Category Archives for "End of Day Analysis"

How to trade the latest test of 2,800 support

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

On Tuesday, the S&P 500 tumbled for the twelfth time this month on lingering trade war fears. May is on track to be the worst month of what was an otherwise outstanding 2019.

All of this started several weeks ago when Trump caught the market by surprise when he slapped additional tariffs on Chinese goods. China responded by retaliating several days later with further tariffs on US goods.

Trump continued escalating the rhetoric Tuesday when he threatened “substantial” increases on existing Chinese tariffs. Rather than getting better, Trump’s trade war keeps getting worse. No matter what Trump and his supporter believe, the stock market definitely does not agree with this trade war.

That said, this trade war has been with us for over a year and no matter how bad the headlines appear, anything will get priced in eventually. And that includes Trump’s trade war. He doubled Chinese tariffs this month, but the stock market is only down 4%. That’s not because these new tariffs don’t matter. They absolutely do because all taxes are bad for the economy. But the stock market hasn’t reacted in a dramatic way simply because the people who care about these things sold last year and were replaced by confident dip buyers. Eventually, there comes a point when we run out of new people willing to sell a headline. That’s when those headlines stop mattering.

Granted, a 4% pullback feel huge given how gentile this year’s climb higher has been, but we need to keep it in perspective. 5% pullbacks are a common occurrence in every bull market. So, the question is if this May swoon is nothing more than a normal and routine 5% pullback, or if this is the start of something far more insidious?

[bctt tweet=”How often does the market give us four weeks to thoughtfully reflect on a new development and give us the opportunity to get out at our leisure before the eventual collapse?” username=”crackedmarket”]

The first thing we should remember about market crashes is they are brutally quick. This month’s selloff started several weeks ago when Trump unexpectedly jacked up the tariffs on Chinese imports. How often does the market give us four weeks to thoughtfully reflect on a new development and give us the opportunity to get out at our leisure before the eventual collapse? That’s not how the market normally works.

Tuesday’s tumble challenges 2,800 support for the third time this month and obviously, there are two ways this plays out. Either the market collapses, or prices bounce. Of course, what that looks like over the next few days and weeks is less obvious. The most likely scenario is prices crash through 2,800 support and just when things look their most hopeless, supply dries up and prices bounce.

The stock market loves fooling everyone and violating support just before bouncing is the best way to trick both sides into giving away money. Convince the bulls to abandon their favorite positions all while tempting bears to jump on the short bandwagon. But rather than prove these second-guessers and cynics right, the market embarrasses both by turning around not long after they make their bearish trades.

Hopefully, everyone has their trading plan laid out and already know how they will respond to this violation of support. Will you hold thorough it? Will you sell defensively and be ready to jump back in after the bounce? It all depends on our outlook, risk tolerance, and time frame. What it should never be based on is how we feel in the moment. Only fools let the market turn their emotions against them. Savvy traders plan their trades ahead of time and then trade their plan as conditions warrant.

That said, there is nothing wrong with trimming a position to help sleep at night. But if you sell, always be ready to jump back in as soon as conditions warrant it.

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Most Likely Next Move: The dip violates 2,800 support before bouncing.

Trading Plan: Get defensive if needed, but be ready to buy the dip once prices find a bottom.

If I’m Wrong: Waves of emotional selling overwhelm the market and prices tumble all the way to 2,600 support.

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Bitcoin popped this weekend. While this strength gives me pause, the cryptocurrency keeps doing everything it needs to do and $10k is the next target. That said, we need to be careful because there are clear signs of market manipulation. All of the big moves over the last few weeks have come in the middle of the night and over the weekend. Times when the volume is the lowest and easiest to manipulate. There is a good chance some unscrupulous players could be jacking up the price in order to suck gullible buyers in so they can sell to them in a classic pump-and-dump.

The buying frenzy in Bitcoin is being driven by the price increases, not a greater adoption of cryptocurrencies. Unless BTC starts delivering on some of its disruptive promises and becomes more ingrained in the economy and consumer behavior, this latest bounce will be nothing more than a fleeting speculative bounce in a much bigger bear market.

BTC keeps acting well and momentum is higher, but the crash will be hard and fast once the music stops. The next move is probably still higher, but we won’t get much warning when this ride ends.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $BTC.X

Not dead yet

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

TL;DR: At the end.

Thursday was another ugly session for the S&P 500 as the index shed 1.2%. After a calm, even boring spring, volatility is roaring back. What this means for the market’s next move is the point of this analysis.

The primary catalyst for this month’s second-guessing is the latest flareup in Trump’s trade war with China. But as unnerving as the situation feels, the index is still holding above long-term support at 2,800.

In Tuesday’s free blog post I wrote the following:

“Quite simply, a market that refuses to go down will eventually go up. As long as we continue holding 2,800 support, the situation is constructive. Eventually headlines will let up and at this point, the only thing we need to rally back to the highs is less bad news.”

And two days later, nothing changed. Fear of new headlines is weighing on traders’ moods, but so far this latest bout of selling only brought us back to support.

The thing to remember about routine dips back to support is they always feel like things are about to get a lot worse. If they didn’t, no one would sell and prices wouldn’t dip in the first place.

So the question we have to ask ourselves is if this dip is the real deal and things are on the verge of getting a lot worse? Or if this is just another vanilla pullback back to support and savvy traders are buying these discounts?

Trumps has been waging his trade war for more than a year, and despite some volatility in the stock market along the way, the economy has swallowed all of the previous escalations fairly well. Without a doubt, these additional taxes on businesses and consumers are not helping the US economy, but so far they don’t seem to be doing a large amount of damage.

The thing to remember about headlines is once the market comes to terms with them, they get priced in and stop mattering. By the time the crowd knows about something, most people have already made all the trades they want to make. The people who fear Trump’s trade war sold last year and were replaced by confident dip buyers willing to hold these risks. Once we run out of people willing to these headlines, they stop mattering.

Without a doubt, we should be cautious as the market flirts with violating support, but until the market gives us a reason to stop trusting it, we should continue giving it the benefit of doubt. These trade war headlines are nothing new and if they haven’t broken this market already, they are unlikely to do so now.

That said, anything is possible when it comes to crowd psychology and we always need to be prepared for the unexpected. Few things shatter confidence like falling prices and I reserve the right to change my mind if we crash under 2,800 support and the selling accelerates. But rather than fear further weakness, the trader in us should be cheering over the opportunity to buy in at even better prices.

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Most Likely Next Move: This test of support will hold and prices will eventually drift back to the highs as the market settles into a summer trading range.

Trading Plan: Get defensive if prices crash through 2,800 support. Baring that, stick with what has been working and that is believing in this market. If a person is nervous, consider selling a portion of your position and then buying back in after the market finds its footing.

If I’m Wrong: The market crashes through 2,800 support and that shatters confidence. If the selling spirals out of control, don’t expect it to stop until we reach 2,600 support.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Sliding into a trading range

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P 500 is recovering from this month’s trade war swoon. Prices bounced off 2,800 support last week and are attempting to retake the 50dma.

