Why smart money hasn’t given up on this market yet

By Jani Ziedins | End of Day Analysis

Jan 18

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The S&P 500 shed 1.6% on Wednesday as the index continues struggling with 4k resistance, the 200dma, and 2022’s downtrend line.

Retail sales fell 1% in December, and wholesale price inflation slipped to the lowest levels since last winter.  The market’s knee-jerk reaction was to buy those headlines in hope of a quicker end to the Fed’s tightening cycle. But the relief was short-lived and prices ended up tumbling nearly 200 points through the session.

Did this morning’s headlines actually change anyone’s mind about the trajectory of the market? Or is this simply some profit taking near obvious technical levels?

The thing to remember about technicals is they should be drawn with a crayon, not a straight edge. These are regions and not specific levels. Bounces and stalls almost always come at some level other than the exact technical levels everyone is watching. Sometimes it is before, other times it is after. But the rarest of them all is a reversal on top of the key level.

To me, this turn-back at 4k looks too tight and clean to be real. I’m not saying that it can’t be real, just that it usually doesn’t work this way. And since trading is a game of probabilities, it is nice to know what outcome is more likely than another.

At this point, Wednesday’s selling looks to me like some profit-taking at the widely followed 4k level followed by waves of reactionary selling as follow-on sellers started fearing another rejection by resistance levels that stymied this market in the final months of 2022.

Real rejection or just another false alarm on our way higher? Lucky for us, we won’t have to wait long to get the answer. A bounce on Thursday and all is forgotten and forgiven. On the other hand, continued selling means lower prices are ahead, but even if that happens, we never stop looking for the next buyable bounce because it could come as early as Thursday afternoon.

All of that said, as much as I’m looking for a bounce from Wednesday’s retreat, I’m a disciplined trader and that means I pulled the plug on my last trade because the market’s retreat undercut my trailing stops. As easy as it is to buy back in, there is no reason to let all of my recent profits escape because I held too long. Buy early, sell early is how l like to play this.

But now that I’m out, I’m itching to get back in and will be looking for a bounce to buy Thursday morning or afternoon. And if not Thursday, then Friday. A bounce is coming, the only question is when.

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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.