For most of us in the US, Thanksgiving is a restful yet very stressful time of year. This week in the market is shaping up to be no different as the restful time that traders will spend away from the screens (or should spend away from the screens) comes right after the Fed announcement… And meanwhile the tax plan vote still looms. But don’t worry, because come Black Friday everything will be back to normal, at least for half a day.
Overall volume last Friday didn’t budge and while prices may have slipped, advancing volume came in ahead for most of the session. Consolidation after a big accumulation day (like the one for the Nasdaq on Thursday) is part of the natural market cycle that’s been in place since the dawn of time. It goes like this:
1. Shakeout – When markets hit all-time highs, market makers will throw on the brakes to shake out the weak hands. If you think your stop-loss order that you skillfully placed right below a well-defined support level will save you from getting shaken out, think again.
2. Run up – After the stops have been hit and most folks think the market is going to continue downward, things suddenly turn around. This forces shorts to cover which propels things even higher.
3. Consolidation – Some folks have to take profits, after all that is the reason why we’re trading (We sold our SPY calls at the top of the “Run up” on Thursday for +31% gain). This creates a sideways motion which gives a chance for anyone who missed the boat to get in for the next…
4. Run up again – If enough advancing volume fills the void, the sideways motion will suddenly ignite and up we go again.
Similar cycles appear everywhere in nature, your career, love life, and even among your friends and family at the holiday dinner table. It becomes frustrating when we realize that sometimes this stuff just keeps happening over and over again whether we like it or not.
So what can we do? Well, we can’t change things that are beyond our control, but we can change the way we feel about them… or at least learn how to say maybe.
So if you feel like you’re getting shaken out for any reason, just remember that the run up will always (eventually, in the case of the stock market) be just around the corner. -MD
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