Stocks slipped modestly as they consolidate near the 1,950 level. Early weakness brought us down to the low 1,940s, but dip buyers propped up the market and are defending these levels.
Unsustainable breakouts tend to rollover quickly when follow-on buying fails to materialize. If we continue holding 1,940 for a fourth day, that suggests buyers still see value at these levels. Of course we need to be extra cautious during the summer’s low-volume since smaller trades have a larger impact and we often see increased volatility.
Recent strength defies the skeptics but from a sentiment POV it makes perfect sense. We’ve transitioned from a fearful market in 2013 to a greedy one in 2014. While this rarely ends well, these moves go higher than anyone expects before breaking down. By itself complacency is bullish because it means most owners are unwilling to sell no matter what the headline or price action. They refuse to sell because they are confident any dip will bounce and so far they have been proven right. In a self-fulfilling prophecy, lack of selling keeps supply tight and makes it easy for the rally to continue.
Markets move in waves and the risk of a pullback are highest following a strong move higher. At best we digest these gains and trade sideways, at worst we retest recent support back near 1,900. Either way the risk/reward to initiating a new position here is stacked against us. Give the market a couple more days before rushing in.
Anything can happen during summer’s light volumes. The pain trade has clearly been higher as everyone expecting near-term weakness is either out of the market or short. These bears and cynics are scrambling to buy a piece of this market before it gets away from them and that reactive buying keeps pushing us higher.
We trade when the odds are in our favor and buying up here is little more than chasing performance. While this move could easily run toward 2,000 over the next few weeks, the market needs to catch its breath and we will have the opportunity to buy in a few days after the risk of a pullback fades. If we cannot hold 1,940, then things get interesting.
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.