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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
The S&P 500 exploded higher Wednesday following the U.S. midterm election that saw Democrats take control of the House and Republicans add to their majority in the Senate. There was a little bit of good news for everyone and that put traders into a buying mood.
These gains erased a big chunk of October’s selloff. Anyone who sold defensively over the last several weeks is coming to regret that hasty decision. But that is the way the market works. Every buyable dip feels like we are on the verge of a much larger collapse. If it didn’t, no one would sell and we wouldn’t dip in the first place.
With the benefit of hindsight, it is easy to look back and see the bounce off of 2,600 support was the obvious bottom. But since this bottom was only a couple of weeks ago, it isn’t hard to recall exactly how hopeless the outlook was when we reached those lows. Traders were not excited to buy the dip, they terrified of the next leg lower. Remember how you felt at that moment and don’t forget it. That is what every buyable dip feels like.
For those of us that have been doing this a while and lived through countless dips like October, we know better than to overreact to periodic bouts of emotional selling. As I wrote on October 23rd:
“Over the last 69 years, only 11 times have prices tumbled more than 15% from the highs. We often think of big crashes like 1987, the Financial Crisis, or the Dot-Com bubble. But those events are exceedingly rare. All the other pullbacks over the last 69 years have been 15% or less. While 15% is a lot, it isn’t terrifying. And even better, all of those under 15% pullbacks were erased within a few months. Small and short. That sounds like something we can live with.”
And so far, that is precisely what happened this time. There was no real substance behind October’s selloff and that is why we recovered so quickly. The only people who lost out were the ones that overreacted to the fearmongering. That said, there is nothing wrong with selling defensively and it can even be profitable. The key is knowing when to get back in.
October 30th, the day after the market bounced off 2,600 support, I wrote a post titled “What Makes Tuesday’s rebound different”
“no matter which side of the bear/bull debate you stand on, there is an excellent chance this market is ripe for a sharp move higher.
2,700 is the next most obvious price target. But the market likes symmetry and a rebound to 2,700 doesn’t even come close to matching the intensity of October’s selloff. While we could pause and even retrench a little at 2,700 over the next few days, the most likely target for this rebound is the 200dma/2,800/2,820 region the previous bounce stalled at in mid-October. Even rising up to and above the 50dma and the start of this selloff near 2,870 is on the table.”
That was a bold prediction when prices were in the low 2,600s and it was met with a lot of skepticism, but it doesn’t seem so far-fetched after the market closed at 2,813.
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Predicting the market isn’t hard because it keeps doing the same thing over and over again. The challenge is getting the timing right. While it was nice to see this 200+ point rebound coming before it happened, what readers really want to know is what comes next.
While I’d love to say we will continue surging up to all-time highs, that isn’t how this works. October’s selloff did a lot of damage to investor confidence and it will be a while before people feel comfortable chasing prices back to the highs.
This rebound recovered nearly two-thirds of the October selloff and that is about as far as these things go before they start running out of steam. Momentum could carry us up to the 50dma and even 2,870 where this whole thing started, but we should expect demand to dry up soon.
For short-term traders, this is definitely a better place to be taking profits than adding new money. At the very least, expect prices to consolidate for a while as investors warm back up to this market. But more likely, volatility will persist and that means a dip back to 2,700 support would be a normal and healthy part of this recovery.
Anyone scared out during October’s selloff and looking to get back in, resist the urge to chase prices higher over the next day or two. Instead, wait for the inevitable pullback and consolidation over the next few weeks. Volatility is still high and that means big moves in both directions are ahead of us. But as long as the economic data holds up, the worst is already behind us.
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Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
A lot can change in 36-hours. Monday afternoon stocks cratered, shedding more than 100 points from the early highs. There are few things more frightening than a strong open that devolves into a panicked selloff. That plunge shoved us under the prior October lows, triggered another avalanche of reflexive selling.
But just when things were the most hopeless, prices bounced sharply off 2,600 support and the market hasn’t looked back. While it is only three days, prices have reclaimed a big chunk of October’s selloff and the mood has definitely shifted. Panic has given way to cautious optimism. No longer is the crowd fixated on trade wars, Chinese growth, and peak earnings. Instead, traders are remembering the U.S. economy is still in pretty darn good shape.
There comes a point in every emotional selloff when things go too far and are ripe for a snapback. That is exactly what I told readers to expect in Tuesday’s free blog post:
“If there is one thing both bulls and bears can agree on, it is that markets don’t move in straight lines. It has been a brutal October for stocks. At the very least, a near-term bounce is overdue. After definitively undercutting the early October lows and setting off a tidal wave of panicked defensive selling, this is about as good of a double-bottom setup as we will ever see.”
