Drifting Higher

By Jani Ziedins | End of Day Analysis

Apr 30
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Another calm day as the market rallied modestly following the Fed’s policy statement and continued Taper.  Volume was above average and continues the streak of elevated trade following Monday’s rebound.

MARKET SENTIMENT
Stocks shrugged off shockingly slow first quarter growth before the bell and took the afternoon’s continued Taper in stride.  This further reinforces the notion that anyone who would have sold negative headlines is already out of the market.  Those left either held through Ukrainian drama and economic uncertainty, or bought the dip in the face of it.  These owners showed a willingness to hold risk and that confidence kept them from hitting the sell button today.  If they didn’t succumb to a dip under the 50-dma Monday or 0.1% growth Wednesday, they will likely be hard to shake free regardless of what the market throws at them and the resulting tight supply props up prices.

High-fliers have been hit hard in recent weeks, but blue chip stocks held the larger market near record highs.  Unsustainable markets, like the dot-com bubble, often see people dump safe stocks to chase speculation.  In this situation, we have the opposite.  Traders are fleeing obnoxious valuations and embracing consistent performers.  That is rational behavior, not a prelude to a crash.

TRADING OPPORTUNITIES
Expected Outcome:  Coasting higher on the back of short covering.
The S&P500 is one point from breaking near-term resistance at 1,885 and that will send some bears running for cover.  The rest will be flushed out when we break 1,900 for the first time in history.  But after shorts and breakout buyers finish buying this strength, the market will likely stall as follow-on buying fails to materialize.  We’ve struggled to extend last year’s rally and the summer doldrums are often a poor time to find support from big institutions.  Most likely the “buy weakness, sell strength” trade will remain the best trade through the summer.

Alternate Outcome:
Recent volatility cleared a lot of weak holders from the market, building the foundation for the next move higher.  Sometimes we need 6 months of consolidation, other times less.  If the market holds 1,900 following a breakout to new highs, this market could defy conventional wisdom and have a strong summer season.

Trading Plan:
Dip buyers should already be in and bears are better served waiting for a better entry point.  Long-term investors should continue holding, but wait for better prices to add to their favorite positions.

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.