A bullish loss

By Jani Ziedins | End of Day Analysis

Jul 10
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks gapped lower at the open on renewed European banking worries, but recovered a big chunk of those losses by the close.  Volume was elevated as fundamental traders responded to the headlines and technical traders bailed on the break under 1,960 support.

MARKET SENTIMENT
While the S&P500 closed down 0.4%, this was about as bullish of a day as we could ask for.  Between the scary headlines and a violating support, owners had every excuse to stampede for the exits.  Instead they did the opposite, absolutely nothing.  The lack of selling tightened supply and there was nowhere for this market to go but higher from the opening lows.

When the market doesn’t do what it is supposed to do, that is a clear indication our analysis is flawed.  Bears had the perfect setup for a cascading selloff between spooky headlines and technical weakness, but when most owners didn’t flinch, it shows bears under estimated the resolve and confidence of bulls.

Even more bullish is the fact that over the last several days many weak-kneed traders sold these down-days, leaving far fewer potential sellers in the market.  Those that bought the dip demonstrated a willingness to own in the face of this weakness and are unlikely to flinch if we see another modest dip.  But a peculiar thing happens when everyone is willing to hold another dip, we don’t get one because when no one sells, there is nothing to push the market down.

TRADING OPPORTUNITIES
Expected Outcome:
Having chased most of the worry-worts out over the last few days sets up a solid foundation of confident owners from which to continue the prior up-trend.  While this rally will eventually end like every rally before it, when the market resists the perfect setup to selloff, it means the rally is not over.

Alternate Outcome:
Buy the dip is the most worn out trade of the last few years.  By the time everyone know something, it is already on its way out.  If we bounced on one last gasp of dip-buying, expect the selling to resume once the dip-buyers run out of money.

Trading Plan:
The market is giving every indication it wants to go higher in the short-term.  Dip-buyers can buy the dip and bears should lock-in any profits they have before they disappear.  If we undercut today’s 1,952 low, all bets are off and the selloff will likely continue.

Plan your trade; trade your plan

Follow

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.