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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
Little more than a week ago, the S&P 500 tumbled in the second largest down day of the year. By most accounts, that was an incredibly ominous sign and put many traders on the defensive. Yet only a handful of days later, the index finds itself at the highest levels in six months and within 3% of all-time highs.
While this swift rebound caught a lot of traders off guard, you would have seen this coming if you knew what to look for. Two day’s after that tumble, when the market was still flirting with the lows and threatening to violate 2,800 support, I wrote the following:
“Selling dried up and prices bounced. While we are not in the clear yet, every hour that passes without tumbling lower decreases the probability we will tumble lower. While we only recovered a sliver of last week’s losses, the fact the selloff stopped in its tracks is a big win. Market crashes are breathtakingly quick and the longer we hold these levels, the less likely a continuation lower becomes. I like the way the market is acting and the path of least resistance remains higher.”
I wrote that last Tuesday and today the market closed 50-points higher.
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While it was nice to see this rebound coming ahead of time, it is already in the rearview mirror and what readers really want to know is what comes next. Fortunately, the market has been telling us what it wants to do for a while.
Between the 1.9% plunge two weeks ago and last week’s repeated violations of 2,800 support, the market had more than enough excuses to tumble lower. The bearish headlines of slowing global growth and the weak price action would have crushed us if this market was fragile and vulnerable, yet here we stand. Rather than run scared, most owners shrugged and kept holding. The resulting tight supply ended the selloff made it easy for prices to bounce.
Last year’s epic collapse chased off a lot of scared owners. They chose to sell their stocks at steep discounts “before things got worse”. But at the same time they were rushing out of the market, confident dip buyers were rushing in. Those confident dip buyers are the same ones holding today. If they were not afraid of these headlines then, why would they be bothered by them now? They wouldn’t, and is why every attempted dip this year on recycled headlines failed to make a dent.
That said, while the path of least resistance remains higher, the rate of gains is clearly slowing. The easy money has already been made. Now things get a lot more choppy. And choppy means challenging. Breakouts fizzle and breakdowns bounce. React to these moves and you will end up buying high and selling low.
Choppy, sideways markets are best either held or avoided. This is a good time for longer-term buy-and-hold. Or simply sitting out and waiting for a better risk/reward skew. Chasing these daily gyrations will most likely end in losses as people buy the strength and sell the ensuing weakness. Repeat that a few too many times and the losses will start to add up. This market needs to be traded proactively, not reactively. Don’t fall for its tricks.
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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:
Last Friday’s 2% tumble in the S&P 500 was the second largest down day of the year and the biggest threat yet to 2019’s stunning rebound. The only constructive thing we could say about Friday’s devastation is the collapse stopped right at 2,800 support. But as worrisome as Friday felt, two days later we are still hanging on to this critical support level.
Weak economic data kicked off Friday’s selling in Europe and the carnage continued when US markets opened. But the thing about these headlines is they didn’t reveal anything investors didn’t already know. Last year’s huge correction was fueled by the fear of slowing global growth and by now everyone knows this is a problem.
The thing to remember about news is the more people that know about it, the less important it is. We saw a truckload of selling last year in October, November, and December. Nervous owners abandoned the market like rats jumping off a sinking ship. But the thing about all that selling is those fearful owners were replaced by confident dip buyers. While one person jumped out, another person jumped in. These dip buyers demonstrated a willingness to buy stocks in that negative headline environment. If they didn’t mind the headlines then, what are the chances are they will mind them now?
And that is why every negative headline and modest dip this year has been met with indifference. Confident owners are not afraid. When they don’t care about recycled headlines, the market doesn’t care. When the market doesn’t care, then neither should we.
While Friday was noteworthy, the real test of support came Monday when we dipped under 2,800. But rather than trigger an avalanche of defensive selling, supply dried up and we finished Monday flat. While it is hard to get excited over flat, given how ugly Friday was, flat is pretty darn impressive.
Market collapses are brutally quick. They move faster than people think because the panicked crowd sells first and asks questions later. But rather than hit the sell button Monday, most traders stood around and waited to see what everyone else was doing. By nature, investors are an optimistic bunch. They prefer holding stocks for higher prices and are always reluctant to let them go prematurely. That is why it is no surprise when you give investors a little breathing room, the anxious selling pressure evaporates.
While it is easy to identify these things after they happened. It isn’t that hard to do beforehand if you know what to look for. This is the analysis I shared with Premium Subscribers last Friday just after lunchtime:
“Today’s weak price movement doesn’t set off any alarm bells yet. We’ve heard this story many times before and this is most likely just another retelling. 2,800 is our line in the sand. Dipping under it is okay, but only if supply dries up and prices bounce back not long after. I will be a lot more concerned if we slip under 2,800 and the selling accelerates.”
Three days later and that is exactly what happened. Selling dried up and prices bounced. While we are not in the clear yet, every hour that passes without tumbling lower decreases the probability we will tumble lower. While we only recovered a sliver of last week’s losses, the fact the selloff stopped in its tracks is a big win. Market crashes are breathtakingly quick and the longer we hold these levels, the less likely a continuation lower becomes.
I like the way the market is acting and the path of least resistance remains higher. That said, the rate of gains is slowing and that means we should expect more of back and forth. While I’d love to see the market surge higher every day, down days are a very normal and healthy part of every move higher. Resist the temptation to join the herd overreacting to every bump in the road.
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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
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