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By Jani Ziedins | End of Day Analysis
End of Day Analysis:
The S&P500 snapped a seven-day win streak Thursday, but it is a stretch to call a 0.09% bump a meaningful loss, especially since we rebounded nicely off the intraday lows.
Looking at the chart it is obvious the recent rate of gains is unsustainable and today was finally the day we took a break. While there might be a little more upside left in this move, we are definitely closer to the end than the start. If a person is not already in the market, they are late to the party and should resist the urge to chase. Risk is a function of height and it is more dangerous to buy up here than it was before we broke out. Wait for the inevitable cooling off before rushing in. Institutional money hates chasing breakouts and we should follow their lead. If big money is holding back, in a bit of a self-fulfilling prophecy their lack of buying actually creates the dip they are waiting for. We should exercise the same restraint. As the saying goes, “It is better to miss the bus than get hit by the bus!”
It’s been a tough stretch for bears who were convinced the market was going to tumble from 2,300 resistance. Instead we broke through and surged 50-points. But that shouldn’t come as a surprise to regular readers of this blog.
“the thing to remember is we tumble from unsustainable levels quickly. We have been hanging out near these record highs for two-months. If this market was fragile and vulnerable, we would have crashed a long time ago. There have been more than enough reasons for this market to selloff, yet every time it refuses the invitation and we run out of sellers. Say what you will about the fundamentals of this market, but when confident owners don’t sell bearish headlines and weak price-action, supply stays tight and prices remain resilient. If the sellers failed to materialize over the last eight-weeks, why would they show up now and sell far more benign headlines and price-action? That is the question every bear needs to answer. If it didn’t happen then, why is it going to happen now?”
Bears could have saved a lot of money if they used a little common sense, but that is that is a lesson to save for next time. Now that we are up here, the question is what happens next? As I already stated, the recent rate of gains is unsustainable, so at the very least expect the market to slow down. That doesn’t mean we are going to tumble, just that we need time to consolidate recent gains. As I wrote on February 9th, confident owners are ignoring all the reasons to distrust this market. Until we find something new and unexpected to shatter this calm, expect the bull market to remain resilient.
If we cool off, the nearest level of support is 2,320. That acted as resistance last Friday and we bounced off that level Monday and Tuesday. I would not expect a routine pullback to dip a lot further than that. Traders that missed the initial breakout can use this dip as a safer entry point.
Until something new and unexpected happens, expect this post-election drift higher to continue.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Update:
The S&P500 closed above 2,300 for the first time ever on Thursday. We started consolidating under this psychologically significant level in early December, but it’s taken us this long to find the demand necessary to push on through. While it’s been a long time coming, it shouldn’t be a surprise for anyone who has been reading this blog. As I said many times over the last several weeks, the longer we hold near the highs, the more likely it is we will break through. We tumble from unsustainable levels quickly and holding on this long told us the market wanted to go higher, not lower.
But now that we’re up here, the bigger question is what happens next. While I think the path of least resistance remains higher as we squeeze shorts and suck in breakout buyers, tepid demand continues to be a real obstacle for this bull market. No doubt we will get some recent profit-takers to jump back in when 2,300 resistance turns into support, but so much optimism has been priced into since Trump’s election that it is getting harder and harder for this market to exceed expectations. Even though momentum will keep us drifting higher over the near-term, this is a better place to be taking profits than initiating new longs. While cashing in over the next few days is a prudent move to make, going outright short creates a far different risk/reward. Even though this strength leaves us vulnerable to the unexpected, we need that unexpected event to happen first. It is far too dangerous to short for no other reason than “we are due for a pullback”. Just ask all the shorts that were crawling over each other to get out this afternoon when we smashed through their stop-loss levels.
There isn’t a lot more to add since this is such a benign market. Emotion is practically nonexistent, meaning there is not a lot of force behind these moves in either direction. Last week we saw a modest retreat from the highs the first time we tried to break 2,300. Now that we finally broke through, expect an equally lethargic breakout. Momentum is higher, but this thing is moving so slow we don’t need to chase it. If you are not already in the market, wait for a better trade. The hardest thing for a trader to do is not trade, but often that is the best move to make.
Jani
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By Jani Ziedins | End of Day Analysis
End of Day Update:
The S&P500 flirted with 2,300 resistance Tuesday, but yet again failed to break through. Is this a healthy and normal pause before the next leg higher? Or are we running out of steam and on the verge of rolling over? That’s the question on everyone’s mind.
2,280 has been a ceiling for this market since early December. We broke through briefly at the end of January but failed to hold those gains. This is our second assult on 2,300 and thus far things don’t look any different. But the thing to remember is we tumble from unsustainable levels quickly. We have been hanging out near these record highs for two-months. If this market was fragile and vulnerable, we would have crashed a long time ago. There have been more than enough reasons for this market to selloff, yet every time it refuses the invitation and we run out of sellers. Say what you will about the fundamentals of this market, but when confident owners don’t sell bearish headlines and weak price-action, supply stays tight and prices remain resilient. If the sellers failed to materialize over the last eight-weeks, why would they show up now and sell far more benign headlines and price-action? That is the question every bear needs to answer. If it didn’t happen then, why is it going to happen now?
That said, tepid demand has been a major headwind for the market at the upper end of the trading range. While confident owners are keeping supply tight, those with cash prove just as stubborn when it comes chasing record highs. When no one is selling and no one is buying, we trade sideways. We know this stalemate cannot last forever, and at least for the near-term, the path of least resistance is higher. What happens after we breakout is less clear, but unless something unexpected happens, don’t bet against this market just yet.
Jani
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