Don’t fear the normal and healthy

By Jani Ziedins | End of Day Analysis

May 16

Free After-Hours Update:

After tumbling five out of six sessions and challenging 2,800 support Monday, the S&P 500 has been on a rip ever since. Prices are still underneath the highs, but this rebound has done a lot to alleviate last week’s trade war fears.

But this shouldn’t come as a surprise. Monday evening I wrote the following:

“But here is the thing about this latest round of trade war headlines, how much worse can they get? Both sides are already taxing so much they are quickly running out of new things to tax. Even if this doesn’t get solved, we are not far from the point where this cannot get any worse simply because both sides are running out of options to make it worse.

In my opinion, the headlines over the last seven days were the worst of what we will see. The market was blindsided by this escalation since it was anticipating a deal. But after the shock wears off and the market comes to terms with these headlines, most of the downside will have already been realized.”

And that is exactly what happened. The trade war headlines climaxed Monday morning and so did the selling.

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Rather than fear Monday’s tumble, smart traders were buying the discounts. People always pray for a pullback. Unfortunately, when the market gods finally answer their prayers, most people end up being too afraid to buy.

And even worse, reactive traders sold the dip and are stuck buying back in at higher prices. Sell low and buy high. Do that a few too many times and they won’t have any money left to trade.

Now that Monday’s lows are 75-points behind us, the question is what comes next?

The market is acting well. Pullbacks to support are perfectly normal and healthy. Unfortunately, most people forget about this fact when we are stuck in the middle of one. As long as we continue holding 2,800 support, all is good.

That brings up the one nuance we need to be wary of. There are few things more bearish than a bounce that fails to stick. If this rebound fizzles and prices tumble under the lows, that tells us demand evaporated and lower prices are ahead. But that is the worst case scenario. As long as this week’s gains stick, then all is good.

In fact, things are great. We challenged support and the bulls won. That doesn’t mean prices will continue racing higher, in fact, they could retreat some over the next few days. But as long as they remain above 2,800 support, that tells us the bull market alive and the uptrend will continue. If this market was fragile and on the verge of crashing, it would have happened by now.

Stick with what has been working, whether that is buying the dips, or patiently sitting on your favorite buy-and-hold stocks. Let the other guy give away his money by overreacting to these normal and healthy dips.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN

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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.