Extending bounce

By Jani Ziedins | End of Day Analysis

Jul 14
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks extended Thursday’s bounce off of 1,950 with modest gains on light volume.

MARKET SENTIMENT
While not many traders participated this low-volume move higher, what is more important is confident owners chose not to sell the rebound.  As long as owners are willing to hold no matter what the headlines proclaim, it is really hard for a correction to take hold without supply.  And that is why, much to the chagrin of bears, this market continues to climb on weak volume in spite of all the ominous headlines.  No supply means no selloff.

While we all know this cannot go on forever and at some point this bull market will stall, the challenge is figuring out when.  Predicting what the market will do is easy, all the money is made getting the timing right.  While there are countless indicators pointing to how high investor sentiment is, in the near-term these indicators are bullish because it means people continue throwing money at the market.  Only after we get too close to the sun will we finally come crashing back down to earth.  Until then, let the good times roll.

The best way we know this is not the top is twofold.  First last week gave the market the perfect excuse and setup to trigger an extended selloff.  But instead of gathering momentum and sending spooked owners scrambling for the exits, everyone shrugged off the headlines and viewed the weakness as yet another buyable dip.  The second indicator is how wound up short-term traders, bears, and the financial press became over a 1% dip.  Bullish sentiment on Stocktwits SPY stream plummeted from 66% to 41% in a week!  That shows there is still a healthy amount of fear and skepticism in the market.  And now these aggressive bears will need to buy the market to cover their premature shorts, adding more fuel to the fire

Source: Stocktwits SPY stream 7/14/2014

Source: Stocktwits SPY stream 7/14/2014

TRADING OPPORTUNITIES
Expected Outcome:
Selloffs are breathtakingly quick and this is the third day we’ve held 1,950 support, suggesting last week’s dip was little more than a test of support.  While I’m no raging bull, this market is giving every indication it wants to test 2,000.

Alternate Outcome:
One of these days we will come across a dip that shouldn’t be bought.  While the final score might be 99-1, bears will ultimately have the last laugh.

Trading Plan:
Last week’s selloff appears dead and bears should cover shorts before they turn into losses.  Nimble short-term traders can position themselves for a short-squeeze to 2,000.  Long-term investors already in the market should stay in the market but hold off on making new purchases for a couple of months because we will likely see better prices.

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.