Three days later and 140-points higher, that is precisely what happened. Sign up for Free Email Alerts so you don’t miss profitable insights like these.
So far I’m stating the obvious because everyone already knows what happened. What readers are more interested in is what comes next. And for that, we can also look back at what I wrote on Tuesday because it is still relevant today:
“2,700 is the next most obvious price target. But the market likes symmetry and a rebound to 2,700 doesn’t even come close to matching the intensity of October’s selloff. While we could pause and even retrench a little at 2,700 over the next few days, the most likely target for this rebound is the 200dma/2,800/2,820 region the previous bounce stalled at in mid-October. Even rising up to and above the 50dma and the start of this selloff near 2,870 is on the table.”
We already checked 2,700 off the to-do list, and as expected, the gains slowed a little after we reclaimed this critical support level. But this is just a pause before the next leg higher.
After Thursday’s close, AAPL reported record earnings, but gave a slightly disappointing revenue forecast. Last week the exact same story played out in AMZN and is what contributed to Monday’s collapse. But the thing about headlines is they lose their bite with each retelling. Apple’s disappointment could weight on prices Friday, but it won’t be anywhere near as big of a deal as it was when AMZN told us the same thing. The shock wears off over time and life moves on. That is exactly what is happening in Thursday’s after-hours trade as the S&P 500 only dipped a fraction of a percent following AAPL’s “disappointing” news.
While the next move is still higher, we shouldn’t expect prices to race back to all-time highs. As I wrote earlier, everyone knows markets don’t move in straight lines and that means any rally higher will end in a step-back. Bulls and bears will argue if this will be two-steps forward, one-step back, or one-step forward and two-steps back. At this point, it doesn’t really matter because the next move is higher and the move after that will be a step-back. Once we get there, we can weight the likelihood of higher-lows or lower-highs. But until then, enjoy the (somewhat bumpy) ride higher.
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Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
There is a good chance that weeks from now we will look back at this Tuesday as a key turning point in S&P 500. It was only the second time the index finished in the green in the last ten sessions, but that’s not the only thing that made it feel different. Volume has been ramping up over the previous six sessions and Tuesday’s rebound was the highest of them all. Clearly, something big is happening, the only question is what.
If there is one thing both bulls and bears can agree on, it is that markets don’t move in straight lines. It has been a brutal October for stocks. At the very least, a near-term bounce is overdue. After definitively undercutting the early October lows and setting off a tidal wave of panicked defensive selling, this is about as good of a double-bottom setup as we will ever see.
While nothing in the market is ever certain, double bottoms are some of the most resilient bottoming signals the market gives us. Prices undercut the prior lows, triggering an avalanche of reactionary selling. But rather than trigger the next leg lower, that dip is the last gasp of defensive selling. Once we run out of emotional sellers, supply dries up and prices rebound.
Monday’s frighteningly horrific collapse was as bad as it gets. We opened green, but it was downhill from there and by early afternoon, the index shed more than 100-points. But what if that really was “as bad as it gets”? Maybe, just maybe, that was the worst and everything will get better from here. As the saying goes, it is darkest just before the dawn.
As I already stated, both bulls and bears can agree a bounce is coming. And most bears will even concede that the biggest bounces come in bear markets. This means that no matter which side of the bear/bull debate you stand on, there is an excellent chance this market is ripe for a sharp move higher.
2,700 is the next most obvious price target. But the market likes symmetry and a rebound to 2,700 doesn’t even come close to matching the intensity of October’s selloff. While we could pause and even retrench a little at 2,700 over the next few days, the most likely target for this rebound is the 200dma/2,800/2,820 region the previous bounce stalled at in mid-October. Even rising up to and above the 50dma and the start of this selloff near 2,870 is on the table.
But just like how selloffs don’t go in straights lines, neither do recoveries. After recovering 200-points from the selloff’s lows, it will be time for another dip. How big of a dip depends on which side of the bear/bull debate you fall on, but at least both sides can agree that a bounce and a dip are still ahead of us. We can argue about the magnitude after we get there.
If a person wants a preview of what this looks like, scroll your favorite charting software a little to the left and see what took place this spring. A big crash in February, a sharp rebound from the lows, and a pullback from the rebound’s highs. Predicting the market isn’t hard. That’s because it keeps doing the same thing over and over again. The challenge is getting the timing right.
There are no guarantees in the market and the best we can do trade when the odds are stacked in our favor. This selloff is ripe for a bounce and right now that is the high probability trade. If it doesn’t work out this time, we retrench and try again.
If you found this post useful, Follow Me on Twitter so you don’t miss future updates: Follow @crackedmarket
Jani
What’s a good trade worth?
How about avoiding a loss?
For less than $1/day, have analysis like this delivered to your inbox every day during market hours.
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