As bearish as the headlines appeared, the market has been holding up remarkably well. Crashes from unsustainable levels are breathtakingly quick. This is the third week since Trump escalated the trade war and so far prices are only down a couple of percent. If this market was fragile and vulnerable to a collapse, we would have tumbled a lot further by now.

Quite simply, a market that refuses to go down will eventually go up. As long as we continue holding 2,800 support, the situation is constructive. Eventually headlines will let up and at this point, the only thing we need to rally back to the highs is less bad news.

That said, Memorial Day is just around the corner and we are quickly approaching the summer trading season. Big money managers are heading off to their cottages and that means less buying.

A market that refuses to go down combined with lethargic summer demand is the perfect recipe for a trading range. 2,800 support is the lower bounds and last month’s highs near 2,950 is the upper edge. Until further notice, a move to the lower end of this range should be bought and a rally to the upper end should be sold.

Most people know markets trade sideways more than they go up or down, yet every time they approach the lower end of a range, people cannot help but be overcome by feelings of doom and gloom. The same happens at the upper end, except this time people are counting all the money they will make as prices keep racing ahead. Unfortunately, these reactions end in people buying the highs and selling the lows.

It’s been a great year and it only makes sense prices will stagnate for a while as we consolidate recent gains. Stick with your favorite long-term investments. But over the next few months, the best money will be made swing trading a rangebound market. Currently, we are on the upswing following last week’s bounce off support and the next move is still higher. But rather than get greedy when we return to the highs, takes some profits and get ready to do it again.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN

Don’t fear the normal and healthy

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

After tumbling five out of six sessions and challenging 2,800 support Monday, the S&P 500 has been on a rip ever since. Prices are still underneath the highs, but this rebound has done a lot to alleviate last week’s trade war fears.

But this shouldn’t come as a surprise. Monday evening I wrote the following:

“But here is the thing about this latest round of trade war headlines, how much worse can they get? Both sides are already taxing so much they are quickly running out of new things to tax. Even if this doesn’t get solved, we are not far from the point where this cannot get any worse simply because both sides are running out of options to make it worse.

In my opinion, the headlines over the last seven days were the worst of what we will see. The market was blindsided by this escalation since it was anticipating a deal. But after the shock wears off and the market comes to terms with these headlines, most of the downside will have already been realized.”

And that is exactly what happened. The trade war headlines climaxed Monday morning and so did the selling.

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Rather than fear Monday’s tumble, smart traders were buying the discounts. People always pray for a pullback. Unfortunately, when the market gods finally answer their prayers, most people end up being too afraid to buy.

And even worse, reactive traders sold the dip and are stuck buying back in at higher prices. Sell low and buy high. Do that a few too many times and they won’t have any money left to trade.

Now that Monday’s lows are 75-points behind us, the question is what comes next?

The market is acting well. Pullbacks to support are perfectly normal and healthy. Unfortunately, most people forget about this fact when we are stuck in the middle of one. As long as we continue holding 2,800 support, all is good.

That brings up the one nuance we need to be wary of. There are few things more bearish than a bounce that fails to stick. If this rebound fizzles and prices tumble under the lows, that tells us demand evaporated and lower prices are ahead. But that is the worst case scenario. As long as this week’s gains stick, then all is good.

In fact, things are great. We challenged support and the bulls won. That doesn’t mean prices will continue racing higher, in fact, they could retreat some over the next few days. But as long as they remain above 2,800 support, that tells us the bull market alive and the uptrend will continue. If this market was fragile and on the verge of crashing, it would have happened by now.

Stick with what has been working, whether that is buying the dips, or patiently sitting on your favorite buy-and-hold stocks. Let the other guy give away his money by overreacting to these normal and healthy dips.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN

Are things about to get a lot worse?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update: Special Edition

I normally publish free blog posts on Tuesday and Thursday evenings, but Monday’s dramatic tumble warrants a special edition.

TL;DR: At the end.

The S&P 500 tumbled Monday in the second largest drop of the year, shedding 2.5% after Trump and China escalated their trade war to the next level. Last week Trump followed through on threats to increase tariffs to 25% and China retaliated this weekend with reciprocal tariffs. As bad as it sounds, stocks are still holding critical 2,800 support, even if just barely.

While dramatic, no one should have been surprised by Monday’s tumble. On May 2nd when prices were near all-time highs, I told readers to be mindful of a larger pullback to support;

“If prices tumble under 2,900 and finish near the day’s lows, that is a very bearish development and it means further selling is ahead of us. The most obvious next level of support is 2,850. After that, far more meaningful support is back at 2,800. While it would feel scary, either of these would be reasonable levels to test in a normal and routine pullback. Two steps forward, one step back.”

Here we are 11 days later and traders are running around like the world is ending. The thing to remember is these things are not nearly as scary when we see them coming and can develop an intelligent trading plan ahead of time.

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Markets go up and markets go down. That’s what they do and everyone knows it. Pullbacks to support happen all the time and shouldn’t surprise anyone. Yet they always do. By rule, they have to. If they didn’t, no one would sell and we wouldn’t dip in the first place. Every dip, no matter how trivial it looks after the fact, always felt real in the moment.

And now that we find ourselves at support, we have to ask ourselves if this is just another routine, buyable dip. As I already stated, every dip feels like it is about to get a lot bigger. That’s the only reason people sell the dip. Yet every dip in history ended in a bounce. And every time that bounce happened when people were the most pessimistic.

A funny thing happens when pessimism climaxes. That is the point when everyone who could be scared out of the market is finally scared out of the market. When the crowd finally gives up hope is the exact point when we run out of sellers, supply dries up, and prices bounce.

Are we at that point now? In a normal market, yes, we are moments away from the bounce. Maybe prices dip under 2,800 before supply dries up and prices bounce. Or maybe we already hit that capitulation point Monday afternoon. Either way, we are only talking about a handful of points either way. A dip buyer would be sitting on nice profits next week or the week after even if they got in a little too early or a little too late.

But that is only if this is a normal market and this is a routine pullback to support. That means the million dollar question is if this pullback is normal or abnormal.

The edge case occurs when things get wonky and the market goes into full-blown panic mode. Not only do the typical Chicken Littles run around claiming the sky is falling, but the far more confident dip buyers have second thoughts. That is what happened last year when prices tumbled more than 400 points in December.

Could that happen here? Sure. It can happen anywhere at any time and is one of the biggest risks to owning stocks. But as bad as it is, these panics are rare.

The line in the sand is 2,800. This support level stretches back to last fall’s big selloff and was major resistance for several months. Once prices finally break through resistance, it becomes support. And right now it is our lifeline.

Hold this level for a few days and all is good. The things about stock crashes is they are brutally quick. They happen before people have time to think and make rational trading decisions. This is the land of sell first and ask questions later. But if that is how this works and the market holds 2,800 support for several days, then we can be fairly certain the emotional selling died up. At least as far as last week’s headlines are concerned. Meaning it would take a new round of headlines to knock us lower.

