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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.
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
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
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.
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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