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Stocks finished lower for a second day, but the losses were fairly modest in comparison to recent gains. The market started weak, but recovered early losses by midday as traders bought the dip. Unfortunately for them, things unraveled in the final hour of trade and we closed near the day’s lows. Of course “unravel” is bit strong to describe today’s 0.38% decline. The market is still well above support and a little cooling off is expected and healthy. This is nothing to sound the alarm over yet.
Many traders bought the midday rebound, but it was short-lived as we slid into the close. Given yesterday’s “engulfing candle”, prospective buyers remain cautions and today’s weak close justified that sentiment. While the long-term trend remains solidly intact, 130-points over three-weeks is a hell of a run and a little pullback here is long overdue.
Bears love to talk about how “overly-bullish” this market is. When we keep setting record high after record high, how can this be anything but over-bought? Here is another Yahoo Finance poll that shows an “overwhelming” plurality of traders have “no fear”. The 42% bulls far outweighs all the other categories, but is this the right way to look at the data? What if we combined everyone fearing a bubble and compared them against those that think the world isn’t in such bad shape? Then we find 42% think things are okay, while 68% fear we are on the verge of some kind of bubble. Framing it that way, it is hard to claim this market is overly bullish and traders are complacent when nearly two-thirds of all traders think we are standing on a trapdoor.
Given today’s weak close, we probably have a little more selling in the near-future, but this is nothing more than two-steps forward, one-step back. Look for a retest of 1730/1740 support before a larger legion of dip buyers jump in and buy the discount.
While most markets go up and down, occasionally we run into a market that goes up and up and up. It’s been a strong year and this outcome is less likely given where we are, but it is possible big money will buy any and every dip no matter how small.
While the trend remains intact, expect some near-term weakness as prospective buyers wait for the market to dip to support. Maybe they will rush to buy before we get there, or maybe they wait to see how far we will go. I don’t have a crystal ball and we will evaluate the situation as it develops. Prospective buyers should wait a little longer to see if we get better prices. Shorts can hold for a little more downside. But both sides should realize this will be a modest dip, so don’t wait too long to initiate new positions or cover shorts.
Real-Time Trade Alerts
A free look into my portfolio: As of this writing, I am 300% short the SPX through the SPXU leveraged ETF and have been since Wednesday morning. My target is the 1740 region and depending on how the market responds to this level, I will look to cover and go long if we find support. To get more trade ideas like this, subscribe to the Real-Time Trade Alerts using the tab above this post or follow this link.
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.