What’s the next move?

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks bounced from yesterday’s selloff after finding support near 1,950.  This rebound recovered two-thirds of Tuesday’s decline on average volume and puts us within a few points of all-time highs.

MARKET SENTIMENT
Bulls are breathing a sigh of relief as dip-buyers rush in after only a single day of selling.  It sure feels like this is the easiest market ever.  Anytime stocks go down, buy more.  Repeat over and over until obscenely wealthy.  The problem with obvious trades is they rarely work for long.

If we looked strictly at active market participants, they are for the most part invested in this market and under normal conditions we would be setting up for a normal and healthy down-wave.  The wildcard is investors still sitting out following the 2008 carnage.  Are they finally warming up to this stock market that does nothing but go up?  While these participants are usually the last to the party and suggest we are getting closer to a top, their buying in the near-term keeps the good times rolling.

Since buy-the-dip has become such an obvious trade, it is not surprising we bounced Wednesday.  The bigger question is if this bounce is sustainable or just one last gasp of hope before returning to the 50dma.  While no one knows for sure, the market will let us know which way it wants to go real quick.  An absence of buyers on Thursday tells us to expect more selling in the near-term.  But if we hold 1,950 into Friday, it means owners are not selling and without excess supply, prices will hold steady.

TRADING OPPORTUNITIES
Expected Outcome:
While this buy-the-dip trade is getting a bit too obvious, as long as people are willing to throw money at record highs, we’ll keep marching higher.  Picking tops is tricky business, but if 1,950 support barely lasts 24-hours, that shows demand is weak and we have lower prices in our future.

Alternate Outcome:
If this were easy, everyone would be rich.  Markets move higher as they turn cynics into believers.  There are still a lot of people who don’t believe in this market and those are the next round of buyers when they become more afraid of being left behind than they fear heights.

Trading Plan:
If bulls cannot defend 1,950, owners should consider locking in profits and bears can jump on the short side.  Use recent highs as a stop-loss.

Plan your trade; trade your plan