PM: Rally let some air out

PM Update

MARKET BEHAVIOR

Markets slid through the day as air let out of the recent rally.  We dropped back to 1420, what was overhead resistance up until two days ago.  Volume was average, but lower than the last couple days.  The somewhat restrained volume shows panic hasn’t hit the market and it was more a lack of buying that pushed us lower than a surge of selling. Is old resistance at 1420 going to become new support?  Or is there more downside left?

MARKET SENTIMENT

With seven short-squeezes over the last month, it wouldn’t surprise me if a large number of bears developed an aversion to shorting this market.  Fool me once shame on you, fool me seven times, shame on me.  But the thing about the markets is the more failed attempts there are, the more likely the next one will succeed.  Seven short-squeezes is getting up there and the probability for a real pullback is growing by the day.

It took a lot of buying to push us up 90+ points and  there is little wonder why the market is struggling to find new buyers.  It will probably take more than a one day decline to tempt value buyers with their large war chest to jump in.   A pullback to 1400 and things start looking real interesting again.

We could get hit with a panic driven selloff if the Fiscal Cliff thing blows up, but that is unlikely.  The post-election selloff shook out most of the emotional traders, so there are a lot fewer people left to hit the panic button this time around.  Further, there are a lot of people who already expect us to fall off the cliff and that possibility is so widely discussed it is largely priced in.  And lastly, the Fiscal Cliff is more like a rolling hill than a cliff and most of the effect won’t be realized for moths, so passing the deadline is more symbolic than consequential.  You could have retail investors dump their 401k accounts, but there will be so few of them that the selling will be far more restrained than the post-election selloff.  And honestly I would welcome more irrational selling because that creates great profit opportunities for those that keep their head.

TRADING OPPORTUNITIES

Be prepared for more downside, but don’t be surprised if the market bounces pretty quick.  Shorts need to be real careful here and don’t get greedy.  It shouldn’t be hard to hit 1410,  1400 is a little more of a stretch because we could bounce anytime in that area.  Waiting for 1390 is getting greedy and less likely to happen.  I’m not saying it can’t happen, just less likely.  It is easy to make money in the markets, the hard part is keeping it, so selling a little early is always preferable to waiting too long and letting those profits evaporate.

Fiscal Cliff negotiations will play a role in the next few trading sessions.  We need to pay careful attention to how the market is responding to these developments.  If the market shows increased skittishness, then there might be more room on the downside, but if the market continues its indifference, then we can ignore it and trade the rebound.  Coming up on the holiday break next week, the result will be binary, either negotiations fall apart and everyone goes home, or a deal will be reached.  In coming days we will look at how to trade this.

INDIVIDUAL STOCKS

Predictably AAPL had a bad day, but I think this is a really good sign.  I would be far more concerned if AAPL rallied today because that shows the emotional trade is still in control.  The closer AAPL follows the indexes, the better off the stock will be.  We might see some agressive selling if we break under recent lows, but that autopilot stop-loss selling is expected, normal, and healthy.  It will take months for AAPL to climb out of this hole, but for the long-term investor the risk might be worth the reward.  For the swing-trader, there is still some volatility to play.

Stay safe