But here is the thing about this latest round of trade war headlines, how much worse can they get? Both sides are already taxing so much they are quickly running out of new things to tax. Even if this doesn’t get solved, we are not far from the point where this cannot get any worse simply because both sides are running out of options to make it worse.

In my opinion, the headlines over the last seven days were the worst of what we will see. The market was blindsided by this escalation since it was anticipating a deal. But after the shock wears off and the market comes to terms with these headlines, most of the downside will have already been realized.

The thing to remember about falling stock prices is they are actually less risky to buy. That’s because a lot of the damage has already been realized. People are afraid of falling off of buildings, not falling off the ground. Yet paradoxically in the stock market, people are most comfortable on the top of tall buildings and most afraid when standing on the ground. Even though prices could fall a little further tomorrow and the day after, it is still far less risky to buy today’s dip than last week’s highs.

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Most Likely Next Move: This is a buyable dip and if the market didn’t bottom Monday, it will happen Tuesday or Wednesday.

Trading Plan: People pray for a dip so they can get in at cheaper prices. But every time the market answers their prayers, they lose their nerve. Don’t lose your nerve.

If I’m Wrong: Prices tumble under 2,800 support and the reactive selling intensifies instead of dries up. Dipping under 2,800 is okay as long as we bounce back above not long after. But if we crash through support and finish the day at the lows, fear is taking over. But rather than fear the fall, take comfort in knowing even better bargains are coming.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

A plan to trade Trump’s trade war

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Thursday was another rocky session for the S&P 500. China countered Trump’s trade war rhetoric with some of their own. That threw cold water on global stocks overnight and the S&P 500 tumbled at the open, crashing through minor support at 2,850. While it looked like it was going to be another ugly day, Trump lifted hopes when he said a deal was still possible, sending a wave of relief through our markets and erasing a big chunk of those initial losses.

This is a headline-driven market and nothing else matters. Trump’s self-imposed deadline is Friday and no matter what happens, expect something dramatic. If Trump strikes a deal, stocks will surge in relief. If talks break down and Trump follows through with his punitive tariffs,  markets will tumble. While that is stating the obvious, the most likely outcome is a combination of the above, a postponement and continued negotiations. That is half-full enough to keep the optimists in the stock market and half-empty enough to keep wary traders from buying the dip.

While the market’s next move hinges on what Trump and the Chinese do, those outcomes will have less impact over the medium- and long-term. Trump started his trade wars last year and has long said he is willing to tax everything imported from China at 25%. The market lived under these clouds for a long time and the risks have not prevented stocks from rallying to all-time highs. No doubt the same will happen this time too.

Even if Trump escalates the trade war for the umpteenth time, the market will react, get used to it, and then move on. Good news, bad news, it all gets priced in and then forgotten. Trump’s trade war is no different.

Up, down, or sideways, the next question is how to trade this. Personally, I don’t have any insight into whether Trump and the Chinese will strike a deal Friday or not. I don’t try to predict the headlines and I’m not going to start now. That said, how the market reacts to these headlines will give us something good to trade.

If a deal is reached: All is forgiven. The stock market is off to the races and we should stick with what has been working, which is buy-and-hold. The market will rally in relief as one more risk falls by the wayside.

If negotiations continue in a constructive way: The market will rally some as we avoid the worst case scenario. The market is buyable for anyone with a longer-term investment horizon. But as we’ve seen countless times over the last 12 months, there is lots of back and forth during these protracted negotiations. That means we should expect some dips and gyrations along the way as the inevitable snags drag us down. That means better prices might be ahead of us if someone wants to take advantage of a short-term move. As long as the market trades sideways and remains volatile, buy the dips and sell the rips.

And if talks fail: Let the market tumble. But rather than fear the collapse, get ready to buy the inevitable oversold condition. Emotional traders make poor decisions and that includes selling stocks at unreasonably low prices. Their pain becomes our gain. (You remembered to keep some cash handy to buy the dip right?)

Get a resolution and prices will quickly return to the highs. Protracted negotiations mean we could see further weakness. And a busted deal will lead to a sharp, but buyable selloff.

It is cliche, but only because it is true, “Plan your trade, and trade your plan.”

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN

When this dip stops being buyable

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

It’s been a volatile few sessions for the S&P 500. It started last week when the Fed disappointed investors after telling us rate cuts were not being considered in response to slowing global growth. Then this weekend Trump shocked markets by announcing he was slapping additional tariffs on China.

So much for the easy glide higher. But we always knew the good times could not last and a bout of volatility was inevitable. We couldn’t predict the why and when, but the fact this happened shouldn’t surprise anyone.

The question everyone wants to be answered is if this is just a quick bout of indigestion. Or if this is the start of a larger pullback. For that, we need to dig deeper and look at the evidence.

Last week’s dip due to the Fed’s disappointment was fleeting and by Friday, prices had already returned to the highs. That decisive resilience told us those worries were not a serious threat to this market. But this week’s tumble following Trump’s trade war escalation is far less compelling.

Stock owners always run the risk of new and unexpected headlines. But this latest round of trade war rhetoric is not new and it is not unexpected. The trade war started more than a year ago and six months ago Trump threatened to tax everything coming out of China at 25%. But these headlines fell off the front pages during this year’s historic rebound and traders had largely forgotten about them…..until this week.

There are two reasons I don’t think this latest escalation is a big deal:

First, last year’s trade wars didn’t break the economy. Meaning a further escalation will probably also have a limited impact. These developments are most definitely not helpful, but they are not crippling either. We need to be wary of a tipping point where a little extra has an oversized effect, but assuming we avoid that, the next round of tariffs will have as limited of an impact as the previous rounds.

Second, it is widely known Trump judges his presidency by the performance of the stock market. As he shifts into reelection mode, he will be far more pragmatic and won’t take risks that damage his chances. While he might act tough, if this starts dragging down the stock market, expect him to back off pretty quickly.

No doubt lingering uncertainty will drive near-term volatility, but it will be far less dramatic than last year. Most of the people who fear trade war headlines bailed out last year and were replaced by confident dip buyers.

The next meaningful support level is 2,850 and the 50dma. That was a near-term bottom for Tuesday’s selling. Break that and far more durable support rests underneath us at 2,800. If that fails to hold, then we need to reevaluate all of our assumptions. But until then, this is just another buyable dip on our way higher. People always pray for a pullback, but when the market gods answer their prayers, they are too scared to buy the discounts.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Should stock owners be worried?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

It’s been a dramatic two days for the S&P 500. Between Wednesday afternoon and Thursday morning, the index shed more than 50 points over a few short hours of trading. That volatility was a radical departure from the gentile glide higher trades have grown accustomed to.

Wednesday the Fed reiterated its policy of keeping interested rates steady, but it disappointed some investors when it said it was not considering rate reductions in response to slowing global and domestic growth. That disappointment triggered a two-day wave of reflexive selling that didn’t stop until we tumbled to 2,900 support.

Everyone loves a market that goes up nearly every day with dips measured in hours instead of days. These periods of calm spoil investors. But the inevitable arrival of volatility shouldn’t surprise anyone. And to be honest, Wednesday’s initial 0.75% decline and Thursday’s 0.21% followup loss barely qualify as volatility in conventional markets. This week’s moves only feel dramatic because of how calm things have been.

