Market bounce

By Jani Ziedins | End of Day Analysis

Dec 16
S&P500 daily at end of day

S&P500 daily at end of day

Stocks reclaimed 1,780 in early trade and held this level through the close.  Volume was higher than Friday, but still below average.  The market is inside of the 1,780 to 1,810 trading range still holding above the 50dma.

The talking heads are going round and round over whether the Fed will announce a reduction in QE on Wednesday.  Some say yes, most say no, but the consensus is the Fed will come out with strong language preparing the market for a slow withdrawal of fiscal stimulus in coming months.

Today’s rebound started strong, but failed to add to early gains and settled 5-point off the early highs.  Many traders are simply waiting for the Fed’s policy statement before adjusting their positions.  No doubt if there is a post-Fed pop, today’s strength brought some of that buying forward and makes an explosive move higher less likely.

Expected Outcome:
The market remains in no man’s land, stuck between,780 to 1,810.  At this point it is a coin-flip if we get Taper.  The consensus seems to expect no Taper, so it is likely priced in.  We could get a short-lived bounce as news driven traders chase the move, but expect the market to quickly return the previous state.  Over the last couple weeks, the market has a couple lower-lows and lower-highs following the Thanksgiving all-time high.  Since then traders have been reluctant to buy near the highs and the market drifted lower on light demand.  (heavy selling is accompanied by above average volume)  Unless the market is shocked by good news out of the Fed, expect the light-volume drift lower to continue after the Fed induced volatility passes.

Alternate Outcome:
The market made it most of the way to the 50dma and often we don’t need more than that before refreshing the rally.  Without a scary headline, holders don’t have a reason to sell and are happy to own stock at these levels.  As long as they refuse to sell into weakness, supply will remain tight and it will be easy for the market to bounce on modest demand.

Trading Plan:
So close to the Fed statement, it is a bit late to put on a trade.  It is a binary trade and little more than a coin-flip, so the conservative approach is to trade the resulting move.  The most likely outcome seems to be an initial pop as the Fed kicks the can down the road, followed by weakness as most already expected this move and bought in anticipation.  Failing to hold 1,780 is sortable and surging above 1,800 is buyable.

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.