piles on the risk, but don’t get paid for it.  That’s why it is better to sit in cash waiting for the next directional move.  Of course where is the fun in that?  We are traders and the best way to follow the market is to be in the market.  So anyone long here, cover under recent lows and anyone short cover a strong break above 1670.  Just recognize the elevated risk in trading a choppy sideways market and adjust position sizes accordingly.

Plan your trade; trade your plan


About the Author

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.