The S&P 500 b0unced back on Thursday, gaining 0.9%, easily erasing this week’s selling.
Last week, bulls were pilling in ahead of their widely predicted 4,800 breakout. This week bears were patting themselves on the back for shorting the next big breakdown. And as luck would have it, both sides got their trades exactly wrong. But what should one expect when making directional trades in a sideways market?
Luckily, readers of this blog saw this sideways meat grinder coming and resisted the urge to overtrade it. As I wrote two weeks ago:
If this market was overbought and vulnerable, [January 9th’s] opening losses were the perfect opportunity for bears to strike by opening the selling floodgates. Instead, most owners saw [January 9th’s] early losses, shrugged, and kept holding. That caused supply to dry up and prices to bounce.
We’ve come a long way from the October lows, and the market deserves a well-earned break. I’m not expecting a surge past 4,800 anytime soon and the market is settling in for a sideways grind under 4,800 resistance.
Here we are, nearly two weeks later, and that’s exactly what happened. Markets spend 60% of their time trading sideways, yet that doesn’t stop everyone from predicting the next big directional move is just around the corner.
Not much is happening in the financial headlines, and these daily moves are nothing more than the market’s inability to sit still. The market does something every day, but these daily moves don’t mean anything, and the index is simply consolidating last year’s big gains by grinding sideways for a bit.
This will change at some point, but this is not that point, so we need to keep expectations low and anticipate more sideway chop for the foreseeable future. If prices were going to surge higher, they would have surged by now. If they were going to collapse, they would have collapsed. The fact we are doing nothing tells us the market doesn’t want to do anything.
This 4,700/4,800 trading range is too tight to contain for much longer, but that doesn’t mean the next directional move is coming. Instead, the first few times we break out of this range, that move will stall and reverse as the consolidation simply looks for more elbow room between its swings. Continue anticipating reversals until we have a compelling reason to do otherwise.
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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.