Morning Market Thoughts
Good morning. Recall yesterday’s muted continuation of Tuesday’s big advance, where the S&P (which is the index that most keep track of to see which way the money is flowing in the market — in…or out?) closed slightly higher after a very small pullback. That seemed to me as if the buying pressure was waning a bit. That led me to start thinking “Day 3” was Wednesday — the last stragglers of bulls were getting into the market. So it’s not surprising that the market is due to open lower this morning. But how low? Ha! Barely. They’re just slightly below yesterday’s close, and it’s likely that this little dip will be met with buyers.But how far will stocks extend today if they do start ripping higher? I can’t predict that move, but I will say that the S&P has run nearly 2% in the last few days and is back to the 20-day moving average. The only time I really ponder the 20-day moving average is in uptrending stocks where the higher highs and lows tend to oscillate between the 20-day moving average and the upper Bollinger Band. During those trends, it’s also advisable to draw a trendling ABOVE the trend. When the trendine that follows the highs is drawn, then we typically get an early warning about upcoming changes in the trend. When a high fails to touch that trendline–even though it might still be a higher high relative to the last high–the uptrend is getting weak.
But there is another way to read that “resistance trendline” too. If you look at a chart of the S&P covering January 2016 up to March 2017, you’ll see that the S&P actually blasted through the trendline — accelerating to the upside. This type of steep acceleration can be viewed as capitulation, where those who were shying away from the market are ultimately afraid that they’ll be left behind if they don’t get in. And as the S&P starts moving, more and more buying from stock chasers pushes the chart to a steep ascent. It’s a mild peak — not exactly a “blowoff top”. But the steep slope cannot be maintained. So the S&P falls back to test support — here, the 50-day moving average. OK, test passed with a B+. And now we’re back to looking for the next high, which will probably be lower because the bulls just need a bit more rest. So, if the buying activity has been spent, then a test of the 20-day moving average has a pretty good chance of failing. It’s not a certainty that this will happen; but I’ve seen it happen countless times.
So what does this mean for us? For longer term positions, it doesn’t mean a darned thing. The market is in an uptrend, and your stock are probably working just fine. For short term traders, it means that you take a look at your stocks, and make sure that the charts are bullish. And you always keep a chart of the S&P in front of you so you can keep a reference for what’s REALLY happening.
One stock that we need to check out in the forum this morning is Lululemon (LULU). They could probably change their ticker to UHOH. The stock is down over $14 bucks, and more than 20%. That’s a rubber band that typically snaps back a bit. So we’re going to want to watch it very carefully at the open. If it does start snapping back, there is money to be made on that rebound. Just need to make sure that the business of selling has nearly run its course and the buying has begun. This could be a “gap and reverse”…or a “Homer Simpson” — that pattern where the stock opens down big, you buy, and the stock keeps falling. You hang on as you wait for the inevitable bounce. It keeps falling. Finally, you say, “Doh!” and sell the stock.. At that point, the stock turns around and you realize that you’ve managed to sell the stock at the exact bottom.
So wait for the stock to truly find a bottom, then buy, with a stop below the lowest price of the day. I’ll cover that process in the trading forum this morning in real time. I’m pretty sure we’ll be able to make some money on it.
Hope to see you there.
–Dan
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