Morning Market Thoughts
Good morning. The market opened higher this morning, with the S&P up 3/4 of a percent — which is actually kind of a big move (from close to open) in this market. But this just takes it back into congestion. And so far, there is no follow through this morning. It took 6 minutes before the S&P peaked at 2,144 before rolling over just a bit. If you are an active trader, you might want to set an alert at 2,144. If that level is hit again, we could see higher prices this morning. But the usual rule of thumb is that, if a stock is not above the opening print at 9:45, it’s not likely to move higher later in the day. My “modified” rule of thumb is that, once a stock rallies off an open and prints a higher high, any retracement needs to be shallow (this one is), and it needs to break above that higher high. And if it doesn’t do that within the first 30 minutes of trading, then it’s probably not gonna do it later — which means that the morning high will probably be the daily high.I’ve seen this play out enough times to start relying on it in my decision-making. But this is a “rule of THUMB”, not a RULE. So we’ve always got to be flexible and listen to what the trading crowd is showing us.
To the astute observer, the market will tip you off early in the day about where the preponderance of trading interest is — even during a relatively flat market.
Consider $NFLX. Are buyers soaking up every dip? If so, then we see higher lows, relatively flat action, and ultimately higher highs.
Are sellers stringing out stock into every advance? If so, we will see a relatively flat stock (look at $NFLX on a 1-minute chart) on declining volume. In this event, we can conclude that $118 is a pretty fair price for the stock right now. That’s what the market thinks. So if you are shorting this stock because you think it’s “gone up too much”, you are in disagreement with the crowd. The crowd might eventually come around to your way of thinking, but you are now on the wrong side of the trade.
So what we’ve set up is a standoff between buyers and sellers. There are enough buyers to keep the stock above the opening print of $116.63. That’s pretty serious, considering the $17 gap from yesterday’s close. They’re still buying! At the same time, sellers are so happy to get $119 for the stock that they’re selling into the demand. Not in size. Not just “banging the bid” to a point where it will crush the stock. But they’re issuing supply to the market.
So this is an equilibrium within a $3 channel…and this equilibrium has persisted for the first 30 minutes of trading. Even though the price action is boring, it is actually quite impressive! It takes a lot of commitment on the part of both sellers and buyers to keep a stock in such a tight channel at such an elevated level. But at some point, either the supply or the demand is going to dry up, and the stock will indeed break out of this trading range.
You can just smell it coming. As I write this, the bollinger bands on the 1-minute chart are incredibly tight. And that just begs for a breakout one way or the other.
I’m describing all of the things that a chart can tell you if you are looking at it with a curious eye. My bet is that NFLX will break higher and I have an alert set at $120. If it breaks out, I may subscribe to NFLX. But until then, I’m on the sidelines, just watching the tug-o-war.
See you in the forum.
–Dan
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