One step back

By Jani Ziedins | End of Day Analysis

Jul 07
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks pulled back from record highs, giving up a fraction of a percent, but are still holding above recent resistance near 1,960.  The market continues to levitate 50+ points above the 50dma, something it last tested back in mid-May.

MARKET SENTIMENT
Noting boosts investor optimism like a long string of new highs.  Fear of heights and calls for a correction have been drowned out by frenzied dip-buying.  In the first six-months of the year the S&P500 has only experienced three occurrences with three down-days, two of those barely qualify with losses of 0.1% or less.  And we  still have yet to string together more than three down-days.

While that is a worrying sign, the good times continue until they don’t.  So far owners remain reluctant to sell shares no matter what headline pops up.  Their conviction that every dip is buyable prevents us from having a dip.  While we all know this cannot last forever, it almost always goes on longer than anyone dreams possible.

The biggest prop behind this market is the sheer size of all the money on the outside the market looking in.  These regretful investors made a hasty decision to bail out during the financial crisis and now that everyone around them is making money, the pressure is on to overcome their fears and pick up some of this easy money.

TRADING OPPORTUNITIES
Expected Outcome:

Finding support above 1,960 for a couple more days suggests this market is headed to 2,000.  Breakdowns happen quickly and holding these levels shows buyers are willing to continue buying these levels and few are selling and locking in gains.

Alternate Outcome:
It’s been a good run since they May breakout and swing-traders will likely lock-in profits if we dip under technical support.  That selling could trigger wider selling and push us back down to the 50dma.

Trading Plan:
It is waaaay too late to buy this strength.  Anyone out of this market should wait for a pullback.  Bears should also avoid jumping too aggressively on any weakness since every other dip this years has been enthusiastically bought.  At this point we just wait for the complacency to pass and allow the next wave of emotion to create a trading opportunity.

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.