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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
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.
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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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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 slipped another half percent on Monday as 4,800 resistance remains an impenetrable barrier.
Days of up followed by days of down sounds like a trading range to me. Luckily for readers, this is exactly what I forecast in last week’s Free Analysis:
Bulls and bears are jumping all over these gyrations that confirm their biases, only to have those trades blow up in their faces a few hours later. This market is entering a consolidation phase, and it will be a while before we get the next big, directional move. Keep that in mind the next time you are planning a trade.
In range-bound markets, we trade the reversals; we don’t bet on the continuations. Until the market decisively breaks out of the 4,700/4,800 trading range, be prepared for a lot more sideways chop.
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Trading ranges look seductively easy to trade in hindsight, but it is impossible to overstate the difficulty of standing your ground when it feels like the market is moving against you. This is one of those times where, if you wait long enough, both Bulls’ and Bears’ trades will show a profit. Unfortunately, it is never that easy. Instead, both sides lose their nerve and bailout for a loss before the profits show up. Buy high, sell low, repeat until broke.
Remember, successful trading isn’t about big winners. Everyone gets those. It is about keeping those profits in the follow-up trades, which is why I’m not anxious to press my luck here. Maybe we get a nice buyable bounce later this week, but with the market switching direction every day or two, it takes impeccable timing to get these trades exactly right, so be careful chasing these nickels and dimes. It would be a shame to allow haste and greed to cause us to give up our big pile of profits by irresponsibly overtrading this sideways chop.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 finished Thursday’s session pretty much where it started. But as quaint as that flat finish sounds, getting there was anything but a smooth ride.
Before the open, we got December’s CPI report showing inflation picked up a small amount from November. While not terrible, it leaves inflation above the Fed’s target and hints that rate cuts might not arrive as quickly as some investors hoped.
After opening with small gains, the selling hit hard, and the index shed nearly 60 points over a few hours. But when it looked like another big wave of selling was knocking us back to the January lows, supply dried up, and prices bounced.
Luckily, this sideways chop under 4,800 resistance doesn’t surprise regular readers. As I wrote in my Free Analysis Tuesday:
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. But as long as we keep getting more up than down, this is a better place to be owning stocks than it is to be shorting them.
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As luck would have it, we hit our head on 4,800 resistance and turned back. But equally expected was another aborted selloff that didn’t go anywhere.
Bulls and bears are jumping all over these gyrations that confirm their biases, only to have those trades blow up in their faces a few hours later. This market is entering a consolidation phase, and it will be a while before we get the next big, directional move. Keep that in mind the next time you are planning a trade.
In range-bound markets, we trade the reversals; we don’t bet on the continuations. Until the market decisively breaks out of the 4,700/4,800 trading range, be prepared for a lot more sideways chop.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 slipped less than 0.2% Tuesday.
While a loss is a loss, this small give-back actually looks bullish for two reasons. First, we opened the session with much larger losses, and the market spent all morning climbing back from those opening lows. Second, giving back less than 0.2% of Monday’s towering 1.3% surge is barely a scratch.
Tuesday’s price action follows what I wrote in Monday’s free evening post:
Monday’s decisive bounce off of 4,700 support must be respected. At this point, last week’s step back is over, and the rally is resuming. That’s the only way to trade this. For a nimble trader, the bounce off of 4,700 was buyable. The non-stop, nearly straight-up rally through Monday’s session was paid for by tardy shorts getting squeezed out of their positions. Odds are good we will see more pressure applied to bears over the next few sessions.
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If this market was overbought and vulnerable, Tuesday’s opening losses were the perfect opportunity for bears to strike by opening the selling floodgates. Instead, most owners saw Tuesday’s early losses, shrugged, and kept holding. That caused supply to dry up and prices to bounce.
While two days of resilient trade is not conclusive (three if you count Friday’s draw), it sure is a good start. As I often write, something that refuses to go down will eventually go up. And so far, the market is refusing to resume last week’s selloff.
While last week’s selloff could return at any time, the first thing a bigger selloff needs to do is violate 4,700 support. As long as the index remains above this key level, last week’s selloff is dead.
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. But as long as we keep getting more up than down, this is a better place to be owning stocks than it is to be shorting them.
Everything will change if the index falls under 4,700 support. But until that happens, keep giving the market the benefit of the doubt.
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 surged 1.4% Monday, closing comfortably above 4,700 support as last week’s worries faded from memory.
Financial headlines haven’t changed, but the market is enjoying a bit of relief as Congress makes incremental progress toward avoiding a shutdown. Sometimes, that’s all it takes to cure a bout of selling. As the saying goes, buy the rumor, sell the news. And traders were definitely buying the rumor on Monday.
Time will tell if Monday’s strength proves durable, but often, it only takes removing the selling pressure for the market to regain its footing. We will learn more about the market’s mood on Tuesday, but so far, things look promising. One day doesn’t make a trend, but every trend starts with that first day.
As readers will recall, I put on a short position last week. Fortunately, I was prepared for something like Monday’s bounce. As I wrote last week:
At this point, the pullback deserves the benefit of the doubt. Anyone who shorted Tuesday or Wednesday morning is sitting on small but comfortable profits, and they can lower their stops to their entry points, greatly reducing their risk.
[S]horting a rally is one of the hardest ways to make money in the market, so this only applies to the most adventurous traders, but for the moment, this trade is working and we stick with it. The most important thing is respecting our stops. Just ask anyone who shorted “too high” at 4,400, 4,500, and 4,600. Don’t make the same mistake and pull the plug if the short trade stops working.
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With Monday’s buying erasing all of last week’s selloff, that obviously qualifies as the short trade no longer working. Savvy traders pulled the plug at their entry points. As the saying goes, no harm, no foul. This trade didn’t work, but it didn’t cost us anything. Does anyone complain about getting free lottery tickets, even when they don’t pay off? I sure don’t
As for what happens next, Monday’s decisive bounce off of 4,700 support must be respected. At this point, last week’s step back is over, and the rally is resuming. That’s the only way to trade this. For a nimble trader, the bounce off of 4,700 was buyable. The non-stop, nearly straight-up rally through Monday’s session was paid for by tardy shorts getting squeezed out of their positions. Odds are good we will see more pressure applied to bears over the next few sessions.
And if the selling returns, that’s okay, too. I’m willing to ride the next trade in either direction. Start small, get in early, keep a nearby stop, and only add to a position that’s working.
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What’s a good trade worth to you?
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For as little as $1.28/day, receive actionable analysis and a trading plan every day during market hours
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