Wild ride

S&P500 daily at end of week

MARKET BEHAVIOR
Stocks had a wild close to the week as we dipped 23 points on Thursday, but then recovered all of those losses on Friday.  As dramatic as the ride’s been, we are still holding within the 1750 – 1775 consolidation following October’s strong rebound.  While the daily chart shows a wild ride, taking a step back reveals a fairly benign weekly chart.

MARKET SENTIMENT
There are always two sides to every market and price is the perfect balance point between these two views.  Recent volatility chased out anyone that lacked the conviction to sit through Thursday’s sell off.  These sellers were replaced by far more confident owners willing to buy the weakness.  That confidence ended the selloff on Friday and turned it into a powerful short-squeeze that quickly turned the tables on the cocky bears gloating about the impending collapse only a day before.  But in the Bear’s defense, changes in trend are often accompanied by increases in volatility as the long dominant party starts losing its grip on power.  This shift evens the fight and allows the minority to start flexing its muscle.   It is too early to say which scenario is playing out and we need to uncover more clues in coming trade.

TRADING OPPORTUNITIES
Expected Outcome:
When in doubt, stick with the trend; it continues countless times, but reverses only once.  It’s been a good year and the rally that just won’t quit is unlikely to give the cynics what they’ve been looking for all year.  We’re coming to the end of the year and many of the last holdouts are conceding defeat and going with the flow.  While this is often part of the topping process, these shifts take time and the trend often continues farther than anyone expects.

S&P500 weekly at end of week

Alternate Outcome:
Recent volatility has people  concerned and paying attention.  String together a couple down-days and confidence will quickly devolve into uncertainty and fear.  While it often takes a catalyst to send us lower, running out of buyers and topping on good news will signal a bigger pullback than the news-driven ones we’ve seen in recent years.

Trading Plan:
Continue watching for trading opportunities.  We remain stuck in a consolidation and until further notice, buy weakness and sell strength.  Since neither Thursday nor Friday’s moves materially breached recent highs and lows, look for a wave of stop-loss trading to accelerate a move out of this region, but if the a wider pool of traders does not embrace this breakout/breakdown, expect it to fade back into the consolidation.

Plan your trade; trade your plan