Support continues

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks continue consolidating recent gains, holding above the widely followed 50dma.  They are within a dozen points of reclaiming 1700 and just over one-percent from all-time highs.  We are in the upper end of the 1600/1700 trading range that stretches back to early May.  Do we sell this strength, buy the breakout, or can a nimble trader do both?

MARKET SENTIMENT
Markets regained their composure following brief anxiety surrounding Taper and Syria.  With a couple of weeks to digest headlines, it decided all the fear was unwarranted, but that is not entirely true.  For simplicity, we often talk about the market as a single entity, but it is really a composite of individual opinions.  Anyone previously afraid of Taper and Syria is likely still afraid of these events, but they have since moved out of the market, selling at a discount to opportunistic traders willing to bet things are not as bad as feared.  This churn in ownership ended the recent selloff and is pushing us back toward new highs.  With all those afraid of Taper and Syria already out of the market, it will take all new headlines to send the new crop traders rushing for the exits.

Much of the lift from the 1630 lows came from short covering as many bears were forced to buy as prices moved against them.  Unfortunately for many of these traders, the pain of losses forced them out after they failed to lock in recent profits.  We are in this to make money and the only way to do that is selling our winners.  In choppy, sideways markets, take your profits early and often.  Greedily holding for more profits hasn’t worked for either bulls or bears all summer.

TRADING OPPORTUNITIES
Expected Outcome:
The rate of gains is slowing as we run low shorts covering and prospective buyers remain reluctant to jump in head first.  The big takeaway is few are selling this strength and that allows the market to holding the 50dma even with weak demand.  Stable trade is most often bullish and holding these levels for a couple more days suggests 1700 and new highs are on their way.  As anxious as traders remain, the market needs that nervous energy to continue higher.  Stocks rally in the face of fear and decline on the back of complacency.

Alternate Outcome:
While traders still fear headlines, each buyable dip lulls them into inaction.  Every dip they sold this year was a mistake and many promised themselves never again.  That resolve to continue holding keeps modest selloffs in check as supply stays out of the market.  That works for a while, but even under tight supply, markets fall under their own weight when we run out of new buyers.  Once traders screens fill with red, formerly confident owners turn into fearful sellers.

Trading Plan:
The long trade is still the right trade as we hold recent gains.  Keep stops under recent resistance.  While recent highs are in play, it is anyone’s guess how the market will respond once we get there.  Stay nimble until the market breaks out of the summer’s trading range.

Plan your trade; trade your plan