Did you get caught in the bear trap? Listening to all the doomsday correction pundits?
The S&P 500 had continued it’s downward trend on Monday through Wednesday before waking up on Thursday and Friday. This was the first positive week of the year for the index. Trend followers were frustrated as a weak jobs number did not add any fuel to the seller’s fires. In fact it probably confirmed the FOMC’s course with keeping US rates low for the foreseeable future and the measured pullback of the most recent bond buying quantitative easing program. Since the US labor market hasn’t shown any robust growth, the measured and predictable actions of the FOMC has given the market a sense of stability as to its policies. Traders reacted by buying all day on Friday.
The SPY etf that tracks the S&P 500 index recently touched a long term support level where it has historically bounced. Perhaps this wil make it easier for long positions to make money. Be careful of falling into a bear trap where you feel the weight of the recent downward price moves will dominate the market. The media will talk about corrections since it is easy to do so. it is similar to weather reports making normal snowfall sound like blizzards. The main reason for the caution is that it is easy to think you will see another 5% down move. Going short can be dangerous. If there is a bounce off this support level it may strong. It will wipe you out of your money and then fall back down to a point where you would have been profitable if you had kept your trade on. This could push you into trading on emotions instead of rational game play. So you have to be careful to not get caught expecting the market to go down. It might do the opposite quickly and force you into losses.
Chart Courtesy of StockCharts.com
As you can see with the green circled areas, multiple times the lower trend line was touched, the SPY rallied. Then in 2013, it barely broke below the upper trend line. It also bounced every time it had touched the upper line as demonstrated by the yellow circles. What happens next? Who knows. The idea is that shorts could be in for a rough time or have a small window to get short and cover to take profits quickly. It will not be an easy trade.
This week, the US will have Janet Yellen testifying in front of the House Financial Services Committee on Tuesday and the Senate Banking Committee on Thursday. This will be her first public commentary as the Federal Reserve Chairwoman. Investors will be interested in what she has to say. Her approach is not expected to stray far from her predecessor. However, a market desperate for news will over-analyze the average number of adjectives per sentence that she uses.
Wednesday will bring earnings for Cisco Systems Inc (CSCO) and Deere & Co (DE). Thursday will bring US retail sales numbers for the month of January. Friday will round out the week with US Industrial Production. These reports will all give a glimpse into the condition of the US economy. The earnings reports will also give insight to global economic trends as Deere is one of the world’s largest manufacturer of heavy equipment. Cisco’s reports are always important as they usually contain commentary about technology infrastructure trends.
Last week the SPY stayed within the ranges predicted. Let’s see if it stays in the range of $176.00 and $183.70.
Good luck and trade rationally.