There are two ways to interpret this hiccup. Either it is an aberration that will vanish as quickly as it hit. Or this is the first jolt at the start of a bumpier ride.

Thursday morning started well enough with dip buyers rushing in and pushing prices above Wednesday’s lows, unfortunately, the lift was short-lived and prices quickly tumbled to new lows. The resulting selling picked up speed and didn’t stop until we exhausted supply almost exactly at 2,900 support.

The most encouraging development Thursday is prices closed well off the lows. The morning freefall bounced off near-term support and after that, traders were far more inclined to buy the weakness than continue selling it.

While this pullback is small, 2019 has been a year of small pullbacks. The thing about trends is they are far more likely to continue than reverse. (they continue countless times, but reverse only once) As long as we keep holding above 2,900 support, I will keep giving the benefit of doubt to this rally.

But if prices tumble under 2,900 Friday and finish near the day’s lows, that is a very bearish development and it means further selling is ahead of us. The most obvious next level of support is 2,850. After that, far more meaningful support is back at 2,800. While it would feel scary, either of these would be reasonable levels to test in a normal and routine pullback. Two steps forward, one step back.

What a person does in any of the above scenarios should already have been decided. Smart traders plan their exit before they even enter a trade. That’s when they decide if it will be a quick trade or a long-term investment. Whether they will sell into strength on the way up, or use a trailing stop to lock-in profits before the fall. There are many ways to trade, the important thing is to make those decisions during the clarity that comes before a position is put on. In the heat of battle, even the most experienced trader is vulnerable to making an impulsive decision if they don’t have a plan.

My personal preference is to sell early on the way up. That way I have cash on hand and am looking for a buying opportunity when everyone else is scared and worried about bigger losses. But that is what works for me. You need to decide what works for you. And no matter what you do, plan your trade and trade your plan.

I’d love to see this dip go further because that creates even more profit opportunity for swing-trade. Unfortunately, I don’t think I’ll be that lucky and this will bounce quickly like every other dip this year.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

All-Time Highs!

By Jani Ziedins | End of Day Analysis

Free After-Hours Update

The S&P 500 surged to the highest levels in history on Tuesday. This completed the final chapter in 2018’s sharp, but brief correction and it is officially in the history books. The upside is we can start talking about something else……starting tomorrow.

As is often the case, the market is attracted to levels the crowd is fixated on. This occurs on both the low and high side. Obvious support levels get breached while obvious resistance levels are broken through. That’s why it is no surprise we got here. But the lingering question remains, what happens next?

Recent strength came from corporate earnings being less bad than feared. As often is the case, reality ends up being better than the naysayers predict. And while there is no end in sight for Trump’s trade wars, these headlines are ancient news. If they haven’t affected us yet, they are not going to start anytime soon.

Over a month ago I wrote the following after the market crashed through 2,800 support.

“Last week’s dip was the perfect setup to trigger a bigger selloff if that is what this market was inclined to do. We’ve come a long way since the December lows and a pullback is a normal and healthy thing to do following such a strong move. But rather than use the excuse to lock-in profits, most owners stood their ground and refused to sell.”

Conventional wisdom tells us complacent markets are vulnerable to collapse. What it fails to mention is how long complacency lasts before the collapse. And as we are finding out, complacency can last a long, long time.

The thing we have to remember about complacent traders is they are not afraid of anything. The obvious problem is if complacent traders don’t sell spooky headlines, where does the supply come from that fuels the big dips?

As this market is proving, that lack of supply nips every dip in the bud. This year’s biggest pullbacks barely lasted more than a few days. This bull market will die like all the others that came before it. I have no idea when that will happen, but it is acting well enough at the moment to continue giving it the benefit of doubt.

As I wrote last week, this remains a buy-and-hold market:

“This continues to be a buy-and-hold market. Those with the patience to stick with their favorite long-term investments have been rewarded as the profits came to them.  Unfortunately, the environment has been less good for swing-traders since the dips and bounces have been so fleeting. Sometimes the best trade is to not trade. And that has been the case here. Profiting from these small gyrations takes impeccable timing and is all too easy to get wrong.”

Nothing has changed since then. Stick with what has been working and that is buy-and-hold. That said, keep a little cash available for the next trading opportunity. We cannot buy a dip if we don’t have any money.

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Why boring is good

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P 500 finished Tuesday almost exactly where it started. And not only that, this was the third close in pretty much the same spot. Regardless of what is going on around us, the market is very content at this level and reluctant to leave it.

How a person interprets this lack of movement largely depends on how they view the market. Bulls call it resting. While bears claim it is stalling. Which is it? That’s what we are going to figure out.

Last week I wrote the following:

“If this market was overbought, fragile, and vulnerable to collapse, [last] Tuesday’s headlines and dip were more than enough to kick off an avalanche of selling. The fact prices held up tells us the ground under our feet is solid and there is a lot of support at these prices. This continues to be a strong market and the path of least resistance remains higher.

That said, we burned through a lot of demand since the start of the year and it is no surprise the rate of gains is slowing. We are quickly transitioning to more sideways than up as we approach the old highs. That means we need to be patient and expect a little more back-and-forth.”

And so far this is exactly what happened. Prices resisted the temptation to tumble while at the same time struggling to find the energy to continue higher.

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This week’s lethargic price action doesn’t change anything. In fact, it confirms and reinforces what I thought previously.

It is far easier for a market to tumble than it is to go up. Given how quickly prices fall, simply holding steady is an encouraging and constructive sign. If this market was going to breakdown, it would have happened by now on any number of bearish headlines and negative price action we’ve seen over the last few days, weeks, and months. The defiant act of resisting the temptation to fall proves this market is far more resilient than the critics and cynics want you to believe.

And having survived so many attacks from trade war, rate hikes, and slowing growth headlines, that tells us most of these headlines have already been priced in. If the first, second, and third retelling of these headlines didn’t break this market, why should we fear the fourth, fifth, or sixth? The simple answer is we shouldn’t. And so far that’s proven to be the right call. The longer a headline sticks around and the more people talk about it, the less it matters. If the market doesn’t care about these things, then neither should we.

Prices have been rallying on a reality that is turning out far less bad than feared late last year. Given how dire predictions of doom and gloom were last fall, it didn’t take much to beat those expectations. And even in the face of slowing global growth, the market is still enjoying relief that things could have been so much worse.

That said, “less bad than feared” was good enough to get us back to the highs. But to keep going, we need to transition to “good” headlines. At this point, we’re not there yet and is why the rally has stagnated. We can rest easier because we are not standing on the edge of a precipice, but we shouldn’t expect an explosive move higher either.

This continues to be a buy-and-hold market. Those with the patience to stick with their favorite long-term investments have been rewarded as the profits came to them.  Unfortunately, the environment has been less good for swing-traders since the dips and bounces have been so fleeting. Sometimes the best trade is to not trade. And that has been the case here. Profiting from these small gyrations takes impeccable timing and is all too easy to get wrong.

