Welcome to 2014

S&P500 daily at end of day

Intraday Analysis

MARKET BEHAVIOR
Stocks slipped for a third consecutive day as they stumble into the new year.  Volume was slightly above average as traders return from Christmas vacation and get back to work.  The market cleared prior resistance near 1,810 and broke to new highs in the final weeks of 2013, but it would not be unusual for it to retrace those low-volume gains and test support at 1,810.  Holding support shows broad support for these new highs and builds a solid foundation for further gains in coming weeks.  Failing to hold the breakout shows big money doesn’t support the move orchestrated by a smaller pool of holiday traders.

MARKET SENTIMENT
Stocks ran up in light volume over the holidays, quarter end, and year-end, but investors have shown less enthusiasm in buying these new highs following a change in the calendar.  No doubt there was lots of portfolio shuffling into quarter and year-end for window dressing and tax reasons.  But now that we are in a new year and these strictly bureaucratic maneuverings are behind us, few are willing to continue bidding up stocks.

The only overhang coming into December was the inevitable Taper.  Some feared a selloff on the winding down of easy money, but in typical market fashion we saw the exact opposite as the market surged on the news.  With Taper anxiety and uncertainty behind us, there is nothing holding this market back.  While that sounds extremely bullish, we must remember that strong moves follow heavy weights being lifted from the market as reality turns out less bad than feared.  Without fear to fuel this rally, the only thing left is letting momentum carry us higher, and so far that’s been working.

The risk is when the market doesn’t have fear, there is plenty of room for it to become fearful.  While no one knows what the market’s next obsession will be, the market is a worrier by nature and we all know it is coming.  The last time the market was this complacent we fell nearly 20% on a US credit downgrade.  While it is always possible to skate obliviously on thin ice for hours without falling in, all it takes is one bad headline to ruin our day.

TRADING OPPORTUNITIES
Expected Outcome:
The market needs to consolidate the low-volume holiday gains and three days of selling is hardly alarm-worthy.  Failing to hold support at 1,810 and 1,800 is where things get interesting, but without any fear inducing catalyst, expect momentum to continue carrying us higher.

Alternate Outcome:
Rallies die only after most stop calling for a top.  While recent strength silenced most of the critics, has complacency finally sucked in the last of the buyers and set the stage for a reversal on lack of demand?  Price is truth and failing to hold support will be our best signal the supply of willing buyers is drying up.

Trading Plan:
Look for support near 1,810 to demonstrate support for recent gains.  Hold these levels into next week and expect new highs.  Fail to hold support and things get interesting.

Plan your trade; trade your plan