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By Jani Ziedins | End of Day Analysis
Free After Hours-Analysis:
Find my Trading Plan at the end of this post.
Federal Reserve Chairman Jerome Powell testified in front of congress Wednesday, suggesting the Fed is ready to cut interest rates later this month in order to protect the U.S. economy against the risks of slower global growth and trade-policy uncertainty. His dovish testimony put traders in a buying mood and the S&P500 briefly poked its head above the psychologically significant 3,000 milestone. While that was great for the record books, as I’ve written previously, we are still stuck in the slower summer months and that means we don’t have the firepower necessary to fuel an explosive move higher. Instead, expect prices to move more methodically. But as long as there is more up than down, all is good.
All of the negativity that hung over the market last year has disappeared. But this is no surprise, in early June I wrote the following when traders were scrambling for cover after the S&P 500 challenged 2,800 support:
“We trade the market we are giving and so far this one keeps acting like it wants to go higher. As long as we hold 2,800 support, then we should continue giving it the benefit of doubt. Follow the market’s lead. If it doesn’t want to be bothered by the trade war, then neither should we. If prices continue recovering next week and remain above 2,800 support, Monday’s dip to 2,750 was just another buyable dip on our way higher.”
And here we are, nearly 7% higher since I wrote that.
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The Fed stopped raising rates. We got a truce in the trade war. The Fed is even contemplating rate cuts. And most importantly, despite all the worry, the economy is still holding up remarkably well. Of all of the things that could have gone wrong, we avoided the worst. In fact, things actually turned out pretty well. As usual, the traders overreacted to “what ifs” and that triggered to last fall’s stock crash. But for those of us that recognize the buying opportunity, those repressed stock prices gave the opportunity to profit from the inevitable “less bad than feared”. Avoiding the worst is all it took to get us back to the highs.
Now that we’re making new highs, there isn’t any reason to stop. At least over the near-term. The headline storms are parting and this market rallied every time tensions cooled off. There is no reason to think it won’t happen this time too. That said, temper your expectations. Big money is still on vacation and that means a bigger directional move won’t happen until their deep pockets return in the fall. Until then, enjoy this gentile glide higher.
Market Mentor
It feels like I’ve said this a million times this year, but the best plan is always sticking with what is working. If this market wants to go higher, there is no reason to argue with it. The previous three days of early weakness was met with indifference. In fact, most traders were more inclined to buy the opening dip than jump aboard the selling.
Conventional wisdom tells us complacent markets are dangerous, but the thing conventional wisdom always forgets to mention is how long markets can remain complacent before they fail. This bull market will die like all of the others that came before it. But this is not that time. Until further notice, keep doing what has been working.
Trading Plan
Most Likely Next Move: The slow glide higher continues. Down days are inevitable, but as long as there is more up than down, all is good.
Trading Plan: Stick with what is working and that is buying any dip and every breakout.
If I’m Wrong: Headline fear-mongering comes roaring back. The most likely culprits are either a return of trade war escalations or the Fed disappointing by not cutting rates at their next meeting. Either of these events are still weeks away, so we don’t need to worry too much about them right now.
Highfliers
FB and AMZN are breaking above their recent highs and look great technically. NFLX is close behind but hasn’t exceeded recent highs yet. But if the broad market keeps trading well, expect NFLX to follow suit. AAPL is a little further back, but it is still performing well given the trade risks the company is faced with. GOOGL is the biggest laggard of the bunch, but that also means it has the most room to improve. It is well off its lows and seems like traders are growing immune to the anti-trust issues facing the company.
