Market Still Refuses to Consolidate

by Serge Berger | June 11, 2014 2:23 am

Market Still Refuses to Consolidate

Stocks again traded in a lackluster fashion Tuesday, but are still holding last week’s gains. On Monday[1], I discussed that stocks are likely to consolidate, either in price (lower) or in time (sideways), in coming days. Thus far, we are seeing the latter, which speaks to the strength of the recent breakout and the fact that investors are chasing stocks.

At the same time, both historical volatility and implied volatility remain very low, with the CBOE Volatility Index (VIX) trading well below 12, and this makes it challenging for traders to make money.

On Tuesday[2], I mused that should the S&P 500 rally into the 1,980-2,000 area this week before taking a pause, I would dare to call it the blow-off top for the current cyclical bull market. We are not there, but with the index yet to show any weakness and Tuesday’s close only 1.5% away from the lower end of the range, I am keeping the possibility for a blow-off top this or next week front and center.

After making the rounds with a few brokers Tuesday, I heard several say that stocks can only fall so low, as there is an implied floor in the market due to low bond yields and, thus, forced demand for stocks. I see where they are coming from, but whenever I hear several brokers say the same thing with authority I get a bit suspicious and more risk averse.

Despite the flat close, there was action underneath the surface. Social media stocks like Facebook (FB[3]) and Twitter (TWTR[4]), which had been written off as junk by some investors in recent months, broke past near-term resistance lines.

06 11 14 fb twtr 300x195 Market Still Refuses to Consolidate
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As a money manager, trader and adviser, it is my job to keep my clients and funds on the right side of the market. My goals in order of importance are:

1. Don’t blow up the portfolio
2. Don’t lose money
3. Make money

This focus on risk management rather than reward chasing has kept my performance positive for eight straight years. If we can concentrate on choosing high-probability trade setups and managing risk properly, then profits should take care of themselves. A big part of all this is simply not fighting the broader trends.

This brings me to the daily chart of the S&P 500, which as discussed above, still refuses to show any price consolidation after the break past 1,900.

06 11 14 spx 300x195 Market Still Refuses to Consolidate
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But just because a market is trending higher is no reason to try to short it. As the saying goes, the trend is your friend until it ends. Yet, chasing the index higher at this point is not a high-probability strategy either.

06 11 14 rut 300x195 Market Still Refuses to Consolidate
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The Russell 2000 is finding immediate-term resistance at the March diagonal resistance line. The question is whether this index will make a lower high versus its March highs or push past them. A push to new highs should bring about further broad-based buying, while a lower high could get the bears growling.

Stocks remain well bid and Tuesday’s positive action in social media stocks is yet another sign that buyers are not exhausted.

I continue to trade this market both ways (long and short), but with a long-biased approach as well as a good amount of cash in the portfolio so I can react quickly when the bulls start to face stiffer headwinds.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[5].

For a list of this week’s economic reports due out, click here[6].

Like what you see? Sign up for our daily Beat the Bell[7] e-letter and get investment advice delivered to your inbox every morning!

Download Serge’s trading plan in the Essence of Swing Trading e-book here[8]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. On Monday: http://investorplace.com/2014/06/stocks-cheer-jobs-report-buy-selectively/
  2. On Tuesday: http://investorplace.com/2014/06/stocks-hold-gains-week-still-young/
  3. FB: /stock-quotes/FB-stock-quote/
  4. TWTR: /stock-quotes/TWTR-stock-quote/
  5. click here: http://www.bloomberg.com/apps/ecal?c=US
  6. click here: http://www.bloomberg.com/markets/economic-calendar/
  7. Beat the Bell: https://order.investorplace.com/?sid=FQ8104
  8. Essence of Swing Trading e-book here: http://www2.marketfy.com/l/15492/2013-07-23/55sww

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