May 07

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

May 02

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

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