Nov 01

Is this rebound still buyable?

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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Oct 30

What makes Tuesday’s rebound different

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: 

Jani

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