Testing 1,800 again

By Jani Ziedins | End of Day Analysis

Dec 10
S&P500 daily at end of day

S&P500 daily at end of day

Stocks slipped in modest trade as buyers took a break.  We remain near the upper end of the recent 1,780 to 1,810 trading range and barring any major headlines, we will likely bounce around these levels as the market consolidates recent gains.

It is not unusual for the market to cool off after Friday’s strong rebound and the previous 150-point run from the October lows.  While it is easy to grow enthusiastic following such strong moves, rationally we acknowledge that every day cannot be an up-day.  But is this just cooling off or hinting at far more insidious stalling?

Last Friday’s better than expected employment report erased a five-day losing streak, but since then buying has been fairly tepid.  Yesterday the market failed to punch through 1,811 three different times.  Market makers and HFTs love pushing us to new highs because that often triggers a short squeeze and stimulates trading that puts money in their pockets.  But if they didn’t have the strength to push us those last few points, we have to wonder if this latest rebound is already running out of gas.

Sentiment swung dramatically from the depths of the Budget Crisis and most measures of sentiment are near historical highs.  While these conditions can persist for long stretches of time, it does suggest upside is more limited if the crowd already embraced this market and is fully invested.  We need new buyers to keep pushing prices higher.

Expected Outcome:
Previously 1,800 acted as support and it will be insightful to watch how the market responds now that we are just a couple of points above this support.  Do we bounce off it as the good times roll, or does last week’s slow-motion slide continue as we dip back into the 1,700s?  Supposedly our politicians are coming together around a budget deal, but if that good news fails to excite the market, that likely means most of the good news is already priced in and more selling is likely.

Don’t buy any of the chatter about bubbles, crashes, and the such.  Markets go up and markets go down.  It is as simple as that.  Don’t read too much into these periodic step back.

Alternate Outcome:
Bouncing off of 1,800 and setting new highs will prove there is still plenty of demand for this market at these prices and there is little else to do but hang on and enjoy the ride.

Trading Plan:
If the market is in a trading range, expect near-term weakness.  1,780 is an important level because we bounced off it and a large pile of stop-losses are littered under this level.  Slip under and it will likely set off a wave of selling and push us down to the 50dma.  If we bounce off 1,800 and make new highs, this rally is not ready to take a break.

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.