Continue sitting on your favorite long-term investments. But keep a little cash handy for when the next opportunity pops up. We cannot take advantage of the next dip if all our money is tied up in stocks. Even though things are pretty boring right now, without a doubt, they will get a lot more exciting when we least expect it. Be ready.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

As expected, a whole lot of nothing

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Thursday was a boring session for the S&P 500 as it did a lot of nothing and finished exactly flat. But boring is good. Bear markets are filled with emotion and volatility. They move so fast people don’t have time to think or make rational trading decisions. Contrast that with this market where we barely moved 10 points in a week.

The most dramatic move occurred Tuesday after Trump revived trade war fears when he threatened Europe with new tariffs. But that 0.6% loss failed to build momentum and the next two days finished green.

But this isn’t a surprise. I wrote the following Tuesday evening:

“Despite [Tuesday’s] weakness, I still like this market. It has been challenged by countless bearish headlines and weak price-action. Yet, every time these dips fail to build momentum. We fear what we don’t know, not what everyone has been talking about for months. If these headlines were going to break this market, it would have happened a long time ago. If the market doesn’t care, then neither should we.”

Two days later and Tuesday’s bearish headlines and market dip are long forgotten.

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If this market was overbought, fragile, and vulnerable to collapse, Tuesday’s headlines and dip were more than enough to kick off an avalanche of selling. The fact prices held up tells us the ground under our feet is solid and there is a lot of support at these prices. This continues to be a strong market and the path of least resistance remains higher.

That said, we burned through a lot of demand since the start of the year and it is no surprise the rate of gains is slowing. We are quickly transitioning to more sideways than up as we approach the old highs. That means we need to be patient and expect a little more back-and-forth.

Down days like Tuesday are a normal and healthy part of every move higher. Resist the urge to assume every day’s gyration means something. Most of the time the market’s moves are meaningless noise. Yet that doesn’t stop people from predicting every up-day is the start of the next surge higher and any dip lower is the beginning of the next collapse.

As I said, if this market was going to collapse, it would have happened by now. But at the same time, the rate of gains definitely slowing. Combine these two ideas and we have a market that is doing a lot of nothing. It is okay to keep holding our favorite buy-and-hold investments, but for a trade, there isn’t much to do.

We want to trade when the odds and risk/reward are stacked in our favor. We want to trade when the market is handing out money. But a lot of the time, the smartest trade is to not trade. Holding risk of the unexpected for a 10-point profit over a week is simply not worth it. We only want to own stocks when we are getting paid and right now the market is being stingy. Better trading opportunities are coming, we just have to be patient. Until then, don’t let these meaningless gyrations fool you into making poorly timed trades.

Note: The above only applies to short-term trades. This market is acting well and there is nothing to do with our favorite buy-and-hold investments expect sit on them and patiently wait for the profits come to us.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

We knew the dip coming, but what’s next?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P 500 stumbled Tuesday, breaking an eight-session win streak. Investors were unnerved after Trump announced a fresh round of EU tariffs, reigniting trade war fears. And right on cue, the EU said it was ready to implement retaliatory tariffs against the US.

So much for the trade situation getting better. But even though trade war headlines flared up again, the index shedding 0.6% is a fairly benign response. It certainly doesn’t measure up to the fear that gripped equity markets last year.

Today’s muted reaction is not a surprise for those of us that have been paying attention. We know most owners who fear Trump’s trade wars bailed out a long time ago. And not only did these fearful sellers already abandon the market, they sold to confident dip buyers who demonstrated a clear willingness to jump in front of these headlines.

If these confident dip buyers weren’t scared then, there is no reason to think they will get scared now. No matter what the cliches say about confidence, confident owners don’t sell, and when they refuse to sell, supply remains tight.

While tight supply is preventing any of this year’s modest dips from growing into something bigger, supply is only half the equation. The problem we is as prices approach last year’s highs, a huge chunk of demand has already been satiated during this amazing run. While most of this year’s rebound was fueled by “less bad than feared”, as we approach the old highs, “less bad” is no longer good enough and we need headlines to shift to “good” to continue marching higher.

I said as much last week when I predicted more back and forth was ahead of us:

“while the path of least resistance remains higher, the rate of gains is clearly slowing. The easy money has already been made. Now things get a lot more choppy. And choppy means challenging. Breakouts fizzle and breakdowns bounce.

Chasing these daily gyrations will most likely end in losses as people buy the strength and sell the ensuing weakness. Repeat that a few too many times and the losses will start to add up. This market needs to be traded proactively, not reactively. Don’t fall for its tricks.”

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Even though most of us understand the markets move sideways more often than they go up or down, almost everyone comes to the markets with a preexisting bias. Either people are bullish or bearish about current levels and they believe any move in their direction is the real deal. If they are bulls, they buy the breakout. If they are bearish, they short the breakdown. But not long after they react to the market’s move, it fizzles and reverses. Once prices start moving against these reactive traders, they lose their nerve and pull the plug. Buy high, sell low is a horrible way to trade. Unfortunately, most people fall for the market’s tricks and end up losing money.

Despite Tuesday’s weakness, I still like this market. This it has been challenged by countless bearish headlines and weak price-action. Yet, every time these dips fail to build momentum. We fear what we don’t know, not what everyone has been talking about for months. If these headlines were going to break this market, it would have happened a long time ago. If the market doesn’t care, then neither should we. The

This market is transitioning to more sideways than up. That means we need to be more careful with our purchases and stop-losses. In fact, for most people, they would be better off not trading this chop. Either buy-and-hold your favorite positions and wait for the slow grind higher to continue, or stay out and wait for the risk/reward to skew more in our favor.

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Don’t fall for the market’s tricks

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

Little more than a week ago, the S&P 500 tumbled in the second largest down day of the year. By most accounts, that was an incredibly ominous sign and put many traders on the defensive. Yet only a handful of days later, the index finds itself at the highest levels in six months and within 3% of all-time highs.

While this swift rebound caught a lot of traders off guard, you would have seen this coming if you knew what to look for. Two day’s after that tumble, when the market was still flirting with the lows and threatening to violate 2,800 support, I wrote the following:

“Selling dried up and prices bounced. While we are not in the clear yet, every hour that passes without tumbling lower decreases the probability we will tumble lower. While we only recovered a sliver of last week’s losses, the fact the selloff stopped in its tracks is a big win. Market crashes are breathtakingly quick and the longer we hold these levels, the less likely a continuation lower becomes. I like the way the market is acting and the path of least resistance remains higher.”

I wrote that last Tuesday and today the market closed 50-points higher.

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While it was nice to see this rebound coming ahead of time, it is already in the rearview mirror and what readers really want to know is what comes next. Fortunately, the market has been telling us what it wants to do for a while.

Between the 1.9% plunge two weeks ago and last week’s repeated violations of 2,800 support, the market had more than enough excuses to tumble lower. The bearish headlines of slowing global growth and the weak price action would have crushed us if this market was fragile and vulnerable, yet here we stand. Rather than run scared, most owners shrugged and kept holding. The resulting tight supply ended the selloff made it easy for prices to bounce.

