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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 stumbled Tuesday in the biggest loss in nearly a month. Last week’s relief as prices surged to all-time highs has turned into this week’s second thoughts. Nothing material has changed in the headlines, but running into resistance near the highs was inevitable as I explained last week:
“Now that prices bounced back near all-time highs, the question is, “what comes next?” I wish I could say the path is rosy for as far as the eye can see. Unfortunately, that is never the case. Momentum is definitely higher and prices will creep back toward all-time highs next week and even start encroaching on 3,000, but the thing we need to remember is we are stuck in the slower summer season. That means big money is on vacation and without their buying power, it will be hard for smaller investors to fund a larger directional move. For that, we need big money and they won’t be back until the fall. So temper your expectations until then.”
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That said, 1% losses are normal and routine. If anything, we should be more surprised by the lack of them, not that one happened today.
The biggest financial headlines continue to revolve around the Fed’s interest rate policy and Trump’s trade war with China. While the Fed didn’t cut rates last week, they said the right things and pushed stock prices to record highs. But that was largely expected, so the bounce was short-lived and now traders are shifting their attention back to trade negotiations as Trump and president Xi are scheduled to meet later this week.
The last time these two got together, they diffused the trade situation with Trump agreeing to postpone a tariff increase. But that reprieve was only temporary and May’s stock tumble started after Trump surprised everyone by going ahead with those tariffs.
Will we see more of the same this time? Probably. Both sides will play nice for the cameras and that will send hope back into the market. But when it comes to actually putting a deal together, the details could derail the process for the umpteenth time since these negotiations started more than a year ago.
Sentiment moves in waves. Periods of relief are inevitably followed by periods of second-guessing. And we should expect the same here. Prices that dip are viewed as good bargains and are snapped up by savvy investors despite the negative headlines. The opposite happens as prices rise on good news and become expensive. Rather than pay the premium, savvy investors are locking in profits and waiting for the next bargain.
As prices push up to resistance during the slower summer months, it shouldn’t surprise anyone to see the rate of gains stall. The only question is if this market refreshes by dipping or by trading sideways. I don’t know the answer to that, but I don’t need to in order to make a good trade. Instead, we wait for the market to tell us what it wants to do and then we jump aboard and enjoy the ride.
[bctt tweet=”Buyable dip or breakout after a lengthy consolidation? Both are very tradable and we should formulate a trading plan around each scenario.” username=”crackedmarket”]Buyable dip or breakout after a lengthy consolidation? Both are very tradable and we should formulate a trading plan around each scenario. What signals do you need to see before jumping in? How much of a dip? What constitutes a breakout? I know what works for me, but my risk tolerance and time frame are different than yours. Decide what works for you and then go for it. And just as important as when to get in, don’t forget a plan to get out. That includes both stop-losses and when to take profits. The next trade is coming. Now is the time to get ready for it.
Trading Plan:
Most Likely Next Move: Consolidating after running into resistance near all-time highs. The market will either refresh through a buyable dip back to support, or an extended sideways consolidation under resistance followed by an upside breakout.
Trading Plan: Buy the next dip or the next breakout
If I’m Wrong: Rather than consolidate, Trump and the Fed answer all of the market’s prayers and prices smash through the highs and don’t look back. Any large upside move needs a fundamental catalyst to suck in new buyers. If we see a headline driven buying frenzy, join the party and enjoy the ride higher.
Bitcoin continues its wild gyrations, but more important than any of these daily swings is that prices remained firmly above $10k. That is the line in the sand. Stay above it and all is good. Fall under it and that could be the end of this bounce. The risks are extraordinarily high. The safe time to buy was back at $4k. People chasing prices above $10k face a good chance of getting burned. Volatility and the risks are too high for my tastes. I’d rather wait to see BTC hold these prices for a while before betting on a bigger move higher. That means I might miss the next move. But I’m okay with that. There is investing and there is gambling. To me, betting on a big move higher today is a lot closer to gambling than investing. As the saying goes, it is better to miss the bus than get hit by the bus.
What’s a good trade worth to you?
How about avoiding a loss?
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN
By Jani Ziedins | End of Day Analysis
Free After-Hours Update
Trading Plan: at the end of this post.
