Stocks bounced off the 50dma in early trade and are holding near 1,850 as they search for direction. So far today’s move is more like a pause than decisive rebound since we are only up a few points from Monday’s close.
For as much drama as two-days of selling caused, we are only 2.5% from all-time highs. This can be taken one of two ways. Either this dip is no big deal and we shouldn’t be obsessing about it, or this is the start of something that still has a long way to go. Of course the truth most likely lies between these two extremes.
Today’s pause marks the end of two-days of emotion fueled selling. Those with a weak hand were flushed out in the rush for the exits, but confident owners continued holding and that limited new supply. As soon as the emotional finished selling, the market found a floor and this is taking pressure off any remaining anxious holders. But the fate of this move is no longer in the hands of holders. Instead buyers will be the ones to save us. Traditionally this is a mix of value investors and dip buyers. Today’s pause is tempting dip buyers, but it is hard to claim a 2.5% discount from all-time highs represents a great buy for the stingy value investor. Sometimes dip buyers can do this on their own, but if we need the value investor’s help, we probably need to slip a little further before they come to the rescue.
If the marked doesn’t end this dip in a decisive v-bottom today, we will likely hold near for 1,850 over coming days. This leaves us vulnerable to one last emotion filled selloff as those barely hanging on get flushed out. That last dip will likely be the end of the selloff and clears the way for a continuation higher. We saw a similar move in late January.
While big selloffs usually need a reason, sometimes we only come up with one after the fact. While this is behaving like a vanilla pullback, it could devolve into bigger waves of emotional selling if dip buyers and value investors don’t have sufficient numbers to prop up the market. Every dip is buyable until the one that isn’t.
There is not a lot to do here as we wait for the next trade. We will likely see one last dip lower before bottoming. This means shorts can continue holding and dip buyers can wait for a better entry.
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.