Stocks are modestly higher and just 5-points shy of all time highs. 1,850 has been resistance since the end of 2013 and pausing here adds to the importance this key level.
Sideways trade underneath resistance has drained some of the excessive excitement following the strong rebound from 1,740. A market that appeared invincible last week is giving some second thoughts this week. But that is how markets work; if this were easy, everyone would be rich.
As traders we need to decide what is more significant, stalling short of resistance, or holding near record highs despite half-full headlines? Extended and unsustainable markets typically roll over quickly, but maintaining these levels despite weakness on Wednesday is encouraging. That dip was more than adequate to trigger wider selling if the market was overbought and inclined to selloff. When that weakness reversed a day later, it demonstrated just how shallow the pool of willing sellers is and that bodes well for the near-term prospects.
While the market is poised to head higher on tight supply, we need to watch demand for signals on where we are headed over the medium term. If new buyers fail to embrace a breakout to new highs, that could be what sends us back into the heart of the trading range.
Expected Outcome: Headed toward upper end of extended trading range.
While the high-probability trade remains higher, the risk/reward is moving the other direction. Given how far the market’s come and buyer’s reluctance to keep pushing us higher, likely means we are nearing the upper bound of this move. If we are indeed entering a 6-month trading range, at most we have a couple dozen points of upside left all while standing on top of a 100-point trapdoor. For a +24/-100 trade to make sense, we need a huge degree of confidence, something unheard of in free and fair markets. That means this is a better place to be locking in profits than initiating new positions.
Pausing shy of 1,8500 and Wednesday’s dip to 1,825 cooled what was getting a tad exuberant. Consolidating and resting under resistance for another week improves the odds of a sustainable breakout.
Either this market is headed higher, stuck in a trading range, or on the verge of collapsing lower. Se we are at the upper end of a potential trading range, that means 2 out of 3 options would have us pullback from current levels. Those odds imply this is good place to adopt a more defensive stance. While it feels good to watch our profits grow, they are only real when we sell. But even though the odds for a pullback improve by the day, as long as momentum continues higher, we don’t want to short the market yet. Wait for a breakout to new highs and then short the market when it fails to hold those gains.
Plan your trade, trade your plan
Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, 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 young children.