As Expected

End of Day Update:

The S&P500 slipped 1% Tuesday, ending a streak of five-consecutive up days. Volume was average, but less than the elevated levels seen during the breakout above the 50dma. Oil gave up a big chunk of its Monday gains and was an excuse for equity traders to take profits following this nearly 200-point rebound from February’s lows.

It comes as no surprise the market’s gains slowed down after such a strong run. Big money managers hate chasing large jumps in price. Experience taught them these things inevitably cool off and they can get in at better prices if they are patient. In a bit of a self-fulfilling prophecy, big money’s reluctance to buy leads to a vacuum of demand and causes the very pull-back they are waiting for. Just like big money, we should also resist the temptation to chase. This is a far better place to be taking profits than adding new positions. If someone missed the move, chalk it up to a learning experience and wait patiently for the next trading opportunity. Better to miss the bus than get hit by it.

Last Thursday I told readers to watch for a rally that breaks 2,000 and then fizzles. So far that’s been exactly what happened. Friday’s strong employment pushed us through 2,000 resistance, but not long after demand dried up and we slipped from those midday highs. When the market fails to rally on good news, look out below. And if we needed confirmation, we got it Monday when oil popped 5% yet the S&P500 finished the day flat. Only a few weeks ago a move in oil like that would have lit a fire under equities. The lack of movement Monday tells us bulls are tapped out.

While one day of weakness doesn’t automatically make this the start of a bigger pullback, we will know real soon if it is. Selloffs develop quickly and if we are consolidating recent gains, expect a dip to at least the 50dma to develop over coming days. On the other hand, if prices firm up instead, expect the rebound to continue to at least the 200dma. If someone shorted a break of 2,000, the trade is working and you should continue holding until at least 1,950. But now that the weakness started, move your trailing stop down to 2,000 because if this is the real deal we shouldn’t retest that level.

Jani

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