The main job of the market is to move up with the least amount of investors onboard. This can be witnessed by the number of times we see tree shaking in a trend.
Tree shaking can be in different forms such as BuF or mini consolidations but the sole job at that time is to remove the weak traders from and bullish trend. It’s easy to have an opinion but most times opinions are wrong and the market, regardless of the move it is making, is always right. Don’t try to fight the market.
The difficulty arises in establishing new entry points when we are in a bull market and prices remove the weak traders by pulling back. There are two options.
- Entry on the breakout.
- Entry on the pullback.
The breakout option can be very delayed if the pullback was deep. It may take a while for price to test that resistance so a trader might be standing aside for months or more before price gets back to the resistance. As of May 2020, breakout traders could currently be going through this process right now.
The pullback can offer a timely entry but the risk is price could move down further. The goal is to enter near strong supports and exit if the bounce fails to materialise.
Where we are right now is nothing more than a day of profit-taking. Thats not an opinion, thats the fact based on price bars. The hesitation of the DVI and couple that with the recent move up, profit-taking was bound to occur at some point.
We discussed the support levels that we need to be aware of and that still holds true. If the major averages breach support levels then we need to be concerned. Right now, this might be the start of profit-taking.
If we see a further move down then we could expect 5% or more. Near term, the S&P support 2855 – 2822 is where we should expect support. The latter taking price to around 4% from the highs.
Standing aside and watching is a position so if need be, cash might be good for today.
One day does not change the trend and the trend is still bullish….for now.
Sell in May and go away is also on the cards, in which case we may see a few months of consolidation.
Lets go trade!