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By Jani Ziedins | End of Day Analysis
Free After-Hours Update:
In the market, a lot can happen in a few days. My last free blog post was last Thursday after the S&P 500 smashed through 2,700 resistance. A buying frenzy pushed prices up to the 200dma after the Fed Chairman suggested interest rates were approaching his neutral target.
But rather than cheer those gains, I cautioned readers in that post from last week:
The market was a great buy Monday and Tuesday. But risk is a function of height and Wednesday’s large gains make buying now a lot less attractive. A big chunk of Wednesday’s buying came from chasing and short-covering. Those are both fleeting phenomena and now that they’ve come and gone, we need another group of buyers to come in and push us higher. Unfortunately, many of those with cash remain nervous, especially following such a large move higher. Their fear of heights will likely keep a lid on prices for a few days. And even a dip back to 2,700 wouldn’t be a surprise. Two steps forward, one step back.
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While I expected this step-back, even I was caught off guard by the speed with which it happened. But even that isn’t a surprise. The market operates in two speeds, infuriatingly slow, or breathtakingly fast. This time the hivemind got together and turned the last few days of frenzied buying into a mad dash for the exits. Easy come, easy go.
While it was nice to see this weakness coming and prepare for it, that was then and this is now. What readers really want to know is what comes next.
Stock prices popped Monday after Trump and China reached an agreement this weekend to de-escalate the trade war. But that relief proved fleeting as traders started analyzing the details. The primary catalyst for Tuesday’s collapse was Trump disclosing the strings attached to his pledge to not increase tariffs on Chinese imports. The shine further wore off when Trump reiterated his pledge to impose tariffs if the Chinese didn’t make substantial concessions. That sent risky stocks tumbling and safe-haven bonds soaring. So much for the relief.
But the thing we have to ask ourselves is if Tuesday’s collapse was lead by rational and thoughtful selling, or if it was nothing more than herd selling because people sold for no other reason than other people were selling.
There are few, if any, 3.25% declines that are led by rational and thoughtful selling. Today was no different. We opened near yesterday’s close and slipped to normal losses by lunchtime, but slipping under Friday’s close triggered an avalanche reactive stop-loss sell orders that didn’t stop until we shed another 60-points. As I wrote previously, 2,700 was a key support level and the market found support and bounced off that critical level in afternoon trade. Unfortunately, the bounce proved fleeting and we closed right back at 2,700 on the nose.
The market is closed Wednesday in observance of a national day of mourning for President George H.W. Bush. No doubt the inability to trade Wednesday caused many would-be dip-buyers to sit on their hands knowing they would be unable to trade for a day and a half. Better safe than sorry. But the other thing this extra day off does is give traders a chance to collect themselves and decide if they really want to be selling these discounts, or if they should be buying them instead.
I expect global stocks to get hammered Wednesday as the world reacts to the U.S. market collapse. But after that, expect cooler heads to prevail. As I’ve been saying for a while, this is a volatile period for stocks. That means we large moves in both directions. But so far those wild gyrations have been consolidating October’s losses, not extending them. There is no reason to think this time is any different.
Trading so close to 2,700 support means there is a good chance we will violate it. But as long as the selling stalls and bounces not long after, that tells us most investors would rather buy these discounts than sell them.
I bought the Thanksgiving massacre and sold the frenzied relief rally up to 2,800. And I will do the same thing again this time. If impulsive traders want to keep giving away free money, I will gladly continue taking it.
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Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Two days ago my free blog post was titled “Why Tuesday was a great day.” Even though the index only finished 0.3% higher, the market’s resilience was impressive given the bearish trade war headlines dominating the financial press.
“There are few things more bullish than a market that fails to go down on bad news. That tells us most of the bearishness has already been priced in. Over the last two months, we have witnessed a ton of selling. But what happens every time a fearful owner bails out? He sells his stocks at a steep discount to a confident dip buyer who is willing to own those risks.
Over time these fearful sellers are replaced by confident buyers and there comes the point in every dip where we run out of fearful sellers. Once everyone who fears the headlines sells, there is no one left to sell and the headlines stop mattering. That is what happened today. Trump threatened to take his trade war nuclear, and the market yawned.”
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While I liked what I saw Tuesday, even I was caught off guard by Wednesday’s explosive surge higher in one of the biggest up-days of the year.
People often claim no one can predict the market, but that isn’t entirely true. I had zero idea the Fed Chairman would soften his stance on rate hikes Wednesday, but I didn’t need to know that to make an intelligent trading decision Tuesday.
I will be the first to admit I cannot predict the news. But the thing to remember is the news doesn’t matter, only the market’s reaction to the news. That one small shift in perspective totally changes how we go about figuring out the market’s next move.
Every day traders are bombarded with both bullish and bearish headlines. As traders, it is our job to decide how to interpret these conflicting signals. Sometimes traders gravitate to one piece of news while totally ignoring another one. But even more important than what traders think, is how they trade. Headlines don’t move markets. Neither does the opinion of traders. Only buying and selling moves markets and that is what we must pay attention to.
Trump’s latest threats to escalate his trade war and tax all Chinese imports at 25% was obviously a very negative headline. A big chunk of October’s correction was based on investors’ fears the trade war was damaging the global economy. There is no dispute Trump fanning those flames this week was bad. And given October’s plunge, clearly traders are worried about the trade war. But given all the negativity, why did the market finish Tuesday 0.3% higher?
It’s not because the news was good. Or because traders don’t fear the fallout of a trade war. It’s because everyone who fears the trade war already sold their stocks and they had nothing left to sell. Once an investor is out of the market, his opinion stops mattering.
