Are savvy traders holding the breakout or selling the resistance?

By Jani Ziedins | End of Day Analysis

Jul 27

Free After-Hours Analysis: 

Wednesday was a great session for the S&P 500 as a 1% opening pop turned into a 2.6% surge by the close. And just as important as the headline numbers, the index closed comfortably above 4k for the first time in nearly two months. Not bad for a market people were leaving for dead a few weeks ago.

A couple of factors lead to Wednesday’s buying frenzy. First, Tuesday evening’s poor tech earnings got the party started and Powell brought the punch bowl Wednesday afternoon when he hiked interest rates a whopping 0.75%.

While neither of these developments qualifies as “good” news, stocks don’t need good news to rally in bear markets. Instead, “less bad than feared” is the name of the game. As poor as tech earnings are and the Fed continues slamming on the monetary brakes, investors are relieved things are not even worse.

While Wednesday was a great session to be holding a 3x leveraged ETF, at this point, that is water under the bridge and what readers really want to know is what’s coming Thursday and Friday.

The market hit its head on 4k resistance last week and retreated back to 3,900, but the fact we returned to 4k resistance so quickly tells us the market wants to be up here, not down there. Combine that with a great day that was driven by better-than-expected news, this breakout still has room to run. How much further is anyone’s guess, but 4,200 is very much in play as long as we remain above 4k.

As for how to trade this, keep holding the 4k breakthrough and lifting our stops. There is no reason to abandon a trade that is working prematurely, so I’m not a fan of impulsively selling this strength because “it feels too high.” A test of 4k support Thursday is normal and expected. Even a minor violation of 4k wouldn’t bother me as long as the selling dries up and the index quickly reclaims 4k.

On the other hand, if the selling accelerates under 4k again, that tells us the market isn’t ready and it needs to retrench a bit longer. Lock in some really nice profits and get ready to buy the next bounce.

But I think that will happen. Any test of 4k will be quick and Thursday is setting up to be another good day.

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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.