Now that we hit 5k, how to trade what comes next

By Jani Ziedins | End of Day Analysis

Feb 07

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The S&P 500 added 0.8% on Wednesday, powering to yet another record close, including a midday push to 4,999.89.

That’s as close to 5k as one can get without actually touching it. As I wrote earlier this week in a post titled, “5k, here we come”:

Friday’s reclamation of 4,900 looks like the real deal, and 5k is up next. We might not go straight there, but the odds are good that if we’ve come this far, we will close the deal soon.

I have no idea what happens after we reach 5k, but until then, this market wants to go higher, not lower.

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For all practical purposes, the index hit 5k on Wednesday. So, now it is time to figure out what comes next.

I see three possibilities: up, down, or sideways. Wow, isn’t that insightful? Ha!

But, seriously, we have these three possibilities. Sideways is likely because the October rebound stalled momentarily at 4,400, 4,600, and 4,800, so another pause at 5k fits the pattern.

As for up, nothing would hurt the bears than another short squeeze. And to be honest, the market almost never gets rejected exactly at a widely followed level. Either we stall before or after. Since we didn’t stall before 5k, that means stalling after.

And lastly, down. No matter how impressive the October rebound has been, it has to end at some point. Why not end it at something as spectacular as 5k? That’s exactly what the NASDAQ did in March 2000, peaking at 5,048 before entering into a multi-year bear market.

As for what I think will happen, the market doesn’t care what I think, and the only choice we have is to follow the market’s lead. That said, it wouldn’t surprise me to see the market have another up day or two to decisively put its stamp on 5k before falling into another sideways consolidation, as it did at prior round milestones in recent months.

As for how to trade this, we collect worthwhile profits when we have them because if we allow ourselves to get greedy, the market will take everything back. That means lifting stops and locking in some partial profits while the crowd is the most optimistic.

Markets move in waves, and it’s been a good run. But that also means it is time to start collecting profits and getting ready for the next trade. Which, at this point, could be up, down, or sideways. Only time will tell. But anyone sitting on a pile of profits on the sidelines will be in the best position possible to jump on that next trade.

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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.