The S&P 500 burst higher Tuesday, ending last week’s stalemate between 50dma support and 2,900 resistance. The market is excited to see the ECB and Fed inching toward economically stimulating rate cuts. Further boosting sentiment, Trump and the Chinese president scheduled a face-to-face meeting next week to resolve their trade differences.
Three weeks ago the market was in the dumps and traders were abandoning stocks ahead of what many assumed would be a much larger summer swoon. Fast forward to this his week and everything is great and the market is approaching all-time highs. And so swings the pendulum of sentiment. But these developments shouldn’t come as a surprise for regular readers of this blog.
Two weeks ago I wrote the following:
“[W]e trade the market we are giving and so far this one keeps acting like it wants to go higher. As long as we hold 2,800 support, then we should continue giving it the benefit of doubt.
I won’t pretend like I know what Trump is going to do and if those decisions will push the US into a recession. Instead, we follow the market’s lead. If it doesn’t want to be bothered by these things, then neither should we.
[I]f prices continue recovering next week and remain above 2,800 support, Monday’s dip to 2,750 was just another buyable bump on our way higher.”
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Now that prices bounced back near all-time highs, the question is, “what comes next?” I wish I could say the path is rosy for as far as the eye can see. Unfortunately, that is never the case. Momentum is definitely higher and prices will creep back toward all-time highs next week and even start encroaching on 3,000, but the thing we need to remember is we are stuck in the slower summer season. That means big money is on vacation and without their buying power, it will be hard for smaller investors to fund a larger directional move. For that, we need big money and they won’t be back until the fall. So temper your expectations until then.
The biggest headlines ahead of us continue to be a resolution/breakdown of the US/Chinese trade negotiations and a change in the Fed’s interest rate policy. A constructive trade deal would remove a major uncertainty hanging over the market. A breakdown and escalation will renew uncertainty. I wish I could predict the outcome, but it is hard when dealing with leaders and their egos. Neither leader wants to be viewed as caving and that is how we got to this point. Will it get better? Maybe. But there is also a reason this has dragged on for nearly a year without a resolution.
Luckily, the market has been placing less emphasis on the trade war. People who fear these headlines sold a long time ago and were replaced by confident dip buyers who don’t mind these headlines. This process of purge and replace is how markets price bad news in. Eventually, it gets to the point where there is no one left to sell a headline and the market stops caring. The longer this trade war drags on, the closer we get to that point. May’s tumble started when Trump surprised everyone by doubling the taxes on Chinese imports. While that lead to some near-term weakness, it was short lived and the market has since recovered nicely. A further escalation will send a shock through the market again, but this reaction will be even smaller.
Far more important to traders is what the Fed does. Expectations of rate cuts grow by the day. Disappointing employment numbers were met with cheers earlier this month because that increases the odds of a rate cut. It is actually getting to the point that the market will be disappointed if the Fed doesn’t cut rates soon. And given how cautious the Fed has been, there is a good chance it could continue its “wait and see” approach. That would disappoint the overly optimistic take the air out of this hope-filled rebound.
I won’t pretend like I know what Trump and the Fed will do next. Instead, I will focus on the market and make my trading decisions based upon what it is doing and where the risks lie. The market is acting well, but prices are quickly approaching resistance near the old highs. The higher prices go, the greater the risks. The swift June rebound means buying now is riskier than it was a few weeks ago. If the market is settling into a summer trading range between 2,800 and 2,950, this is a better time to be taking profits than adding new money. That said, if the bad news holds off for a couple of weeks, we could see prices inch toward 3,000. But as always, there are no guarantees in the market. What a person does here depends on their timeframe and risk tolerance.
Trading Plan
Most Likely Next Move: Momentum is higher and prices will return to 2,950 resistance and even break through it over the next couple of weeks if the bad news holds off.
Trading Plan: Approaching resistance is a better place to be taking profits than adding new money. If the market continues to trade well, we can always buy back in. If prices stumble, a person cannot buy the dip unless they have cash.
If I’m Wrong: The Fed cuts rates and Trump and the Chinese kiss and makeup. Adding monetary stimulus and removing political uncertainty will send prices sharply higher. But if these events trigger a bigger move, there will be plenty of time to jump aboard it.
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
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