The S&P 500 failed to hold Friday’s gains and we challenged 1,900 support Tuesday. But regular readers expected last week’s rebound and this week’s retrenchment. A week ago I told them to prepare for a 1,820ish to 1,940ish trading range to develop and to this point the market is acting like it should.
January’s 10%+ pullback did a little too much damage to put in a v-bottom, meaning we should expect a sideways consolidation and trading range to develop in the near-term. While most of us come to the market with a bullish or bearish bias, we need to resist the temptation to overreact these swings. Instead of buying the breakout or selling the breakdown, anticipate these reversals and trade against them. Take profits when the crowd is rushing in and buy when they are giving away stocks at steep discounts.
Trading ranges develop when both sides are entrenched and unwilling to yield. If a stock owner didn’t sell last August’s China meltdown and this year’s oil collapse, what are the chances they will bailout due to a recycling of these same headlines? The is also true on the other side.
Recent sellers abandoned the market because they are convinced things are only going to get worse. A modest bounce is unlikely to convince them to buy stocks with reckless abandon anytime soon. With such strong and opposing viewpoints, we settle into a trading range until something new shakes up the status quo.