We broke through the 50dma and 1,850 barrier as this rebound continues. This puts us back above key technical levels and gives this move credibility.
Last week many were convinced we were on the verge of a larger correction, but this week we’ve done nothing but go up. And that is how the market works. Everyone who expected a prolong selloff dumped shares reactively, but as soon as they finished selling, supply dried up and we bounced. No matter what the headlines or traders’ expectations, market prices only respond to supply and demand. Even when the crowd is pessimistic, we rally when we run out of sellers.
Volatility like we’ve seen over recent weeks churns ownership in the market. The dip forced many weak hands to sell reactively and tempted aggressive bears to go short. While all this aggressive selling continued the move lower, what is going on under the surface is these sellers are transferring ownership to more confident buyers willing to hold the risk and volatility. They confidently buy the discount and patiently wait for the market to bounce. Since they willing stepped into this uncertainty, they are more comfortable holding a declining market. But the paradox is the more willing these new owners are to hold weakness, the less likely it is we will see that weakness. When they confidently hold, then we run out of sellers and the market finds a bottom.
Expected Outcome: Look for the bounce to continue into next week.
This rebound should continue at least until we recover April 10th’s selloff. From there we will have to see what traders think and how the market responds before we decide if this move continues to all-time highs or stalls out.
Last week we saw a painful false bottom that caught many dip-buyers off guard and the same could happen here. Short covering pushed us back above technical support, but we need wider buying for this strength to continue. If demand dries up, we could easily stumble back to the lows. Undercutting 1,810 in coming days means this selloff is going to get a lot worse and the 200dma is in play.
It is getting a little late to buy the dip since we are near the middle of a move back to 1,900. The best opportunities arise from the most difficult trades. Buying the third consecutive up-day is late to the party and exposes a trader to greater risks of an intermediate dip. As for bears, it is still early to short the bounce and the next shorting opportunity would be if the market stalls near 1,870.
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.