PM: Off again

By Jani Ziedins | Intraday Analysis

Dec 19

S&P500 daily at end of day

PM Update

Markets struggled as the Fiscal Cliff deal is off again.  It wouldn’t be surprising to see the market pullback and consolidate some of the recent gains.

MARKET BEHAVIOR

Stocks retreated to 1435 as collaboration in Washington predictably ground to a halt.  The selloff came with the largest downside volume seen in over a month.  This puts us just above the 1430 level that provided support and resistance dating back to early September.  Inability to hold Monday’s breakout doesn’t bode well for a continuation and we might see more weakness here.  Look for selling to pick up speed if the market cannot hold 1430 and the dip starts taking out automatic stop-losses.

MARKET SENTIMENT

Political negotiations took two-steps forward last week as both sides were making constructive progress toward a deal, but that reversed today and we had a big step-back as the rhetoric picked up again.   The market was rallying in anticipation of an imminent deal over the last few weeks, but today’s bickering threw a wrench in those plans.  But this is standard operating procedures for both DC and the markets and shouldn’t surprise anyone.

As much as we want to put the Fiscal Cliff behind us, if politicians agree too quickly, each party’s base would become upset that their guy gave in too easily and should have fought for more.  If there are not multiple breakdowns and stalemates, then you are clearly doing politics wrong.  The reality is both sides are going to make compromises that will upset their base and the political leaders will put up a good fight so they are not criticized for giving in too easily.

And in the markets sentiment swings up and it swings down.  Chasing the market is one of this country’s the favorite pastimes.  If the market is going up, buy-buy-buy.  If it is going down, sell-sell-sell.  We all knew this market could not go up forever, the only question was when it would pullback.  Maybe today was that day, or maybe this is just another short-squeeze.  Only time will tell for sure.

As we covered in yesterday’s post, Tuesday’s high volume was noteworthy and acted as a potential warning flag of dwindling demand.  Everyone will point to the rhetoric out of DC and say that lead to today’s selloff, but two weeks ago the market rallied strongly in the face of similar bickering.  What made the difference between then and now?   Supply and demand.  Two weeks ago the market was grossly oversold after the emotional post-election slide.  That selling flushed out all available supply and after that dried up there was nowhere to go but higher, regardless of the headlines.  And today we saw similar headlines as two weeks ago, but this time we sold off because all the recent buying created a fresh crop of available sellers.  People claim news drives the markets, but it only seems that way when the buying and selling follows the news.

TRADING OPPORTUNITIES

I wouldn’t buy today’s dip, not yet.  We will most likely see slightly more attractive prices over the coming days.  The political side of this will probably get worse before it get better and that could shake out some of the recent buyers expecting a smoother outcome.  We are approaching the holiday week and many big decision makers will be on vacation, leaving junior traders to man the desks.  These rookies will have clear sell orders if we cross certain levels, but most lack the authority to initiate new positions, limiting buying over the next week.  Short of a surprise Fiscal Cliff deal, expect the market to be flat to slightly lower next week.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL finished at the lower end of the day’s range, but it did not give up nearly as much of the previous two-day rally as the indexes did.  This shows some relative out-performance.  Volume was far below average and the lowest we’ve seen in weeks.  Buyers were taking a break after two days of strong gains, but sellers also failed to show up in numbers and the stock consolidated recent gains.  Monday’s dip undercut the previous low gave a potential double-bottom.  Six-months from now a lot of people will be kicking themselves for not buying AAPL when it is trading above $600.

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.