Last year’s epic collapse chased off a lot of scared owners. They chose to sell their stocks at steep discounts “before things got worse”. But at the same time they were rushing out of the market, confident dip buyers were rushing in. Those confident dip buyers are the same ones holding today. If they were not afraid of these headlines then, why would they be bothered by them now? They wouldn’t, and is why every attempted dip this year on recycled headlines failed to make a dent.

That said, while the path of least resistance remains higher, the rate of gains is clearly slowing. The easy money has already been made. Now things get a lot more choppy. And choppy means challenging. Breakouts fizzle and breakdowns bounce. React to these moves and you will end up buying high and selling low.

Choppy, sideways markets are best either held or avoided. This is a good time for longer-term buy-and-hold. Or simply sitting out and waiting for a better risk/reward skew. Chasing these daily gyrations will most likely end in losses as people buy the strength and sell the ensuing weakness. Repeat that a few too many times and the losses will start to add up. This market needs to be traded proactively, not reactively. Don’t fall for its tricks.

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Why Friday’s collapse is failing to deliver the goods

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

Last Friday’s 2% tumble in the S&P 500 was the second largest down day of the year and the biggest threat yet to 2019’s stunning rebound. The only constructive thing we could say about Friday’s devastation is the collapse stopped right at 2,800 support. But as worrisome as Friday felt, two days later we are still hanging on to this critical support level.

Weak economic data kicked off Friday’s selling in Europe and the carnage continued when US markets opened. But the thing about these headlines is they didn’t reveal anything investors didn’t already know. Last year’s huge correction was fueled by the fear of slowing global growth and by now everyone knows this is a problem.

The thing to remember about news is the more people that know about it, the less important it is. We saw a truckload of selling last year in October, November, and December. Nervous owners abandoned the market like rats jumping off a sinking ship. But the thing about all that selling is those fearful owners were replaced by confident dip buyers. While one person jumped out, another person jumped in. These dip buyers demonstrated a willingness to buy stocks in that negative headline environment. If they didn’t mind the headlines then, what are the chances are they will mind them now?

And that is why every negative headline and modest dip this year has been met with indifference. Confident owners are not afraid. When they don’t care about recycled headlines, the market doesn’t care. When the market doesn’t care, then neither should we.

While Friday was noteworthy, the real test of support came Monday when we dipped under 2,800. But rather than trigger an avalanche of defensive selling, supply dried up and we finished Monday flat. While it is hard to get excited over flat, given how ugly Friday was, flat is pretty darn impressive.

Market collapses are brutally quick. They move faster than people think because the panicked crowd sells first and asks questions later. But rather than hit the sell button Monday, most traders stood around and waited to see what everyone else was doing. By nature, investors are an optimistic bunch. They prefer holding stocks for higher prices and are always reluctant to let them go prematurely. That is why it is no surprise when you give investors a little breathing room, the anxious selling pressure evaporates.

While it is easy to identify these things after they happened. It isn’t that hard to do beforehand if you know what to look for. This is the analysis I shared with Premium Subscribers last Friday just after lunchtime:

“Today’s weak price movement doesn’t set off any alarm bells yet. We’ve heard this story many times before and this is most likely just another retelling. 2,800 is our line in the sand. Dipping under it is okay, but only if supply dries up and prices bounce back not long after. I will be a lot more concerned if we slip under 2,800 and the selling accelerates.”

Three days later and that is exactly what happened. Selling dried up and prices bounced. While we are not in the clear yet, every hour that passes without tumbling lower decreases the probability we will tumble lower. While we only recovered a sliver of last week’s losses, the fact the selloff stopped in its tracks is a big win. Market crashes are breathtakingly quick and the longer we hold these levels, the less likely a continuation lower becomes.

I like the way the market is acting and the path of least resistance remains higher. That said, the rate of gains is slowing and that means we should expect more of back and forth. While I’d love to see the market surge higher every day, down days are a very normal and healthy part of every move higher. Resist the temptation to join the herd overreacting to every bump in the road.

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Why this time the breakout is real

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P 500 slipped a trivial amount Thursday, but more crucially, it held above the psychologically significant 2,800 level. This marks only the 3rd close above this milestone since early November and shows the market continues recovering from December’s brutal tumble.

A lot can change in seven days. A week ago prices fell eight out of the previous nine sessions and it slipped under the 200dma for the first time since mid-February. Traders were getting nervous as it looked like things were getting worse. But last Thursday night in my free blog post, I wrote the following:

“My preferred way of approaching these situations is selling and taking profits early. While other people are sitting through this weakness wondering if they should sell or keep holding, I’m looking at the market with a clear head and waiting for a great dip buying opportunity. When they’re getting scared out, I’m jumping in. If most people lose money in the market, shouldn’t we be doing the opposite of most people?”

And that opportunistic approach paid dividends Friday. The S&P 500 traded sharply lower Friday morning, but that was as bad as it got. In my Premium Analysis sent to subscribers Friday morning, I told them:

“Today’s close will be insightful. A strong recovery tells us owners remain confident and are still holding for higher prices. As long as they keep supply tight, prices will find a bottom quickly. But weak close means many of these owners are developing second-thoughts and their selling will add to the supply. One is bullish, the other is bearish.”

As it turned out, Bulls won the battle and prices closed well above the early lows. That bullish reversal was the start of this week’s strong rebound. That was the signal for dip buyers to jump in and for shorts to lock-in profits and get out of the way.

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But that was then and this is now. What you really want to know is what comes next.

Last week’s dip was the perfect setup to trigger a bigger selloff if that is what this market was inclined to do. We’ve come a long way since the December lows and a pullback is a normal and healthy thing to do following such a strong move. But rather than use the excuse to lock-in profits, most owners stood their ground and refused to sell.

What the market is not doing is almost always more insightful than what it is doing. Last week the market refused to accelerate lower. Confident owners didn’t fall for the second-guessing and no matter what is going on around us, when most owners refuse to sell, prices find a bottom and bounce.

Move forward several days and while Wednesday’s lethargic break above 2,800 resistance was uninspiring, the important thing is we held this key level through the close…and then again Thursday. Prices tumble from unsustainable levels quickly and two closes above a significant milestone is a notable accomplishment.

Refusing to breakdown last week and holding above support this week are two significant accomplishments and definitely give the upper hand to bulls.

What this means going forward is that if bears want to break this market, it will take something even more significant than what we saw last week. Headlines have been far from great. European and Asian economies continue to slow. Trump’s negotiations with the Chinese are bogging down. Even the robust U.S. economy is slipping as last month’s employment missed the mark by a mile and other economic data was disappointing.

All of these headlines were perfect excuses for the market to keep tumbling lower. Yet here we stand, within a few points of six-month highs. If the market doesn’t care about these things, then neither should we.

This week’s muted reaction to reclaiming 2,800 shows this market lacks explosive upside, but the path of least resistance remains higher. The going will be slow, but expect higher prices over the near- and medium-term. While we always run the risk of being blindsided by the unexpected, it will need to be far larger than anything thrown at us thus far if it is going to derail this rebound.

