Jan 22

What to make of Tuesday’s dip and how to profit from it

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

The S&P 500 slipped Tuesday, ending a string of four consecutive gains and posting the biggest loss in nearly three weeks.

It’s been a great run since the Christmas lows, with the index surging 10%. But as we know, markets don’t move in straight lines and a down day was inevitable. The question is if this is just one of those step backs before continuing higher, or if today’s weakness marks the end of the rebound.

Stocks have been surging despite December’s negative headlines sticking around. Nothing has been resolved in Trump’s trade war with China. Global growth continues to slow. The Fed is still planning further rate hikes. And the federal government has been shut down for a month with no end in sight.

Hardly seems like rally material, but that is exactly what happened. While the news has most definitely been bearish, it hasn’t been as bad as the crowd feared when they were scrambling for the exits at the end of last year.

Markets are prone to excess and that means oversized moves in both directions. Last summer we went a little too high. Then we fell too far in the fall. And now there is a good chance January’s rebound went a too far and it is time for a well-deserved rest. Even a pullback would be a normal and healthy way to process these gains.

Where we go from here largely depends on what happens next. Last week we reclaimed the widely followed 2,600 support level that propped the market up through October and November. While any near-term weakness will most likely dip under 2,600, how the market responds to such a violation will tell us what mood traders are in.

In December, fearful owners rushed to sell every hint of weakness. But the thing is, eventually we run out of fearful sellers. That’s because every person desperate to bailout ends up selling to a confident dip buyer who is willing to hold the risks. Out with the weak and in with the strong is how these things get turned around.

While bearish headlines are largely the same, and in some respects have even gotten worse, the market stopped caring. And not only has it stopped caring, it is acting as if everything has been getting better. But that is the way the market works. Buy the rumor sell the news. While we don’t have a resolution to any of the problems facing us, the market is assuming a solution is coming and anyone waiting for the confirmation will be too late.

But that assumes things turn out less bad than feared. There is an alternative outcome where the situation turns out worse than feared. And that is what it will take to send this market to fresh lows. But until that happens, expect every dip to bounce.

Having surged 300-points since Christmas, it is clearly too late to be chasing the rebound. Instead, we should be shifting to a defensive mindset and preparing for a consolidation. Savvy short-term traders have been taking profits into this strength. The most aggressive and nimble can try their hand at shorting this weakness. For the less bold, a dip under 2,600 support will likely find a bottom near 2,500 and that would be a great dip buying opportunity. If this market is healthy market, we shouldn’t get anywhere near the lows and retesting 2,400 would be a very bearish sign. Trade accordingly.

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Jan 10

How you could have seen December’s dip and bounce before it happened

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

What a difference a few days makes. Three weeks ago the financial world was collapsing and desperate sellers were scrambling for the exits. This week everything is peachy as the market erased the pre-Christmas bloodbath. But this isn’t a surprise to those of us that have been paying attention.

December 20th, I wrote the following:

“While I like these discounts, the looming holidays complicate the situation. What would normally be an attractive buying opportunity might struggle to get off the ground since big money already left for Aspen. Their absence puts impulsive retail investors in charge and that is rarely a good thing. Luckily, these little guys have small accounts and their emotional buying and selling cannot take us very far.

We saw similar emotional selling knock 100 points off the market during the Thanksgiving week. But a few days after the holiday, the market rallied 170-points when big money returned to work and started snapping up the discounts. No doubt we could see the same thing this time around.”

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The market one-upped the Thanksgiving rebound and recovered 250-points since the Christmas holiday. Those of us that kept our cool enjoyed the ride. Unfortunately, those that panicked are kicking themselves right now. But that is the way the market works. It rewards thoughtful and deliberate decisions while it punishes the impulsive and reactive.

The key to surviving periods like this is selling poor price-action, not fear. By the time fear is running through the herd, it is too late to sell because most of the damage has already been done. In fact, selling fear is often the exact wrong move to make because capitulation and a rebound is usually just around the corner.

So what is the difference between poor price-action and fear? Most of the time poor price-action shows up before the crowd gets nervous. This is the stalling when the market should be going up. But it is so subtle that most in the crowd missed it. We saw this in early December and I pointed it out in my December 13th blog post:

“the last three day’s has seen early gains fizzle and we closed well under the intraday highs. Multiple weak closes is never an encouraging sign. And as usual, the market is giving us conflicting signals. It is up to us to determine what it means.

I really like how decisively the market held support this week. But I’m disappointed we couldn’t add to those gains and these weak closes are a concern. What does this mean for what comes next? Unfortunately, this is one of those situations where we don’t have enough information and we need to see what the market does next.

A decisive rally Friday tells us all is well and we are on our way back up to 2,800. But a fourth weak close means a near-term test of 2,600 is ahead.”

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Everyone knows what happened next. But the thing to remember is the market was flashing these warning signs days before the crash through support. A savvy trader could have bailed out a full 300 points above the eventual bottom.

I will be the first to admit I have been, and continue to be, bullish. But just because I believe in the economy doesn’t mean I need to ride stocks down. The biggest advantage individual traders have is our size allows us dart in and out of the market with ease. We don’t need to ride these waves lower as long as we know what to look for.

But that was then and this is now. What most readers want to know is what comes next. And as I often remind people, the market doesn’t move in a straight line. The rebound from the Christmas lows has been a beautiful thing, but rebounds only go so far before they run out of gas. As expected, the rate of gains has slowed as we approached the prior lows near 2,600. What was once support has now turned into resistance.

I still believe in this market over the medium- and long-term, but things could get a little bumpy over the next few days and weeks. Last month’s fear turned into this month’s hope. Unfortunately, hope leaves us vulnerable to disappointment.

As always, the market can do one of three things; up, down, or sideways. Momentum is clearly higher and the longer we hold near 2,600 resistance, the more likely it is we will break through it. Trump striking a deal with Democrats and the Chinese will send prices surging higher. But if we don’t pause and consolidate recent gains, that breakout will be fragile and vulnerable to a pullback. I would be selling a sharp breakout, not buying it. This would be a buy the rumor, sell the news kind of thing.

Markets consolidate one of two ways. Either they take a step back, or they trade sideways for an extended period of time. Given how volatile the market has been and how much uncertainty there is in the headlines, boring, sideways trade seems highly unlikely. Instead, this market most likely needs to take a step back before continuing its climb higher. Whether that step-back starts Friday or waits until the 2,600 breakout fizzles is anyone’s guess, but at least we know what to expect and that helps us get ready to trade it.

I would rather be taking profits at these levels than adding new money. A near-term dip to 2,500 that bounces would be a great buying opportunity. An unsustainable breakout above 2,600 that fizzles could be an interesting shorting opportunty.

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