Bitcoin flirted with $13k again this morning. We’ve come a long way from the $3k lows of only a few months ago. While anything is possible with something as volatile and speculative as BTC, a little cooling off and consolidation above $10k would go a long way to refreshing the market and building a solid platform for the next move higher. $10k continues to be the line in the sand. As long as we stay above it, everything looks good. But it could be a while before we see the next explosive move higher. There is nothing to prevent a buying frenzy from pushing us through $15k tomorrow, but it is prudent to prepare for a longer wait before the next big move higher.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN $AAPL $NFLX $GOOGL $BTC.X
By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
The S&P 500 stumbled Tuesday in the biggest loss in nearly a month. Last week’s relief as prices surged to all-time highs has turned into this week’s second thoughts. Nothing material has changed in the headlines, but running into resistance near the highs was inevitable as I explained last week:
“Now that prices bounced back near all-time highs, the question is, “what comes next?” I wish I could say the path is rosy for as far as the eye can see. Unfortunately, that is never the case. Momentum is definitely higher and prices will creep back toward all-time highs next week and even start encroaching on 3,000, but the thing we need to remember is we are stuck in the slower summer season. That means big money is on vacation and without their buying power, it will be hard for smaller investors to fund a larger directional move. For that, we need big money and they won’t be back until the fall. So temper your expectations until then.”
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That said, 1% losses are normal and routine. If anything, we should be more surprised by the lack of them, not that one happened today.
The biggest financial headlines continue to revolve around the Fed’s interest rate policy and Trump’s trade war with China. While the Fed didn’t cut rates last week, they said the right things and pushed stock prices to record highs. But that was largely expected, so the bounce was short-lived and now traders are shifting their attention back to trade negotiations as Trump and president Xi are scheduled to meet later this week.
The last time these two got together, they diffused the trade situation with Trump agreeing to postpone a tariff increase. But that reprieve was only temporary and May’s stock tumble started after Trump surprised everyone by going ahead with those tariffs.
Will we see more of the same this time? Probably. Both sides will play nice for the cameras and that will send hope back into the market. But when it comes to actually putting a deal together, the details could derail the process for the umpteenth time since these negotiations started more than a year ago.
Sentiment moves in waves. Periods of relief are inevitably followed by periods of second-guessing. And we should expect the same here. Prices that dip are viewed as good bargains and are snapped up by savvy investors despite the negative headlines. The opposite happens as prices rise on good news and become expensive. Rather than pay the premium, savvy investors are locking in profits and waiting for the next bargain.
As prices push up to resistance during the slower summer months, it shouldn’t surprise anyone to see the rate of gains stall. The only question is if this market refreshes by dipping or by trading sideways. I don’t know the answer to that, but I don’t need to in order to make a good trade. Instead, we wait for the market to tell us what it wants to do and then we jump aboard and enjoy the ride.
[bctt tweet=”Buyable dip or breakout after a lengthy consolidation? Both are very tradable and we should formulate a trading plan around each scenario.” username=”crackedmarket”]Buyable dip or breakout after a lengthy consolidation? Both are very tradable and we should formulate a trading plan around each scenario. What signals do you need to see before jumping in? How much of a dip? What constitutes a breakout? I know what works for me, but my risk tolerance and time frame are different than yours. Decide what works for you and then go for it. And just as important as when to get in, don’t forget a plan to get out. That includes both stop-losses and when to take profits. The next trade is coming. Now is the time to get ready for it.
Trading Plan:
Most Likely Next Move: Consolidating after running into resistance near all-time highs. The market will either refresh through a buyable dip back to support, or an extended sideways consolidation under resistance followed by an upside breakout.
Trading Plan: Buy the next dip or the next breakout
If I’m Wrong: Rather than consolidate, Trump and the Fed answer all of the market’s prayers and prices smash through the highs and don’t look back. Any large upside move needs a fundamental catalyst to suck in new buyers. If we see a headline driven buying frenzy, join the party and enjoy the ride higher.
Bitcoin continues its wild gyrations, but more important than any of these daily swings is that prices remained firmly above $10k. That is the line in the sand. Stay above it and all is good. Fall under it and that could be the end of this bounce. The risks are extraordinarily high. The safe time to buy was back at $4k. People chasing prices above $10k face a good chance of getting burned. Volatility and the risks are too high for my tastes. I’d rather wait to see BTC hold these prices for a while before betting on a bigger move higher. That means I might miss the next move. But I’m okay with that. There is investing and there is gambling. To me, betting on a big move higher today is a lot closer to gambling than investing. As the saying goes, it is better to miss the bus than get hit by the bus.
What’s a good trade worth to you?
How about avoiding a loss?
For less than $1/day, have profitable analysis like this delivered to your inbox every day during market hours
Follow Jani on Twitter @crackedmarket
Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $AAPL $AMZN
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