That said, slow means lots of back and forth. Some days will be up, some days will be down, but the up will be a little bigger than the down. The only thing we need to fear is a shockingly bad headline that sends prices tumbling under 2,800 and the losses accelerate after that. A routine dip under 2,800 that bounces hours later is nothing to worry about. In fact, bouncing quickly would be yet another bullish sign that this market doesn’t want to sell off.

A market that refuses to go down will eventually go up.

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Why we should have seen this coming

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis

Thursday was another tough session for the S&P 500 as it lost ground for the fourth day in a row and seven out of the last eight. While the initial down-days were trivial and more sideways than down, the last few have started to add up and we now find ourselves at the lowest levels in nearly a month. This leaves us 70-points under Monday’s opening highs and is quickly on its way to being the biggest pullback of the year.

But none of this comes as a surprise to those of us that have been paying attention. Two weeks ago I wrote the following after the market finished higher nine out of the previous ten days:

“While almost everyone loves calm climbs higher, rather than be lulled into complacency, we should be getting nervous about what happens next. The market finishes higher 53% of trading days, meaning it falls the other 47%. If a person believes in reversion to the mean, and they should, expect this string of up-days to be offset at some point by a string of down-days.”

Barely two weeks later and we’ve strung seven out of eight losing days together. Who would have thought???

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But now that we’ve given up a big chunk of February’s gains, the question is what comes next.  Even though this is quickly becoming the biggest dip of the year, it still has a long ways to go before it qualifies as a legitimate pullback and even further if it wants to match the intensity of this year’s strong start.

The market loves symmetry and that means big moves in one direction (last fall’s collapse) are matched with equally large moves in the opposite direction (this year’s epic rebound). If these oversized gyrations continue, there could be a lot more downside over the next few weeks.

We are currently challenging, and finding support, at the 200dma. If that fails, then 2,700 is the next meaningful level. After that, maybe 2,650…..but more likely 2,600. If we fall that far, most likely we will tumble under 2,600 support before finding our footing. I’m not predicting that we fall that far, just pointing out that it is a very real possibility.

The goal isn’t to predict the future down to the day and dollar, but to understand the odds and be prepared for what is coming our way. It is a lot easier to sit through a dip and react rationally when we know what is coming. This allows us to craft our trading strategy with a clear head and not overreact and make poor decisions like everyone else in the crowd.

My preferred way of approaching these situations is selling and taking profits early. While other people are sitting through this weakness wondering if they should sell or keep holding, I’m looking at the market with a clear head and waiting for a great dip buying opportunity. When they’re getting scared out, I’m jumping in. If most people lose money in the market, shouldn’t we be doing the opposite of most people?

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Is the market’s mood changing?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Volatility is making a comeback. Monday’s wild swing produced the S&P 500’s biggest loss in nearly a month and the intraday price range was one of the widest of the year. Tuesday’s dip also marked the fifth loss out of the last six trading sessions.

Just going off of that description, you’d expect stocks to be down a lot. Fortunately, they only slipped half a percent from last week’s closing high. That said, this back and forth is definitely getting people’s attention. But none of this should come as a surprise. Last week I wrote:

“Widely watched resistance levels often turn into self-fulfilling prophecies. Prices rally up to resistance. Technical traders see this signal as a good place to take profits. Their profit-taking pressures prices, leading to a small pullback. Other traders see the weakness develop, so they start selling too, adding even more pressure. Prices keep slipping until either we run out of sellers, or they are attractive enough that dip buyers jump in and take advantage of the discounts.

Given how far the market’s come since the Christmas lows, it wouldn’t be a surprise to see the market take a break and catch its breath. In fact, that would be the normal and healthy thing to do. I would be far more concerned about the sustainability of this rebound if we keep racing ahead without resting.”

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Prices only slipped a fraction so far and it is encouraging to see supply dry up and dip buyers jump in so quickly. But this string of losses is definitely a new thing for a market that has done nothing but go up all year.

Everyone knows prices cannot rally at this rate forever. But they lose track of this fact in the moment. People love trends and they cannot help but imagine they continue as far as the eye can see. But just like every dip eventually bounces, every rally eventually stalls.

One of the bigger flags for me was Monday’s fizzled breakout following encouraging news coming out of US/Chinese trade negotiations. If you believe the headlines, the sides are quickly approaching a deal. Weeks ago, this news would have sent stocks flying 2% or 3%. Unfortunately, Monday morning they only managed to eke out a 0.4% opening gain before fizzling and shedding nearly 50-points. We were lucky a late-day rebound recovered a big chunk of those intraday losses, but that midday swoon demonstrates just how much selling potential is hiding in this market.

The biggest question is if Monday was nothing more than a momentary bout of indigestion. Or if it really is the first signs of a mood change. I certainly wish we could go up like this forever because that would make trading a million times easier, but we know that’s not the case. This rally will pause and even pullback, the only question is when.

While we can continue drifting higher over the near-term, the rebound from the Christmas lows consumed a ton of demand. The problem is that no matter how much better the news gets, eventually we stop going up because everyone who wanted to buy has already bought. This happens so frequently in the market it actually has its own cliche “buy the rumor, sell the news”.

The market is still acting well and the drift higher can continue over the near-term, but a lot of buying has already happened and there is a lot of air underneath us. Limited upside and lots of downside creates an almost tragic risk/reward. Long-term investors should ignore these near-term gyrations, but for a short-term trade, buying up here definitely borders on foolish.

The way I view this market from my years of experience, it is too late to buy, but too early to short. Prices are holding up well and it will take more than just weak price-action to convince confident owners to abandon their stocks. Most likely, the fatal blow with come from the trade deal. Failing to reach a deal will obviously send stocks tumbling. But even a deal could ultimately turn into a letdown if it isn’t as good as the market is hoping for. We very well could be on the verge of a “buy the rumor, sell the news” kind of trade.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

What it will take to finally break this market

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 slipped Thursday morning, but those early losses were modest and failed to ignite wider selling.

The biggest headline was Trump walking out of negotiations with North Korea. This development has limited implications for the US economy and is why it didn’t affect the stock market. But could this foreshadow a potential outcome during Trump’s far more critical meeting with the Chinese president? Could all the hype and hope surrounding the imminent trade deal turn into a similar bust? Given the market’s resilience today, it doesn’t seem worried, but sometimes it takes more than a subtle hint to get the market’s attention.

Prices continue to hover underneath 2,800 resistance. Even though Monday’s breakout fizzled, only pulling back a small amount is actually a bullish signal. If prices were overbought and vulnerable to a larger pullback, it would have happened quickly. Instead, prices continue hovering near the highs as confident owners refuse to take profits because they are waiting for even higher prices. That tells us this market wants to go even higher.

But all of this is dependent on a stable headline environment. Owners’ bullishness by itself has been enough to hold us near the highs and the market is resisting the more traditional ebb and flow of prices. But given how far we’ve come and how many weak holders are still hanging on because they haven’t been shaken out during a routine pullback, one piece of damning news has the potential to unleash a torrent of selling. At the moment, the most likely culprit would be hitting a major snag in negotiations with the Chinese.

