Stocks gapped 10-points higher at the open and climbed another 10-points by midday. The bounce slowed at prior support near 1,770 where it traded sideways into the afternoon.
Markets are whipping around on obscure economic data. Monday we plunged on disappointing PMI, today we surged on encouraging weekly jobless claims and comments from the ECB. While talking heads claim these data points are what moved markets, they were simply the excuse people used to trade their already existing bias. Over the last couple weeks everyone was looking for an excuse to sell. Once we ran out of willing sellers, supply dried up and it didn’t take much to trigger a short-squeeze.
While the news is random, the market’s reaction to it is not. Think of the market like a chained dog, except instead of a chain, we use a rubber band. When we get to one extreme or the other, it is always possible to keep going in the same direction, but it becomes increasingly difficult and the path of least resistance is to go back the other way. Markets overshoot and undershoot the “ideal” level as traders overreact to news and price moves. At least for the time being, selling off to 1,740 appears to be a short-term overreaction.
Expected Outcome: Modestly bullish – expect the market to stay in trading range.
Everyone is looking forward to Friday’s employment report, but most of the worrywarts sold earlier in the week, while those still holding showed a willingness to hold volatility and risk. This makes them less likely to jump out the window at the first signs of trouble or price declines.
The market is likely entering a sideways trading range between 1,740 and 1,850. While we could easily dip under 1,740 and even test the 200dma, we are closer to the end of this selloff than the start.
While the market has priced in some modest economic weakness, there is still room for dramatic downside if it turns out we are slipping into economic contraction or these Emerging Market issues spill over into developed economies. While selling took a break, watch for anxiety to flair up again.
While we could slip on a disappointing Job’s report, there is far more potential for the market to explode higher in a short squeeze. If we are in a trading range, buy weakness and sell strength.
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.