Markets opened above the 50dma and almost instantly began selling off. Could this be the last short-squeeze before pulling-back and digesting some of the recent run up? It is still early in the day and we need to watch if the market rebounds this afternoon like it has with other recent intra-day declines. If we fail to get that bounce, we might be seeing the market shift character and a change its near-term trend.
Everyone knows the kind of rally we’ve seen since the bottom on Nov 16th can’t keep going up indefinitely. But what they know rationally doesn’t always connect with what they feel when looking at their trading screens. We had several categories of traders in the recent move:
Where we go from here largely depends on what the aggregate of the above groups does next.
So what does all the above mean? It means we are running out of new buyers and a fresh wave of sellers could show up if prices start pulling back. The financial press always tries to find a fundamental reason stocks moved one way or the other, but the truth is prices only move to balance supply and demand. Now sometimes unexpected news will affect expectations and in turn skew the balance of supply and demand, but often in medium timeframes supply and demand will move the market by itself independent of the news around it. For example stocks will often sell off when everyone is most optimistic on a stock because at that point everyone who wants some already has some and without any new buyers waiting in the wings, demand dries up and the price declines. The opposite has happened here. Fiscal Cliff talks have grown further apart over the last two weeks, but the market has rallied in the face of these negative developments.
If there was a time to lock in profits, now is looking pretty good. If the break above the 50dma doesn’t stick, this would also be a place for aggressive and experienced traders to look at shorting the market. But if we continue holding these levels for a few days, that shows buying hasn’t climaxed and there is still upside left in this move. If that is the case, I don’t think owning the market here makes for a good risk/reward because there is only so much higher this steep rally can go, but for shorts it would be a prudent to cut bait and wait for the next entry.
AAPL is still in the green, but off of early highs like the rest of the market. All of the above commentary applies to AAPL as a stock too.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. 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 engineering at Fortune 500 companies, small business consulting, 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 children.