WR: Recovered early losses

By Jani Ziedins | Intraday Analysis

Dec 08

S&P500 weekly at end of week

Weekly Review

It is important to periodically take a step back and look at the bigger picture because too often the daily noise can be confusing and misleading.  That is the intent of these weekly reviews.

MARKET BEHAVIOR

The market sold off early in the week as Monday and Tuesday finished in the red, but the market rebounded Wednesday, recovering all of those losses.  Interestingly enough, we opened the week by gapping above the 50dma, couldn’t hold that level and traded down to 1398 before bouncing back, ending the week above the 50dma.  Wednesday was the low point in the week and had the highest daily volume in quite some time.  Was this the capitulation point of a modest pullback?    Certainly could be looked at that way.

MARKET SENTIMENT

How a week closes is similar in importance to how a day closes.  Often big money makes their trades later in the week after they had a chance to evaluate market conditions and new fundamental data.  Pros throw their weight around near the end of week and it is important to keep tabs on what they are up to because they have all the money.

The most bullish thing from last week is buyers were willing buy Wednesday’s dip under 1400 and kept pushing the market all the way back above the 50dma.  On the other side we should be asking if this was the last short-squeeze before correcting lower.

The single the most challenging aspects of trading the market is both sides always have extremely compelling arguments for their positions.  The market price is the exact balance point between these two opposing viewpoints and you end up with exactly half the money on each side of the trade.  One side is buying because they think it will go higher, the other side is selling because they think it is time to get out before prices decline.  (there are other reasons to sell, but lets keep this simple)  To be successful, we need to spot group think and exploit opportunities where the crowd is getting it wrong.  For the near-term trade that is hard to do here because it seems both sides are equally matched.  A bad headline could trigger an emotional selloff, or the pervasive pessimism could continue fueling a rally that discounts every piece of bad news thrown at it.

TRADING OPPORTUNITIES

Right now it is hard to get ahead of this market because there is no obvious group-think skewing the crowd one way or the other.  From here the best play is waiting for the market to reveal its hand and then jumping along for the ride.  Holding above the 50dma for a couple more days makes this a buyable rally.  Dipping under the 50dma shows buyers are unwilling to support these prices.

And of course lets remember we don’t always have to be in the markets.  Don’t trade just for the sake of trading.  If you don’t have an edge on the market, take some time off and come back when there are better profit opportunities.  Volume for the rest of the year will trend lower and volatility will pick up as smaller players will be able to push the market around.  That could be enough of an excuse to take a break and come back in January with a rested mind.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL had its worst week in a years.  Resistance at the 200dma turned the stock back down and most of the traders who piled in on the recent rebound from $500 are now under water.  Funny how the market manages to turn the easy trade into the wrong trade.  There are a dozen psychological and economic reasons this happens, but it boils down to if it is easy to buy, it is probably a bad idea.  AAPL’s bounce off $500 sucked in a lot of people and this second pullback barbecued them.  AAPL is quickly going from a buy-and-hold stock to one that should be sold any time you have a profit because two days later it will reverse hard and you’ll be in the red.  The shocking thing is how volatile such a large company is when there is no real news to speak of.  There is no scandal at the top, no PR disaster, no major accident, strike, or disruption, AAPL is making these dramatic swings just because.  You’ll get a dozen reasons out of the financial press and analysts, but the truth is the stock was over-owned and ran out of buyers.  Without buyers, fundamentals don’t matter.

Sunday we’ll look forward to what we might happen next week.

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.