Calm returns

End of Day Analysis

MARKET BEHAVIOR
Volatility virtually disappeared on a calm climb 0.5% higher Tuesday, a welcome break following Monday’s 60-point whipsaw.  There was a little movement in the first couple hours, but after that the market settled into a couple of point range just under 1,880.  This level morphed into a ceiling we bumped into several times and were unable to break through.

MARKET SENTIMENT
Everyone who wanted to sell already sold and the lack of reactive trading allowed the market to calm down climb higher without much fuss.  There is a finite supply of owners that can be spooked out by gloomy headlines and near-term volatility, and it seems we reached our limit when Monday’s price-action undercut recent technical levels.  That was the signal for the last of the hopeful holdouts to cut bait and once they finished selling, the market rebounded on the absence of selling.  Reacting to pain often flushes traders out at the exact wrong time and that appears to be the case for anyone who sold the dip under 1,860.

While we ran out of sellers, the next question becomes, who will buy this rebound?  The near-term answer is shorts getting squeezed, momentum traders, and breakout buyers will provide lift to 1,900, but after that it is harder to identify the incremental buyer.  In prior tests of record highs, demand dried up and we stumbled lower.  Are buyers finally ready to embrace these fundamentals and political headlines?  I’m not so sure this is the start of the next rally leg.  More likely the sideways trade will continue until big money managers return from summer vacation this fall.

TRADING OPPORTUNITIES
Expected Outcome: Challenge recent highs, but struggle to find new buyers needed to sustain the move.
While recent predictions of a 20% correction appear premature, not bad doesn’t automatically mean good.  We saw large gains last year and it is perfectly reasonable to trade sideways for an extended period.  Barring some headline catastrophe, the summer will probably be relatively uneventful as we continue trading between the 1,800ish/1,900ish levels.

Alternate Outcome:
The market chopped around since the start of the year and that goes a long way to consolidating last year’s gains.  Fear and respect for the market has returned to relatively healthy levels and those contribute to building a foundation for the next move higher.  While that move might come this fall, it could also be here earlier than anyone expects.

Trading Plan:
Buy weakness and sell strength.  The best time to buy this market was when everyone was scared, not as it breathes a sigh of relief.  As we push toward the highs, this is a better place to contemplate taking profits than initiating new positions.  While we likely have more upside, use a trailing stop to protect recent profits.  Bears need to wait a little longer before challenging this rebound.

Plan your trade; trade your plan