Sideways is constructive

By Jani Ziedins | End of Day Analysis

Jan 09
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Analysis

Stocks closed practically unchanged for the third consecutive day as buyers keep holding the market near all-time highs.  While we ended flat, there have been countless sharp intraday declines that always bounced back nearly as quickly as they came.  No matter how swift the dip, it never picked up momentum and the selling stalled.  Volume has been elevated the last three days, showing a good amount of churn.  Is this smart money getting out, or day traders chasing their tail as they overreact to every head fake the market throws at them?  We will know the answer soon enough.

Friday’s headline event is December’s employment report.  Many expect respectable gains around 200k as the recovery slowly picks up steam.  But to be honest, it’s been years since good or bad employment numbers triggered sustained moves.  Lately we’ve seen near-term volatility immediately after the release, but then the market quickly moves on to other ideas and concerns.  Of course looking back over the last year, no matter what headline or report came out, the market kept marching higher.

While this rally cannot continue forever, seeing the market bounce after every attempted selloff is supportive.  Fragile markets crack easily and this one is extremely resilient with all these bounces off 1,830.  People sell for many reasons, but they only buy for one, because they think prices will continue higher.  No matter how much selling bears and profit-takers throw at the market, buyers soaked up all that supply.  Markets typically roll over quickly and holding 1,830 for 6-days after repeated attempted selloffs is bullish.

Expected Outcome:
While many expect decent employment numbers in the morning, it is only one piece traders are using to evaluate the market and economy.  A little above or below expectations will be a non-issue.  Since Taper is a done deal, the market no longer fears too good, so we don’t need to worry about that.  No matter what numbers we put up, it will remove one more risk factor and uncertainty.  As long as it isn’t horrible, expect the prior trend to continue.

Alternate Outcome:
Recent high-volume trade could be interpreted as distribution.  If smart money is getting out, we could see the market roll over fairly quickly once we run out of “next greater fools”.  Of course the best signal this is happening is declining prices.  As long as we remain near all-time highs, we have a sufficient supply of buyers willing to support the market.

Trading Plan:
Either we coast higher or collapse lower.  Holding 1,830 is supportive and expect new highs.  But if we violate support, especially the 50dma and 1,800, this will turn into the correction people have long been calling for.

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.