Challenging old highs

By Jani Ziedins | Intraday Analysis

Apr 01
S&P500 daily at end of day

S&P500 daily at end of day

Intraday Update

MARKET BEHAVIOR
Stocks are higher on the first day of the second quarter and the S&P500 set a new intraday record.  We are at the upper end of the 1,840/1,885 range that stretches back to early February.

MARKET SENTIMENT
Early highs did not set off an avalanche of short-covering, but we only poked above the old record by less than one-point.  Either shorts are sitting tight, or there are few shorts left to cover.  While not a scientific sample, Stocktwits’ SPY sentiment gauge reads 57% bearish, not a level suggesting we are running out of shorts.  The most likely scenario is shorts who were previously shaken out in the last month of whipsaws moved their stops a little further out.  This means we need to push closer toward 1,890 for a short squeeze to begin in earnest.

But short-squeeze or not, the future of this move to new highs depends on the appetite of the masses sitting on piles of cash.  Will they embrace the breakout, or continue waiting for lower prices?  While short-term traders on Stocktwits are wary of this market, most owners are content sitting on their profits and are reluctant to sell regardless of scary headlines like political and military conflict with Russia.  If that doesn’t spook owners into selling, I’m not sure what will.

TRADING OPPORTUNITIES
Expected Outcome: Push to new highs before stalling on lack of follow-up buying.
There is no such thing as a triple top, so it seems likely we are destined to bust through 1,885 in the near-term.  Markets typically collapse from unsustainable levels in quickly, so holding these levels for multiple weeks suggests we are not yet at unsustainable levels.  We will push toward 1,900 in coming days, but unless those with cash embrace this breakout, expect it to stall and fall back under 1,850 on weak demand.

Alternate Outcome:
The S&P500 was up a trivial 1% in the first quarter of the year and this sideways trade helped consolidate recent gains and cool a hot market off.  This pause makes it easier for the market to resume the previous uptrend.  If we break above 1,900 and hold those levels, this bull is ready to rip.

Trading Plan:
The best trade of 2014 has been buying weakness and selling strength and it is unlikely to be any different here.  We will likely challenge 1,900, but that creates a better selling/shorting opportunity than buying one.

Plan your trade; trade your plan

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About the Author

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.