Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, 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 young children.
The S&P 500 stumbled Tuesday in the biggest loss in nearly a month. Last week’s relief as prices surged to all-time highs has turned into this week’s second thoughts. Nothing material has changed in the headlines, but running into resistance near the highs was inevitable as I explained last week:
“Now that prices bounced back near all-time highs, the question is, “what comes next?” I wish I could say the path is rosy for as far as the eye can see. Unfortunately, that is never the case. Momentum is definitely higher and prices will creep back toward all-time highs next week and even start encroaching on 3,000, but the thing we need to remember is we are stuck in the slower summer season. That means big money is on vacation and without their buying power, it will be hard for smaller investors to fund a larger directional move. For that, we need big money and they won’t be back until the fall. So temper your expectations until then.”
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That said, 1% losses are normal and routine. If anything, we should be more surprised by the lack of them, not that one happened today.
The biggest financial headlines continue to revolve around the Fed’s interest rate policy and Trump’s trade war with China. While the Fed didn’t cut rates last week, they said the right things and pushed stock prices to record highs. But that was largely expected, so the bounce was short-lived and now traders are shifting their attention back to trade negotiations as Trump and president Xi are scheduled to meet later this week.
The last time these two got together, they diffused the trade situation with Trump agreeing to postpone a tariff increase. But that reprieve was only temporary and May’s stock tumble started after Trump surprised everyone by going ahead with those tariffs.
Will we see more of the same this time? Probably. Both sides will play nice for the cameras and that will send hope back into the market. But when it comes to actually putting a deal together, the details could derail the process for the umpteenth time since these negotiations started more than a year ago.
Sentiment moves in waves. Periods of relief are inevitably followed by periods of second-guessing. And we should expect the same here. Prices that dip are viewed as good bargains and are snapped up by savvy investors despite the negative headlines. The opposite happens as prices rise on good news and become expensive. Rather than pay the premium, savvy investors are locking in profits and waiting for the next bargain.
As prices push up to resistance during the slower summer months, it shouldn’t surprise anyone to see the rate of gains stall. The only question is if this market refreshes by dipping or by trading sideways. I don’t know the answer to that, but I don’t need to in order to make a good trade. Instead, we wait for the market to tell us what it wants to do and then we jump aboard and enjoy the ride.Buyable dip or breakout after a lengthy consolidation? Both are very tradable and we should formulate a trading plan around each scenario. Click To Tweet
Buyable dip or breakout after a lengthy consolidation? Both are very tradable and we should formulate a trading plan around each scenario. What signals do you need to see before jumping in? How much of a dip? What constitutes a breakout? I know what works for me, but my risk tolerance and time frame are different than yours. Decide what works for you and then go for it. And just as important as when to get in, don’t forget a plan to get out. That includes both stop-losses and when to take profits. The next trade is coming. Now is the time to get ready for it.
Most Likely Next Move: Consolidating after running into resistance near all-time highs. The market will either refresh through a buyable dip back to support, or an extended sideways consolidation under resistance followed by an upside breakout.
Trading Plan: Buy the next dip or the next breakout
If I’m Wrong: Rather than consolidate, Trump and the Fed answer all of the market’s prayers and prices smash through the highs and don’t look back. Any large upside move needs a fundamental catalyst to suck in new buyers. If we see a headline driven buying frenzy, join the party and enjoy the ride higher.
Bitcoin continues its wild gyrations, but more important than any of these daily swings is that prices remained firmly above $10k. That is the line in the sand. Stay above it and all is good. Fall under it and that could be the end of this bounce. The risks are extraordinarily high. The safe time to buy was back at $4k. People chasing prices above $10k face a good chance of getting burned. Volatility and the risks are too high for my tastes. I’d rather wait to see BTC hold these prices for a while before betting on a bigger move higher. That means I might miss the next move. But I’m okay with that. There is investing and there is gambling. To me, betting on a big move higher today is a lot closer to gambling than investing. As the saying goes, it is better to miss the bus than get hit by the bus.
What’s a good trade worth to you?
How about avoiding a loss?
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN