Is today’s late selloff a warning sign?

By Jani Ziedins | End of Day Analysis

May 19

Free After-Hours Analysis: 

The S&P 500 finished in the red for the first time in three sessions. That said, today’s losses only gave up a small portion of yesterday’s gains. So far the rebound is fully intact and prices are just shy of the rebound’s highs. As long as this market keeps making higher-highs, everything remains on track.

While a 1% loss doesn’t mean much by itself, the one noteworthy attribute of today’s pullback is almost all of the selling occurred in the final hour of trade. This is when the largest institutions trade and almost all of their participation seemed to involve selling.

How much of that was swing-traders locking in recent profits and how much was fearful owners looking to get out before the next fall? We won’t have a conclusive answer for a few days, but here is what to look for. If it was simple profit-taking, then this is nothing more than a fleeting bout of indigestion and this weak close won’t amount to anything meaningful. On the other hand, if this is more chronic nervous selling, it could become contagious and trigger follow-on waves of defensive selling over the next few days.

Which is it? Well, since the market rebuffed a far more promising selloff opportunity last week, I don’t see any reason to expect today’s late selloff will turn into anything more dramatic. Last week’s dip was our best chance to crack this rebound. If bears couldn’t get it done with a far better setup, I doubt they have what it takes this time around. Last week’s bounce ended, continuing the trend of higher-highs and bulls remain fully in control as long as prices remain above Friday’s close.

Unless we see an extension of today’s waterfall selling, the path of least resistance remains higher. While I don’t have a problem shorting the next promising crack, remember, shorting is going against the trend and it must be done with extreme caution. That means starting small, keeping nearby stops, and admitting defeat early. Just ask anyone who held a short over the weekend what it feels like to give a short trade “a little more time”.

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


About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.