End of Day Update
Stocks sold off for a second day, testing prior resistance at 1,960.
As dramatic as a 1% selloff from all-time highs feels, it is an indication of just how complacent we have become. Times have been a little too easy when two down-days make us feel like the sky is falling.
While conventional wisdom says complacency is bearish, that is the long-term prognosis. In the near-term it is highly bullish because confident owners refuse to sell their stock no matter what the headlines say. The resulting tight supply drives prices up to dizzying heights.
Weakness over the last two-days was driven by short-term traders trying to time the market. They saw last week’s pop to record highs as a little too much and decided to sell it this week. Some of these are swing traders locking-in profits, others are bears shorting a market that’s gone too high. While these short-term traders are very active, they have shallow pockets. They can move markets for a few days, but after that it takes follow-on trading by big money to extend a move. Here short-term traders are afraid of an imminent market pullback, but the vast majority of shareholders are comfortable with these dips because they learned long ago that they always bounce back. And so far they have been right. Without a fundamental catalyst to shatter the market’s confidence, there is little reason to expect this time will be any different.
This market will breakdown like every other one before it, but it will take some unsettling news that sends fear through the hearts of previously confident owners. While that could happen at any moment, these last few days have been little more than short-term traders selling stock since no one can point to any one thing driving this selling. Without that, there is nothing to send the larger herd rushing for the exits.
The market has only been down more than two days in a row four times this year and all but one of those one of those streaks included a down day of less than 0.1%. This is a complacent market and the dips keep getting smaller before the selling stalls and the dip-buyers rush to the rescue. We found support at 1,960 Tuesday and if we hold this level over the next couple days, the selloff is dead and the market will likely bounce to 2,000 in coming weeks.
While complacent owners are extremely bullish, running out of buyers is just as bearish. If buyers are afraid of these record highs, they will let prices slip to more attractive levels before coming to the rescue.
Long-term holders should keep holding. Nimble swing-traders can buy support at 1,960 if we continue holding it. Shorts should lock-in profits if we don’t crash through 1,960 Wednesday. If we slice through 1,960 and cannot find a bottom, we will likely fall to 1,640. Fail that and we are headed to 1,620. But rather than be the start of a bigger correction, this is just another buyable dip and shorts should lock-in profits instead of get greedy.
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.