We can think of the market like a stalled car on a hill. It takes almost zero effort to push the car downhill, while it takes nearly all of our strength to move it one foot uphill. There are times when the market is similar askew. This time it was nearly impossible for bearish headlines to push us any lower because we exhausted the supply of fearful sellers. But in the opposite direction, it only a few words from the Fed Chairman to launch one of the biggest buying frenzies of the year.
Without a doubt, it is impossible to predict the news, but if we know what to pay attention to, it isn’t hard to figure out which way the market wants to go. Then it simply becomes a matter of waiting for the right story to come along and give us a push.
And going back to what I wrote Tuesday because it is equally relevant today:
“The next most obvious target is reclaiming 2,700 support, and the 200dma after that. We are not out of the woods yet and we should expect volatility to stick around. But the swings are getting smaller and the fear of a collapse are dissipating. We currently find ourselves near the lower end of the trading range and are in a place where the market is brushing off bearish headlines. That tells me the near-term path of least resistance is higher. Things will look different after we run up to the 200dma, but we will discuss what comes after that when we get there.”
Everything played out as expected…..except I certainly didn’t expect to be talking about the market running into 200dma resistance 48 hours later. But here we are.
The market was a great buy Monday and Tuesday. But risk is a function of height and Wednesday’s large gains make buying now a lot less attractive. A big chunk of Wednesday’s buying came from chasing and short-covering. Those are both fleeting phenomena and now that they’ve come and gone, we need another group of buyers to come in and push us higher. Unfortunately, many of those with cash remain nervous, especially following such a large move higher. Their fear of heights will likely keep a lid on prices for a few days. And even a dip back to 2,700 wouldn’t be a surprise. Two steps forward, one step back.
But now that we reclaimed 2,700 support, we need to hold this level. Tumbling under this level tells us buyers have zero confidence in this market and lower prices are still ahead of us. But that is the less likely outcome. Right now things look good because big money would rather buy the discounts than sell the dip. Expect a near-term dip as we digest Wednesday’s huge gains, but after that, expect the rebound to continue up to and above 2,800 over the next few weeks.
If you found this post useful, Follow Me on Twitter so you don’t miss future updates: Follow @crackedmarket
Jani
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By Jani Ziedins | End of Day Analysis
Free After-Hours Analysis:
Tuesday was a great day for the S&P500. While the index only finished 0.3% higher, the numbers don’t tell the whole story.
Prices slipped at the open after Trump fanned the trade war flames by threatening to tax all Chinese imports at 25%. This isn’t the first time he made these threats, so it didn’t catch anyone by surprise, but it threw cold water on hopes the two sides were moving toward a compromise.
But rather than tumble lower, stocks quickly found a bottom and recovered into the green. This is definitely not the price action we’d expect if the market was fragile and vulnerable.
This resilience made Tuesday the opposite of last week’s fearful selling, but this isn’t a surprise. Last week I told readers:
“While this week’s price action slammed us underneath 2,700 support, the thing we have to keep in mind is this is a holiday-affected week. Big money managers who make millions of dollars a year are on vacation this week with their family, not toiling away in the office. Why this is important is because without big money’s guiding hand, emotional retail investors are running the show. Big money’s absence during holidays often leads to increased volatility, and the market shedding nearly 100-points over two days definitely qualifies as volatility.
But the thing to remember about retail investors is they have small accounts. That means they don’t have the firepower to drive large moves. Only big money can propel directional moves and if they’re not behind today’s selling, then we should expect the weakness to stall and reverse once emotional retail investors run out of things to sell.”
That is precisely what happened and this market finds itself well above last week’s lows. Sign up for Free Email Alerts so you don’t miss profitable insights like these.
Recovering from last week’s dip tells us big money would rather buy these discounts than sell the weakness. That was especially true Tuesday when the market failed to tumble on the ominous trade war headlines.
There are few things more bullish than a market that fails to go down on bad news. That tells us most of the bearishness has already been priced in. Over the last two months, we have witnessed a ton of selling. But what happens every time a fearful owner bails out, he sells his stocks at a steep discount to a confident dip buyer who is willing to own the risks.
Over time these fearful sellers are replaced by confident buyers and there comes the point in every dip where we run out of fearful sellers. Once everyone who fears the headlines sells, there is no one left to sell and the headlines stop mattering. That is what happened today; Trump threatened to take his trade war nuclear and the market yawned.
There comes the point in every dip where things go too far and prices are attractive enough for buyers to start ignoring the headlines. It certainly seems like this market is getting to that point.
The next most obvious target is reclaiming 2,700 support, and the 200dma after that. We are not out of the woods yet and we should expect volatility to stick around. But the swings are getting smaller and the fear of a collapse are dissipating. We currently find ourselves near the lower end of the trading range and are in a place where the market is brushing off bearish headlines. That tells me the near-term path of least resistance is higher. Things will look different after we run up to the 200dma, but we will discuss what comes after that when we get there.
Trump specifically called out Apple when threatening to increase Chinese tariffs to 25%. While that would put a massive hole in AAPL’s earnings, the stock largely shrugged off the news and finished practically flat. That tells us AAPL’s 25% tumble from last month’s highs has already factored in a lot of bad news. If further downside is limited because most of the bad news is already being priced in, that actually makes this a pretty safe time to be buying. While prices could continue slipping, the lower we go, the safer it becomes.
It’s been a while since I wrote about Bitcoin because I’ve been so consistently bearish about it there wasn’t much new to add, but now that prices dipped into the $3k’s, the situation has changed. While I’m still skeptical of Bitcoin’s long-term viability, every collapse includes multiple sharp rallies. Given bitcoins sharp fall, I would rather buy these levels than sell them. It wouldn’t be anything to see prices bounce 25% or 50% from current levels. For the most nimble of traders, that’s good money for a few days of work. The challenge is knowing when we will bounce. Anyone buying the dip better be willing to sit through some dramatic near-term weakness first.
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?
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