Stocks dipped at the open, but climbed into the green by midday. The early low tested and held support at 1,810 and the 50dma.
Early weakness came from a renewal of domestic and international economic concerns, but selling was contained and the market shook it off shortly after the open. While similar headlines lead to big losses a couple of weeks ago, the market is largely ignoring them now. If today’s response seems contradictory, it actually makes perfect sense when we think about it. Those that feared these stories sold during the dip to 1,740. Those that bought the weakness or held through it demonstrated little concern for these fears and are less likely to sell a recycled spin on the same headlines. People didn’t change their mind, but the market experienced churn in ownership and is why we ended up with a completely different response today.
While many market participants obsess over headlines, news is less important than understanding who owns stocks and what they think. After everyone who fears a story sells, the market will largely ignore further developments because anyone who wanted to sell already did. News might be random, but the market’s reaction to it is not.
Expected Outcome: Inside trading range, headed toward upper end.
Stocks are behaving well following a fairly typical 5% dip. We recovered prior support and are back above the 50dma. Emotion driven selling ended as we bounced off the 1,740 lows and we now find ourselves 85-points higher. It is time to jump on the rally bandwagon again? Since the market trades sideways 60% of the time, chances are we need to consolidate last year’s gains before marching higher. If the market is entering a ~1,750 / ~1,850 trading range, we are approaching the upper bound and should be thinking more about locking in profits than adding new positions. While it is a little early to pull the ripcord, it is definitely late to be chasing.
Head-and-shoulders and double-tops give a false sense of relief and security before resuming the prior selloff. While trading bounces can be extremely profitable, don’t get fooled into thinking the coast is clear.
Buy weakness and sell strength. Clearly we are not experiencing weakness, so we should be looking closely for an opportunity to sell this strength. Recent gains are chasing out shorts and once the bears finish buying back their shorts for a loss, it will be interesting to see if a wider group of buyers steps in, or the rebound stalls as we near prior highs. A trailing stop under 1,810/50dma is not a bad way to protect 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.