Here is what we can look forward to this week and strategies to trade it.
The market regained the 50dma late Friday. Finding new buyers to support prices above the 50dma will be a key component of continuing the current rally. We are in the middle of the holiday lul and should expect volume to continue slacking off. Lower volume means more volatility since it is easier for smaller traders to move the market, so expect head-fakes to continue.
The 50dma and 200dma are a key psychological levels for no other reason than so many people follow them. Congestion around a price level creates more powerful support and resistance because this is where a lot traders actually bought and sold shares. Emotions of fear and regret will cluster here because this is the point where many traders accounts will move between profit and loss. Moving averages and round numbers make for noteworthy mile markers but don’t generate the same levels of pain and pleasure for traders who didn’t enter or exit trades at these levels But the secondary indicators can affect the market’s mood and influence exceptions about what lies ahead. In many ways these secondary technical levels are self-fulfilling prophecies.
A lot of traders are going to watch how we trade around the 50dma. If we hold above it, they will buy the market. If we fall under it they will sell and short. And if that is what people are going to do, then we want to get out in front of this so we profit from the crowds buying and selling. We don’t want to be the first one on the bandwagon, but we want to jump on before it is obvious to everyone else.
The market is currently ignoring the Fiscal Cliff debate and is not showing concern about the growing political deadlock. Both Republican and Democratic leadership have thrown out ultimatums and I wouldn’t expect either side to back down any time soon. And the market knows this too, but it doesn’t seem concerned. While this might be perplexing to the fundamental trader, we trade the market, not the news.
The thing we have to decide is if traders are buying for non-fundamental reasons here and that is creating this support here. Are shorts buying this market because they cannot stomach further losses? Are bandwagon traders buying because everyone else is? If either of those traders are leading the charge higher, we will head lower quickly after their limited buying power dries up. But if big money vale investors are attracted to these prices, then we will likely continue higher.
The big difference between short-squeezes and momentum traders and value investors is the size of their trading accounts. Short-term traders drive a lot of the daily volatility we see, but only the large mutual funds can sustain major market moves. And so the most obvious way to tell who is leading this market is to wait a few days. If big money is in charge, we’ll hold these levels going forward. But if the short-term traders are propping up the market without the support of larger traders, this rebound will fizzle and collapse under its own weight.
If the market choses to ignore the Fiscal Cliff and thinks a pullback to 1400 is the only rest it needs, we have to respect that because the market is larger than we are. It isn’t about what the market should do, but what the market does that puts profits in our accounts.
How can we not talk about AAPL? Not only is it one of the most widely held stocks, but it also makes up the largest portion of the indexes. AAPL’s $50 decline wiped out more market cap than most of the companies in the S&P500.
The first thing we need to recognize that AAPL the stock is a lot different from Apple Inc. Apple Inc. is one of the most profitable companies in the world and growing like gangbusters. There is nothing wrong with Apple Inc., but AAPL the stock on the other hand has run into significant headwinds. Call it unrealistic expectations or over-owned, but whatever it is, the stock is off 25% from its $700 high just a couple of months ago. Is this stock done selling off? Is it headed to $400? Honestly I have no idea. Has sentiment peaked, or is this just a shakeout? I think AAPL is getting hit by all these people trading for tax reasons and the stock might liven up closer to the new year when this artificial pressure goes away. But there are no guarantees because emotional trades go further and longer than most expect. And lets be honest, at this point AAPL has turned into an emotional trade because it what everyone is talking about. If you are a gambler, try to pick a bottom. But if you are in this to make money, wait for the stock to find a bottom before buying in. Most often we will see a couple false bottoms before the real rebound starts. One false bottom down, one more to go.
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.