Higher-Lows

End of Day Update: 

Stocks took it on the chin for a third day following Friday’s early surge to record highs. This dip leaves us less than 10-points from the 50dma and just above recent support at 1,980. The primary catalyst for this weakness appears to be a selloff in small-cap stocks. While the S&P500 is less than 2% from all-time highs, the Russell 2000 is off 8% and continues the shift from high-flying, speculation stocks to blue chips.

Wednesday will be an important day for the markets with a looming challenge of 1,980 support. This technical level stretches back to early July when it acted as resistance. But as we often see, resistance became support and we bounced decisively off this level a couple of weeks ago. Will selling stall and buyers step in at this level again? We will know the answer in a few short hours.

If stocks stop sliding, look for a rebound to record highs. On the other hand, failing to find support means we should expect the selling to continue to 1,950. While this sounds easy, the real challenge is not falling for the head-fake where the market dips under support, flushing out the reactive traders, before reversing and finishing the day higher. If this were easy, everyone would be rich.

Market sentiment is cooling off slightly, but it remains at bullish levels. While overconfidence could ultimately cause the demise of this bull market, contrary to popular opinion, confidence and complacency is bullish in the short-term. Confident owners don’t flinch in the face of a 2% dip to support. The lack of nervous owners keeps supply tight and props up prices. This has been the story for the last 12+ months and there is no reason to assume the tide is changing here. We continue making higher-highs and higher-lows and the best trade is sticking with what works.

Jani