Struggling with 1,900 again

By Jani Ziedins | End of Day Analysis

May 14
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks slipped from record highs on ever decreasing volume.  The market closed under 1,890 after topping 1,900 for the first time on Monday.  But just as interesting is how this was the fifth consecutive day of declining volume and finished as one of the lowest volume days of the year.  The market is at the upper end of the recent trading range and still well above prior support at the 50dma.

MARKET SENTIMENT
Stocks continued 2014’s trend of stalling as we push toward 1,900.  The market is clearly attracted to these levels as it keeps coming back to them, but it never mustered the follow through necessary to break past this milestone.

Monday’s historic trade was all the excuses a tightly coiled market needed to explode higher in a frenzy of breakout buying and short covering.  The fact that we stalled and pulled back shows us that the market is not in the mood to explode higher.  This is valuable information for any trader that trades risk/reward.  If we eliminate explode higher, that leaves us with grind higher, grind lower, and collapse lower.  Two of the three are negative and one is extremely negative.  Given the outcome skew to the downside, this is a less favorable place to own stocks, let alone buy them.

Volume remains exceptionally light as few are changing their mind.  Those that own stocks keep holding and those with cash remain disinterested in chasing.  While it is encouraging to see the market continue holding these levels, if we cannot find buyers soon, the market will fall under its own weight.

TRADING OPPORTUNITIES
Expected Outcome:  Stalling at the upper end of a trading range in a traditionally slow time of year
Bulls had the perfect setup to extend the rally, but the market failed to take the bait.  Without explosive upside, at best the market will grind higher and it only gets worse from there.  It is hard to justify owning risk here with such limited upside.  The most bullish outcome will be trading sideways until the rally resumes in the fall.  If that’s the case, we don’t get paid to own risk (ie stocks) over the summer.

Alternate Outcome:
When in doubt stick with the trend.  This is the bull that just won’t die and it is far more likely to continue than reverse.

Trading Plan:
The best trade of 2014 has been buying strength and selling weakness and this market is not giving off signals this is changing here.  Anyone sitting on profits should lock them in and for the aggressive, this is the best shorting opportunity in some time.  But don’t mistake a normal and routine dip back into a trading range for a market collapse.  Counter trend trading is the hardest way to make money in the markets and bears should take profits early and often.

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.