Through adversity comes opportunity

By Jani Ziedins | End of Day Analysis

Jul 31
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
We go from boring, sideways trade to one of the most exciting days of the year.  Today’s 2% decline was the fourth largest of the last 13-months and volume was off the charts as we smashed through prior support and the 50dma.

MARKET SENTIMENT
They say a picture is worth a thousand words, so check out the adjacent chart.  Today we plunged through support and finished at the lows of the day.  Looking back over the last year, we can see multiple examples of similar dramatic crashes through support.  The most noteworthy thing is each of these prior down-moves was the final gasps of a selloff.  If we use history as a guide, today’s huge volume selloff could very well mean the worst is already behind us.

Today’s move lower was a pain trade, plain and simple.  We didn’t get blindsided by a shocking headline and most traders had a hard time pointing to the one thing that triggered this selloff.  The best journalists and talking heads could come up with was recycling old headlines about taper, interest rates, Ukraine, sanctions, Israel, and Argentinian debt.  There was nothing new today that hasn’t been talked about ad nauseam over the last few weeks and months, meaning today’s selloff wasn’t really being driven by these recycled headlines.

What if the true root cause was simpler?  What if today’s huge move was nothing more than normal market gyrations that got carried away?  Breaking support sent technical traders running for cover and once they started selling, others followed their lead even though they didn’t know why they were selling.  This is the herd mentality that was ingrained in our species by evolution.  When everyone else in the clan started running, our ancestors started running too because anyone left standing around was about to become lunch.  And so while no one could explain why the market sold off today, they sold alongside everyone else anyway.

TRADING OPPORTUNITIES
Expected Outcome:
We all know the best trading opportunities come from going against the herd but it takes a lot of courage to buy when everyone else is selling.  The market never found its footing today and finished at the lows of the day, but if we look back at previous pullbacks in this bull market, big down moves that broke support and finished at the bottom of the day’s range is fairly bullish.  While we might dip under today’s low by a few points over the next few days, if the aggressive selling doesn’t continue on Friday, the worst is likely behind us.

Alternate Outcome:
If it was too easy to buy the dip, then we haven’t found the bottom.  Everyone knows this is a buy-the-dip market, but we also know this cannot go on forever.  If we don’t find a bottom near Thursday’s lows, then we have to endure more pain before this is over.

Trading Plan:
If we find support Friday, the selloff is dead and everyone should buy the dip.  If we crash another 20-points in early trade, get out of the way because this thing will keep on going.  While we have the monthly employment report Friday, the market will largely trade the direction it wants to go regardless of report shows.

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.