End of Day Update:
The S&P500 broke through 1,940 resistance Monday, driven by hopes of an imminent OPEC production cut. But the good times were short-lived when the Saudis and Iran threw cold water on those expectations Tuesday. That sent us tumbling back to the 1,920s where we finished near the lows of the day on lighter than average volume.
During choppy periods like this, we are often our worst enemy. Almost all of us come to the market with a bullish or bearish bias. Either we think the economic dominos are already falling and it is only a matter of time before stocks wake up to this reality. Or all these headlines and fear mongering are nothing more than Chicken Little and stocks will rebound once people realize the sky isn’t falling. The problem with thinking with a bias is it causes us to get sucked into every breakout or breakdown that confirms our outlook. Slip to the lower end of the trading range and bears are greedily shorting with reckless abandon. On the other side, bulls are buying hand over fist every time we approach the upper end of this range. Unfortunately these have been the worst moves to make at the worst possible times because moments later prices have reversed sharply. Buying breakouts and selling breakdowns is a great strategy in trending markets, the problem is we are stuck in a range bound market and smart money is buying weakness and selling strength. While bulls and bears are duking it out on social media, the pragmatist is making money in the market.
Two-weeks ago owners were emotionally selling stocks at steep discounts near 1,800 because they were desperate to get out before things got even worse. I told readers of this blog that was the exact wrong move to make. Markets move in waves and it is a mistake to sell at the bottom of a wave. If they held that long, then they should continue holding and wait for the inevitable bounce. Now that we rallied 140-points, the previously fearful owners are now getting cocky and patting themselves on the back. But rather than gloat over their good fortune, they should recognize we are nearing the upper end of this range and this is a far better time to be selling defensively. Holding when we are scared and selling when we feel good is hard to do, but going against our emotions is often the best trade to make.
The reason stocks remain range bound is most traders are stuck on their bullish or bearish outlook and no headline or price move is going to dissuade them. Stubborn owners keep holding even when the headlines and price-action are dire. But no matter what headlines proclaim, if owners don’t sell, then we stop going down. That happened in January the first time we tested 1,800 support, and lo and behold the same thing happened when we retested 1,800 support two-weeks ago. Owners that didn’t want to sell in January also didn’t want to sell this time. While that kept a floor under prices, we are also bumping our heads on a ceiling near 1,940. This is where those with cash are no longer interested in chasing stocks given this economic uncertainty. In the same but opposite phenomena, when we run out of buyers, stocks stop going up.
Until one side is unequivocally proven right and the other wrong, expect this stubborn standoff of wills to continue through at least the end of the first quarter. Prices move when people change their mind and adjust their portfolio. Be on the lookout for that new development that persuades one side to give up and join the other. That is when we will finally break out of this sideways market.
As for a trade, 1,900 support will be a key test over coming days. Hold this level through early next week and it is building the foundation for a run to 2,000 resistance. Tumble through 1,900 over the next few days and expect another test of 1,800 support.
What’s a good trade worth to you? How about avoiding a loss?
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