Jul 30
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
A fairly dramatic day.  We gapped higher at the open on stronger than expected GDP numbers, but sold off minutes later and tested 1,960 support.  The Fed rescued us midday with a rosy outlook, but those gains also failed to stick.  For as much as we moved around, we ended almost exactly where we started.  Volume was the highest in a month as many traders reacted to every headline and gyrations.

MARKET SENTIMENT
It was an interesting session with two energetic upside moves that failed to stick.  It’s hard to hang a bullish hat on that kind of performance, but can we infer we are on the verge of collapse?  Not yet.  All today’s price-action tells us is those with cash didn’t want to chase these bullish headlines.  While that limits our upside potential in the near-term, it is the other side of the house that determines if we keep declining.  Right now the market’s fate rests in owners’ hands.  Do they sell at a discount or do they assume we’ll bounce like every other time over the last year-and-a-half and keep holding?  A lot of people are throwing the complacency term around like it is a negative thing, but complacent owners don’t sell and it is really hard to get a correction started without supply.

TRADING OPPORTUNITIES
Expected Outcome:
So far this price-action looks like a vanilla Buy-The-F’n-Dip.  Of course with every BTFD, the challenge is figuring out when we’ve bottomed.  Given today’s weak follow-on buying, it doesn’t feel like we’ve reached the bottom yet.  1,960 is technical support and often the market likes to fool us by violating support before turning around and going the other direction.  If we breakthrough 1,960 but the selling stalls shortly after, that gives us an interesting entry point.

Alternate Outcome:
Every dip, correction, or crash is buyable, the only question is how long to wait before jumping in.  While most of the recent dips were buyable within days, we will eventually find ourselves faced with a longer and deeper dip.  Nothing shatters confidence and complacency like seeing everyone else rush for the exits.  Wait for the selling to stop before buying any dip.

Trading Plan:
Don’t be surprised if we slip under 1,960 in coming days.  But if the selling stalls shortly after, bears should consider locking in profits and bulls can buy-the-dip.  On the other hand, if selling accelerates and we blow through 1,950, hang on because the next stop is 1,930 and 1,900 if that one fails to hold.

Plan your trade; trade your plan

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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.

DB July 31, 2014

How are you measuring holders of equities Vs sideline money(new money-waiting to buy/sell equities) not all sideline money is interested in equities?

    Jani Ziedins July 31, 2014

    Most of my analysis comes from seeing how people respond to market moves on TV and the internet in real time. By the time some surve gets published it is old news. I follow StockTwits/Twitter streams, watch Fast Money on CNBC, and read the WSJ. I’m not looking for trading ideas, but getting a sense of what other market participants are thinking. Another filter I use is my own emotions. I assume that what I see and feel is what most other people are seeing, feeling, and thinking. When it is easy for me to buy, that makes me think twice since I often find the hardest trades are usually the best trades.

spearchew August 2, 2014

Good speech 🙂
I am far more interested in trying to gauge the collective emotions of the market rather than studying PE ratios and unemployment rates. It’s not laziness either.
Some time ago I had this idea to make a wall-poster of the S&P500, overlaid with Central Bank speech notes:
http://s12.postimg.org/yw8nr9bsd/IMG_20140802_100805.jpg
I’m about to start work on a bigger project (just for my own interest);
1) Access The Financial Times Archives 1888 – 2006
2) Note down the key 1/2 headlines from the front page to determine the “topic of the day”
3) Overlay the info on a huge daily or possibly weekly candle chart of equities, oil, gold, interest rates.
I’m not sure what it will reveal, if anything, but I’ve always been captivated by Livermore’s lessons: “Fear and hope remain the same – the study of the psychology of speculators is as valuable as it ever was.”

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