Menu
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 popped Wednesday morning after word spread Trump was willing to sign Congress’s budget compromise. Avoiding another government shutdown eliminated a major risk in front of us and put traders into a buying mood. Unfortunately, that excitement didn’t carry into the close and prices finished near the intraday lows.
A 0.3% gain is still a 0.3% gain and it allowed us to reclaim the 50dma for the first time in more than two months. But if we wanted to be critical and look at the half-empty side, closing near the intraday lows on a good news day is most definitely noteworthy. One day doesn’t make a trend, but it is something to keep an eye on going forward. Almost every day since the Christmas bottom finished near the intraday highs and this late-day buying frenzy propelled us to these highs. But if that buying is waning, it could be an early indication the rebound is shifting into the next phase of the cycle.
The other reason to be cautious is things didn’t end well the previous three times the market retook the 50dma. While there is no comparison between now and where sentiment was last fall, widely followed technical levels have a tendency to turn into self-fulfilling prophecies. Technical traders expect prices to stall at overhead resistance, so they start taking profits proactively, launching the wave of selling that eventually leads to the dip in prices.
I’ve been warning traders to tread likely after the market rebounded nearly 20% from the December lows. And some people criticize me because prices have continued creeping higher. But I’m okay with that. People also criticized me for saying in December people should be buying those discounts, not selling them. By now hopefully everyone appreciates how that one turned out.
After doing this for so many years, I’ve long since gotten used to going against the crowd and actually find reassurance in the criticism because it means I’m on the right track. Nothing makes me more nervous than when everyone agrees with me.
And just because the market has been creeping higher the last few days and weeks doesn’t mean buying up here was the smart thing to do. Allow me to use a blackjack analogy. If a person hits on 18 and he gets a 3 card. That was a great call and he won the hand. But was that really the smart thing to do? While it worked great this time, how often will hitting on 18 backfire? Traders who last a long time in this business understand the monumental difference between being right on a an individual trade and trading smart. Unless you learn to trade to smart, you won’t last very long.
The market continues to act well and momentum is definitely higher, but anyone buying up here is being just as foolish as the guy hitting on 18. Unfortunately, that is the way most people trade. Those that were selling last December’s dip are now chasing 2019’s rebound. Sell low and buy high rarely works out.
Those with long-term investments should stick with their favorite positions. But those with trading profits should be shifting to a defensive mindset and thinking about taking profits if they haven’t already. This rebound priced in a lot of good news. That means there is far less upside left ahead of us and a lot of air underneath us if things don’t go according to plan.
What’s a good trade worth to you?
How about avoiding a loss?
For less than $1/day, have profitable analysis like this delivered to your inbox every day during market hours
Follow Jani on Twitter @crackedmarket
Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 stumbled Thursday in one of the few misses since the Christmas rebound kicked off. Over the last few days, the index struggled to break through 200dma resistance and has slipped back to the psychologically significant 2,700 level.
While today’s tumble felt abrupt given how calm and steady the climb has been from December’s lows, a down day shouldn’t surprise anyone. As I wrote late last week:
“Everyone knows markets don’t move in straight lines and anyone who expects the market to keep racing higher clearly doesn’t understand how market work. While anything could happen, more often than not, hot markets cool off and pullbacks from overbought levels are a normal and healthy way of consolidating gains.”
We knew this was going to happen, we just didn’t know the when or the why.
Sign up for FREE Email Alerts to get profitable insights like these delivered to your inbox.
Thursday’s weakness started before the open when European economic data failed to meet expectations. That brought last year’s global growth fears back to the front. The only question is if this is just a single bout of indigestion, or if this will trigger another wave of second-guessing and defensive selling.
The nice thing about today’s dip is we found a bottom before lunchtime and closed well off the early lows. That is the opposite of last year’s dreadful price-action when early weakness triggered runaway selloffs. At least for the time being, investors appear more inclined to buy the dips than pile on the selling. But it takes more than one day to consolidate nearly 400-points of gains, so we have a long way to go before we can waive the all-clear flag.
I want to make one thing clear, I am most definitely not bearish and think the setup over the medium- and long-term looks good. But I am far less optimistic over the near-term. Markets move in waves and the Christmas rebound priced in a lot of good news. Hope that things will be less bad than feared. Unfortunately, the problem with hope is it leaves the door open to disappointment.
The crowd is always filled with emotions that swing between extremes. Last month’s collapse was built on fear of an economic collapse. This rebound started with hope that things were not as bad as feared and quickly morphed into fear of being left behind. And no doubt recent gains leave us vulnerable to another near-term reversal. Two steps forward, one step back. That’s the way the market always worked and there is no reason to expect something different to happen here.
I’m not predicting a crash or anything dramatic like that. Just a cooling off. Maybe that means some sideways trade. Maybe that means a dip back to support. Either way, it is very predictable and shouldn’t catch anyone off guard. But it will. Because it always does.
Everyone knows markets move in waves, but they always forget that fact in the moment. Every dip is seen as the start of something bigger. By rule, it has to. If it didn’t scare people out, then no one would sell and we wouldn’t dip. Even if this is the start of a very normal and routine pullback to support, expect to hear all kinds of people shouting doom-and-gloom and how we better get out now before it is too late.
Smart money buys discounts and sells premiums. It is definitely premature to call a one day dip a discount and we should be prepared for more. But as long as we know it’s coming, then it is a lot easier to maintain our composure and resist the urge to join the hysterical crowd. The market is acting well and there is nothing to do with our favorite long-term investments. But for our short-term swing-trades. This is a good time to get defensive and start taking profits if you haven’t already.
What’s a good trade worth to you?
How about avoiding a loss?
For less than $1/day, have profitable analysis like this delivered to your inbox every day during market hours
Follow Jani on Twitter @crackedmarket
Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
You must be logged in to post a comment.