Trade the Market, Not Common Sense

By Jani Ziedins | End of Day Analysis

May 27
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

The S&P500 rebounded decisively from Tuesday’s selloff. We opened higher and never looked back, easily reclaiming 2,120 support. Volume was slightly below average and less than yesterday’s downday, but still respectable given this is a holiday shortened week.

Today’s price-action poses a serious threat to the Bearish thesis. Yesterday’s selloff was the crack Bears needed to finally kickoff the long-awaited correction. Nothing shatters confidence like screens filled with red, and we had that in spades Tuesday. But as it turned out, the selling was quite limited as we quickly ran out of owners willing to dump their stocks for a discount. This tightening supply put a floor under the market and the selloff ended as quickly as it started.

If this market was as extended and overbought as many claim, the smallest stumble would trigger cascading wave after wave of selling as panicked sellers rushed for the exits. That’s what happens when markets are unsustainably high, hence describing them as unsustainable. But the perplexing thing is rather than plunge lower, we keep rebounding to the highs. Looking only at the market’s behavior, it is fairly easy to make a compelling argument that this want to go higher, not lower.

The problem many traders have is they spend too much time thinking about what the market should do instead of looking at what it is doing. If the market doesn’t care about rate hikes, employment, inflation, Greece, and all the other jazz, then neither should we. Something will eventually take this rally down, but it will be totally unexpected and not what everyone has been talking about for months.


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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.

Tom May 28, 2015

Yes, we have till mid-June to hit new highs, so hope and pray that we do that by then. I have an uncanny feeling that after mid-June (after Fed meeting and quadruple witching), something big is coming and it may or may not be pleasant.
Corporations want to act on their stock-buyback announcements, but are waiting for a 3-4% drop off the highs. So it’s a game of chicken between investors and corporations. Investors are not selling in anticipation of buy-backs happening along with it’s positive effects on the markets and corporations are waiting for a drop off the highs to buy. If buybacks fail to lift the markets by mid-June, other factors will likely take over investor willingness to buy or sell. That is where it will get tricky.

Jani Ziedins May 28, 2015

It will be interesting to see what happens in the second half of the year. I doubt we continue trading sideways, so that means either a breakout or a breakdown. Both provide good trading opportunities and I look forward to it.

Dave May 30, 2015

Thanks for all your work Jani, Very much appreciated!!

    Jani Ziedins May 30, 2015

    Glad you enjoy it.

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