Hope is not a strategy

By Jani Ziedins | Intraday Analysis

Oct 11

S&P500 daily at end of day

The bull’s feeble rally attempt failed as AAPL fell apart.  Expect the market to drift lower to until we have a huge purge that puts some fear back into traders.

MARKET BEHAVIOR

Markets popped at the open, but gave back most of those gains.  AAPL is having another tough day and raining on the bull’s rally attempt.  Low-volume continues as weak bulls are still hopeful and hanging on.  Most likely the market will run those guys off in a shakeout before resuming the uptrend.

Volatility is creeping back, but only modestly so.  For the first time in a while we are seeing material down days.  This demonstrates the balance of power is more even and bears finally have a fighting chance.  That doesn’t mean we are about to breakdown, just the easy ride higher has come to an end.

MARKET SENTIMENT

Today’s rally was bound to fail.  The mini-trend lower is driven by bull’s hopes of a rebound.  They are holding through the dip because every other time it bounced.  But hope is a horrible strategy and the market is taking aim at the hopeful and complacent crowd.  A high-volume break under 1425 and the 50dma is what the market is working toward.  The sooner the market purges, the sooner we can get back to notching a 52-week high.

Trading volume remains below average and shows weak hands are still hanging on.  Today’s relatively modest pop also shows bears are not over-committed to this market because it did not trigger a massive short-squeeze like we’ve seen so many other times.  Hope by bulls and bear’s fear of getting stung again on the short side indicates we probably have more downside left.

To bottom we need to scare bulls and bring out the arrogance in bears again.  People trade their outlook and when bulls have given up and bears have gotten aggressive will indicate the point where most of the selling has already occurred and a rebound is likely.  Until then we’ll drift lower.

But remember, these are mini-sentiment trends within a larger bull move.  The dip is just a dip and the market will resume higher after sowing some fear in the market.

TRADING OPPORTUNITIES

Too early to buy the dip and too late so short the market.  Unless you are a day-trader, it is best to sit tight and wait for the purge and rebound before buying back in.  If you have a healthy profit in a stock, you can consider waiting this out, but prepare to be scared and tempted to sell before the market recovers.  If the election becomes a turning point for the market, we have to endure a few more weeks of this.

AAPL daily at end of day

INDIVIDUAL STOCKS

Buying AAPL’s dip hasn’t worked out well and anyone who bought in the last two-months is underwater.   The obvious trade is obvious, and obviously not working now.  AAPL probably won’t make for a good buy until everyone is talking about how the run is over.  The last great catalyst for AAPL was Steve Job’s medical retirement and untimely death.  That put a lot of pessimism in the stock and cleared the way for a move higher.  Now there is too much optimism and everyone who wants a piece of AAPL already has one.  With no new buyers remaining, the selloff will continue.  Not a crash, just a glide lower.

Stay safe

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.