Struggling to go higher on good news?

By Jani Ziedins | End of Day Analysis

Dec 07

End of Day Update:

The S&P500 finally broke a string of four down days and put together a respectable gain. While four down-days sounds bad, the losses were relatively modest, only giving back a portion of last week’s breakout.

Tax Reform is marching ahead, but the market is struggling to keep up. The lack of further price increases suggests the Tax Reform rally is running out of steam. We can continue creeping higher over the near-term but anything much above 2,700 seems like a stretch. If there was a lot of upside potential left in the market we would still be racing higher. Instead the breakout stalled and even dipped after the Senate approved their version of Tax Reform. Few things make me more nervous than a market that stops going up on good news.

News gets priced in quickly, that’s how markets works. Once the crowd started assuming Tax Reform was going to happen, the bulk of the upside had already been realized. If someone is still waiting to buy the headlines, they will be late to the party. At this point it looks like the actual signing of the bill will be anticlimactic and could even trigger a sell-the-news dip.

The path of least resistance is still higher and I expect the glide higher will continue over the near-term, but we are definitely approaching the end of the Tax Reform rally. Hope over tax cuts fueled the Trump rally over the last 12-months, but to keep marching higher we need to find a new standard-bearer. At this point I don’t know what it will be. Maybe blow-out earnings reports next month. But whatever it is it needs to be big to keep beating these ever higher expectations.

Switching gears to bitcoin, it shocking how high this has gone over the last few days. Last week we broke through $10k for the first time. Tonight we hit $17k. Two months ago we were under $4k. If anyone still believes this is not a bubble, clearly they don’t have any experience with bubbles. Without a doubt this thing will continue higher, but we are in the frantic part of the climb and the crash is not far away.

The problem BTC will run into is a lot of people are following this surge in price with a trailing stop. BTC passes $10k, they move their stop up to $8k. We surge past $14k and they move it up to $12k. That is actually a very sound strategy, unfortunately it doesn’t work when everyone else is doing the same thing. Without a doubt the price gains over the last few weeks are littered with countless automatic stop-losses. Once BTC starts dipping, sell orders are going to get triggered, which further pressures prices, which triggers even more sell orders. It won’t take long for a tidal wave of sell orders to overwhelm the dip buyers.

The scary part is the these things go down so much faster than they go up. $7k in gains over a week will be undone in an hour. I won’t pretend like I can call the top in BTC and this thing can easily continue past $25k and $35k over the next few days or weeks, but this rate of gains is most definitely not sustainable and it will come crashing down soon. If a person is planning on selling, get out on the way up because you will not be able to find a buyer once this thing starts going down.

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.

Leave a Comment:

(7) comments

Martin December 7, 2017

I do not know but this retreat actually looks healthy to me as the current break out resembled a parabolic run. I actually didn’t feel comfortable with how the market ran up and expected this retreat. What will matter now is how the market would behave now, resemble the trend or stays weak?

Reply
    Jani Ziedins December 8, 2017

    I agree. This sideways stretch if healthy, but the problem is expectations are so high it will be easy to disappoint this market if anything fails to go according to plan. I expect the market to keep going up over the near-term, but the risks are definitely elevated over the medium-term.

    Reply
michael December 8, 2017

I’m a bit confused on the trailing stop example. I know that I can do this with stocks, ETFs, etc. but bitcoin is not traded on an exchange like stocks, right? You have to buy it through an app or website, and then you can buy “stuff” with it at some places, or, I guess, sell it. But trading like Jani suggests has me scratching my head.

Because if it traded like a stock, I’d be about ready to short it…

Reply
    michael December 8, 2017

    Nevermind. A little research has found exchanges and platforms such as GDAX to trade. I haven’t convinced myself that the risk is worth the reward though…

    Thanks Jani, for your interesting insights.

    Reply
      Jani Ziedins December 8, 2017

      The scary thing is these exchanges are being run by people with little to no market experience. It works well enough on the way higher, but I suspect the fragile ecosystem will collapse when everyone tries to get out at the same time.

      Reply
Martin December 8, 2017

Also switching to BTC… One more thing on the stop losses and selling: once the selling hits it will become close to impossible to sell, many stop losses will be hit but will not execute at the stop loss level, mainly when everyone will rush to exit and there will not be enough buyers to buy at those levels. Add it it that the servers of the providers will not be able to handle it and start crashing so people will not be able to do anything about it. Recently Coinbase started seeing this pressure when people were frantically buying BTC (!!) and their platform was inaccessible or the buy orders didn’t go through due to too violent BTC move up!!! Imagine what would happen when this will be falling from the sky! Many bitcoiners have no clue whatsoever. They are already lured into thinking that they are safe and have a good grip on everything and that the stop loss will protect them… Since now we even have a hoe and poll dancer switching into Bitcoin trader and educator the end is really near.

Reply
    Jani Ziedins December 8, 2017

    I agree. It is going to get really ugly because as you mentioned most of these exchanges won’t be able to handle the loads. BTC is very much the wild west and those running the show don’t have experience with this kind of stuff. It will be a very expensive lesson for everyone involved.

    Reply
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