PM: Buy or sell the breakout?

By Jani Ziedins | Intraday Analysis

Nov 30

S&P500 daily at end of day

Markets notched a new high for the rally as we approached the 50dma.  Bears are becoming an endangered species as the bulls continue running them off.  But one of the more powerful paradoxes in the markets is the smaller a group gets, the stronger they become.  Expect the remaining bears to make themselves herd in coming days.

MARKET BEHAVIOR

The market finally cleared 1410 and rose to the 50dma before settling back to 1415.  Volume was average and the masses were not rushing to buy this breakout.

Boehner caused a dip in early trade during a press conference when he said the sides were not close to a deal.    Stocks have come a long way in a couple of weeks as optimism of an imminent deal boiled over, but is this time for the pendulum of sentiment to swing back the other way?

MARKET SENTIMENT

Stocks have been rallying nonstop regardless of the news.  Bad news might cause stocks to sell off momentarily, but within an hour they rally back.  That’s what happened with Reed’s comments a couple of days ago and Boehner’s comments today.  This is a Teflon market as it shakes off anything and everything.  Does that make it a safe time to buy, or is the perceived safety making it even more dangerous?

Bears have gotten chased out for the umpteenth time and are starting to get discouraged.  Markets will often feign a reversal a couple of times before actually going through with it.  Given the recent whipsaws, we are getting close to that real reversal.  Many of the buyers have bought and most of the shorts have been squeezed out.  Without a new catalyst, we will run out of buyers shortly.  There might be enough gas in the tank for one push higher through the 50dma, but don’t expect our politicians to pretend to get along for much longer.

TRADING OPPORTUNITIES

Maybe we’ll poke our head above the 50dma tomorrow, or maybe we’ll finally breakdown.  There has been a lot of hope built in to this rally that the Fiscal Cliff will be resolved early.  But this is nothing more than wishful thinking, as anyone who regularly follows national politics will tell you.  These negotiations will get far worse before they get better and the rhetoric will only get louder as both sides try to court public opinion.

This is a good time to lighten up on stocks because not much upside remains without a definitive Fiscal Cliff deal.  At the same time there is plenty of downside risk if talks breakdown.  Friday might be a good day to try out a short because the weekend will give extra time for some politician to stick his foot in his mouth and wreck the fragile hope something constructive will come out of Washington.

INDIVIDUAL STOCKS

AAPL is riding along on the Fiscal Cliff rollercoaster like everything else in the market, albeit with a little more beta.  There is hope AAPL will declare a special dividend because of the impending tax changes, but I wouldn’t hold my breath on that one.

How did I do?

SCORECARD

This segment recaps past blog posts to see how I did.

November 5th, 2012 “Given the pervasive hope for a Romney win, especially among retail traders bamboozled by the media, creates an opportunity for a trade.  We could easily see a selloff after an Obama reelection if emotional traders dump shares due to an irrational expectation Obama will wreck this country.  That selling will climax quickly and create a great entry point for the trader who understands politics, how the markets work, and supply and demand.  Within a couple of days everyone who wants to pull their money out of equities because of Obama’s win will have done so, meaning all the sellers have sold.  At that point supply dries up and the market rallies.”

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.