When does holding support become stalling?

End of Day Update:

I’ve been bullish on this market for awhile and profited handsomely from this rally above 2,800. But all good things come to an end and I’m losing confidence in this latest move higher. Last week the S&P 500 surged to 2,850 after Trump agreed in principle to end his trade war with Europe. Unfortunately those gains evaporated after FB and NFLX failed to live up to investors’ lofty expectations.

Tuesday evening AAPL joined GOOGL and AMZN in beating expectations, but that wasn’t enough to put traders into a buying mood Wednesday. If this market was poised to go higher, there have been enough positive headlines to fuel a “half-full” move. Instead we remain stubbornly stuck just above 2,800 support as trade war fears simmer in the background.

Few things make me more nervous than a market that refuses to rally on good news and is why my conviction is fading. To be clear, I’m not bearish and don’t expect a large crash. But I am growing more cautious and worried this pause at support is turning into stalling. The longer we hold near support, the more likely it is we will breach it. I’d like to see us keep inching higher, but we are quickly running out of excuses to rally. If good news cannot lift us, eventually bad news will knock us down.

That said, I’m not looking for a large move lower; 2,750 seems reasonable. While a move that small hardly seems worth worrying about, and we shouldn’t worry about it, that is a lot easier to do when we see it coming. Those that are unprepared will watch us crash under 2,800 support and keep falling past 2,790…2,780…2.770…2.760…and…2,750. Those that don’t know what is happening get spooked more easily because it is natural to assume prices will keep falling. Unfortunately the point they finally call mercy and bailout is usually moments before prices capitulate and rebound.

There are two ways to trade a modest dip. Either have the confidence and conviction to ride through the dip and rebound. Or take profits before we stumble and buy back in at lower levels. What we don’t want to do is hold until pain and fear forces us out moments before prices rebound.

I’m not bearish enough to short this stalling, but am growing more cautious. Longer-term investors should be prepared to weather a little near-term weakness, while short-term traders should consider locking-in profits. I still expect good things over the medium and long-term, but I have less conviction over the near-term.

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Jani

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