End of Day Update
Stocks closed above 1,980 for the first time in a couple of weeks, leaving us within a few points of all-time highs. While the market trades sideways, the upward sloping 50dma and 200dma are quickly gaining ground.
The market no one wants to trust keeps holding strong. Many traders admit they think stocks have come too far, but they are reluctant to sell because every time they sold over the last year and a half, they watched the market rebound higher without them.
This is the foundation of the “next greater fool” theory in investing. The logic goes, “I know this is overvalued, but I will buy it anyway because I know someone else will come along later and pay even more for it.” Traders have a natural fear of heights, but this resilient bull market is making many are more afraid of being left behind than losing money. This is why so many continue chasing all-time highs and not selling bearish headlines, even though they don’t trust this market. But like every game of musical chairs, if you stick around too long, you’ll be the one that gets left out.
We are four points from triggering another short-squeeze. While there is no reason to trust this market, it is giving us every indication it wants to go higher. Even if we are setting up a bearish double-top, we still need to set new highs first.
At some point we will run out of dip-buyers. Maybe that day is tomorrow. Maybe it won’t happen until next year. But every dip that gets bought brings us one step closer to the one that doesn’t. Failure to set new highs this week will be an ominous sign.
Both bulls and bears should expect new highs in coming days. The only disagreement will be what to do next. Bulls should use a trailing stop to protect recent profits. Bears should wait a couple of days before jumping in front of this bounce.
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.