Can we finally buy the dip?

By Jani Ziedins | End of Day Analysis

Jul 06
S&P500 daily

S&P500 daily

End of Day Update:

After a “No” vote over the weekend, Greece has never been closer to departing the Euro, yet the S&P500 dipped a modest 0.4% on average volume. Is our market being naive and irrational ahead of Greece’s financial collapse? Or is the Grexit already priced in because everyone who fears it sold a long time ago?

Today’s price-action was constructive. Overnight futures cratered more than 1.5%, but as the sun reached our shores, the panic subsided. While we opened near last week’s lows, almost immediately the selling dried up and we rallied. Supply and demand wise, that tells us it is increasingly difficult to find owners still willing to sell the Greece story. The headlines were as ugly as ever, but few were willing to bail out at steep discounts.

It would have been nice to see prices dip under last week’s lows, the 50dma, and 2,050 before bouncing. This would have flushed out the last of hope and triggered technical stop-loss selling, setting up a traditional double-bottom capitulation. We didn’t get that, but the market never behaves exactly like it is drawn up in the textbooks. Maybe this last leg lower will happen later this week, or maybe supply is so thoroughly exhausted that there isn’t enough left to form a traditional double-bottom. Anyone insisting perfect chart patterns will miss a lot of good trades and so we have to ask ourselves if this is good enough?

The market was hopeful Greece and Europe would kick the can down the road two-weeks ago when it rallied to 2,130. Now that we find ourselves nearly 80-points lower, we can assume the dire headlines have convinced most traders to expect a Grexit. If the worst is already priced in, then this becomes a compelling place to buy because the potential upside far outweighs the remaining downside. While there could easily be a little more left to this dip, this is a far better place to be buying than selling.

Jani

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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.

mark July 6, 2015

Or is this about China?

    Jani Ziedins July 6, 2015

    China already plunged 30%. If it mattered to our markets, we would be down a lot more than 3% from all-time highs. Everyone knew they were in a bubble, so this doesn’t come as a surprise to anyone in our markets.

Ian July 6, 2015

The global bond market has only begun to crack. When spreads start to blow out that’ll be catalyst the bears will need.

    Jani Ziedins July 7, 2015

    If bonds were over-extended, they would have cratered years ago. Bubbles are unsustainable by nature and the frothy stage never lasts for more than a year. Yet people have been claiming bonds have been in a bubble for more than five years. While most will point to the Fed’s buying bonds, those people don’t know their history. No central bank is bigger than the market and most of these central bank interventions fail miserably because they don’t have the strength to fight the market. The only reason it worked this time is because the market wanted to go in the same direction as the Fed.

brian July 7, 2015

John Murphy and other very experienced technical analysts on stockcharts.com see warning signs of a correction coming. They think it could be within a few months even based on bearish market TA. I am not sure i would want to be buying much here as stocks are not behaving as they did earlier as rhere are many false breakouts in individual stocks. Maybe ok to trade if quick but not the time to buy dips for longer term investment purposes I do not think.

    Jani Ziedins July 7, 2015

    Technicals are only half the story and omit sentiment. The headlines are as negative as they’ve been in over a year and AAII investor sentiment is at multi-year lows, yet the market is trading exceptionally well. Strength in the face of bad news is very bullish because it means we ran out of sellers. If we were topping, we’d see the same technical stalling, but the news would be upbeat and sentiment at multi-year highs. The lack of forward progress under those conditions is because we ran out of buyers.

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