Still holding up

By Jani Ziedins | Intraday Analysis

Oct 25
S&P500 daily at 1:17 EDT

S&P500 daily at 1:17 EDT

MARKET BEHAVIOR
Stocks made new highs in early trade, but slipped to break-even by midday.

MARKET SENTIMENT
The market is muddling along as profit-taking cannot dent recent gains, yet new buyers are reluctant to chase new highs.  Previous volatility shook out many weak owners and those left standing demonstrated they are comfortable holding.  While some claim this complacency is a bad thing, it actually supports prices.  Comfortable owners don’t sell weakness or fear mongering, meaning they keep supply out of the market and make it easier for markets to continue climbing in spite of all the calls for a top.  Don’t worry about comfortable owners, but fear a dwindling supply of potential buyers.  Given how many sold Taper, Shutdown, and Default headlines, there are plenty of recent sellers looking for a way to get back in this market.  Their dip buying will support prices and fuel the next leg higher.

TRADING OPPORTUNITIES
Expected Outcome:
Hard to argue with what is working.  Holding above 1740 for the 6th day shows there is ample demand at these levels and the next move is likely higher.  Profit-takers and cynical new-high-shorters have largely sold anything they were going to sell, meaning supply is drying up.  Even though investors are wary of new highs, it doesn’t take a lot of demand to push us higher when supply is tight.

Alternate Outcome:
The market is relieved after weathering a storm of volatility and headline uncertainty.  It is making new highs as we avoided the worst-case scenario and took a lot of risk off the table.  But with less risk priced in, it leaves us vulnerable to a new headline that is not expected.  Markets by nature are always looking for something to worry about and expect it to find something, real or imagined in the not too distant future.

Trading Plan:
Anyone out of the market can use today’s continued support above 1740 as an entry point.  If we were at unsustainable levels, the market would have rolled over by now.  But as usual, there are no guarantees and we need to cover ourselves with a stop-loss under recent support.  Slightly under 1730 gives us enough room to ride out the inevitable dip and test of support at 1740.

INDIVIDUAL STOCKS
AMZN crushed bears with yet another short-squeeze.  Fighting a stock purely on valuation is a quick way to the poor house.  Wait for price-action to crack on fundamental weakness.  This also applies to other high fliers like FB, NFLX and TSLA.  Let some other poor fool die on the cross of valuation.  When these stocks crack, there is plenty of room to fall and we can easily afford to miss the first 10%.  It is better to be a little late, than a lot early.

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.