Things look great and a market that refuses to go down will eventually go up. But we are on thin ice and if any selling starts in earnest, there is a lot of air underneath us.

High probability of modest gains and small chance of big losses. How a person trades this is up to their trading style, risk tolerance, and time frame. Nimble day traders can keep squeezing nickels and dimes out of the upside. Anyone holding for years or decades should ignore these daily gyrations. But those of us that trade over days and weeks need to be more careful.

The path of least resistance remains higher, but the rate of gains is slowing and the upside is more limited. But as long as owners refuse to take profits, expect the market to keep drifting higher.

That said, given how far we’ve come, there is a good chance the next pullback will be larger than normal and is something we need to keep an eye on. The market loves symmetry and last year’s epic collapse resulted in this year’s historic rebound. But when this rally finally runs out of steam, expect the ensuing step back to rattle a lot of nerves. Everything looks great for the time being, but that will change in an instant. While a return of volatility will scare retail investors, I’m looking forward to the trading opportunities it will create.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Are We Pausing or Stalling at Resistance?

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P 500 broke through the 2,800 milestone Monday after Trump officially postponed the March 1st Chinese tariff escalation. That put traders into a buying mood. Unfortunately, the enthusiasm was short-lived and we quickly slipped back under this widely followed level. We flirted with 2,800 resistance again Tuesday, but ultimately we were unable to close above it.

The market hit its head on 2,800 resistance last October, November, and December, each occurrence resulting in a significant tumble. Over the last two days, it has proven to be a stumbling block again. Will this time end differently than the last three? That is the question everyone is wondering.

Widely watched resistance levels often turn into self-fulfilling prophecies. Prices rally up to resistance. Technical traders see this signal as a good place to take profits. Their profit-taking pressures prices, leading to a small pullback. Other traders see the weakness develop, so they start selling too, adding even more pressure. Prices keep slipping until either we run out of sellers, or they are attractive enough that dip buyers jump in and take advantage of the discounts.

Given how far the market’s come since the Christmas lows, it wouldn’t be a surprise to see the market take a break and catch its breath. In fact, that would be the normal and healthy thing to do. I would be far more concerned about the sustainability of this rebound if we keep racing ahead without resting.

The daily back and forth is what keeps the market fresh. These gyrations squeeze out the weak and replace them with the confident. But we have had very little pausing and refreshing since this rebound began back in December. Unfortunately, that means a lot of weak hands are still holding on. Rather than flush them out in small, periodic pullbacks, the supply of weak hands is building up to the point where the next pullback could trigger a mass exodus and do a lot of damage.

In many ways, the market is like a forest. Small fires clear out the debris and keep it healthy. Wait too long between fires and too much fuel accumulates, meaning the next fire has the potential to be devastating. At the moment, everything is great and everyone is enjoying themselves. But all it takes is one spark to send everything up in smoke.

The challenge is knowing what that spark will be and when it will come. Until then, everything will be great. Prices will keep drifting higher until they don’t. Knowing what the market will do is the easy part because it keeps doing the same thing over and over again. The hard part is getting the timing right. That is where all the money is made. While we don’t know the timing of the next dip, that doesn’t mean we cannot prepare for it.

For our long-term positions, there is nothing to see or do here. If we are not selling for years, what happens over the next few weeks is meaningless and we can (and should) completely ignore these near-term gyrations. But for a short-term swing trade, we need to be careful up here. Given how far prices have come, the rewards left ahead of us are a lot smaller than the risk underneath us. The time to buy the discounts was weeks ago, not now that prices are far higher. If a trader is doing anything, they should be taking profits, not adding new money. We only make money when we sell our winners and that almost always involves selling too early. People who get greedy and hold too long often end up giving back all of their profits and then some.

To be clear, I’m definitely not bearish and am not predicting a collapse. I’ve just been doing this long enough to know that I should be cautious when everyone else is feeling good. I’m not calling a top, just warning people to be careful. A routine pullback to 2,600 is most definitely not a collapse, but it will feel like it if a person wasn’t prepared for it. The best way to avoid making poor trading decisions is to not be surprised by the normal and routine.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

The smarter alternative to chasing prices higher

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

On Thursday, the S&P 500 posted its biggest loss in two weeks. Of course, biggest is a relative term since we only gave up 0.35%. And the competition wasn’t all that fierce since there was only one other down day in that span.  But that is an indication of just how comfortable this climb higher has been.

Last fall’s plunge scared a lot of emotional investors out of the market, but now that fear is a distant memory. Long gone are predictions of global economic collapse. It been replaced by fear of being left behind. Last year’s fearful sellers turned into this year’s desperate buyers jumping on every dip in price, no matter how small. This desperate buying is why every bout of opening weakness has been gobbled up and we finished all these days higher.

But the thing to remember about emotional sellers is there are only so many of them. We saw that in late December when we ran out of sellers the day before Christmas. The market bottomed and prices rebounded, not because everything got better, but because we ran out of people willing to sell the fear.

And here we are nearly two months later. But instead of running out of sellers, we need to be worried about running out of buyers. Once all of last year’s fearful sellers finish buying back in, who is going to be the next buyer to keep chase prices higher?

While almost everyone loves calm climbs higher, rather than be lulled into complacency, we should be getting nervous about what happens next. The market finishes higher 53% of trading days, meaning it falls the other 47%. If a person believes in reversion to the mean, and they should, expect this string of up-days to be offset at some point by a string of down-days.

That said, claim the market is going to fall long enough and eventually you will be right. But in the market, we only make money when we get the timing right. Not only do we need to know what the market will do, we need to know when it will do it. And without a doubt, timing is the hardest part to get right.

But we don’t need to know exactly when something will happen to make money in the market. Trading successfully is about playing the odds and managing risk, not predicting the future.

Momentum is definitely higher and a trend is more likely to continue than reverse. But there always comes a point where it is no longer worth it. When the remaining reward shrinks and the risks grow.

Prices are quickly approaching major resistance above 2,800 and we haven’t had a meaningful pullback during this nearly 20% rally. How many points of profit are still above us? 30? 50? How many points of risk are between us and support? 180? Risking hundreds of points to make dozens hardly seems like a prudent trade.

The most nimble day traders can squeeze the last few dimes out of this rally, but the rest of us should definitely be growing defensive. Anyone still buying up here clearly doesn’t understand how markets work.

Don’t get me wrong, I’m definitely not bearish. But I don’t see any reason to be chasing prices higher after such a big run. While I don’t know exactly when the next pullback will happen, I do know it will fall through current levels. If we are returning to these prices at some point over the next few weeks, should we really feel pressured to buy today or risk getting left behind?

The biggest risk these late-buyers have is getting cold feet when prices inevitably dip under their buy point. Do they get scared again and bailout “before things get worse”? Sell last December’s plunge. Buy this February’s surge? Sell April’s dip? No wonder most people lose money in the market. If we want to make money, we should do the opposite. Buy when other people are fearful and sell when they are greedy.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN