AM: A higher-high

By Jani Ziedins | Intraday Analysis

Jan 10
S&P500 daily at 1:15 EST

S&P500 daily at 1:15 EST

AM Update

Markets gapped at the open and notched new post-election highs, but started sliding and filled the gap by mid morning.

Stocks hit their head on 1470 and retreated to yesterday’s close of 1461 before finding support and bouncing back to the middle of the range by mid-day.  A little something for bulls, bears, and everyone in between.

MARKET SENTIMENT

The market continues marching higher in spite of all the reason it should selloff.  Bears will point to the retreat from 1470 as a lack of conviction, but that is just grasping at straws.  The retreat from 1470 is seducing shorts into holding, or worse yet adding to their positions.  They say you can boil a lobster without him realizing it if you raise the temperature one degree at a time, and that is what the market is doing to bears here.  The market takes a bite from them, retreats a bit and lulls the bears back into complacency.  As long as the market keeps taking little bites, the rally will continue.  What we need to watch for is the high-volume climax where the rate of gains ramps up and finally sends bears running for cover.  After the last bears are chased out of the market, buying will climax, demand dries up, and we head lower.  And the cycle continues……

TRADING OPPORTUNITIES

Expected Outcome:
Stocks are making higher-highs.  The trend is clearly up and there is no reason to get in the way of this steamroller yet.  The market is digesting the Fiscal Cliff gains over time instead of pulling back.  As long as pessimism persists, look for the rally to continue.  Stocks rally in the face of pessimism and decline on the back of complacency.  At this juncture we are still a ways from complacency.

How far we can go from here is anyone’s guess, but a possible scenario is rallying through the Debt Ceiling compromise and once everything starts looking good, complacency sets in and the market finally pulls back.

Alternate Outcome:
Anything can spook the market, including its own shadow.  An unexpected event could put a chill over the market and send us through all the stop-losses under 1450.  If this happens, we need to keep an eye on the price action and sentiment to determine if the market is rolling over and worthy of selling, or the dip is just another bear-trap before bouncing higher.

AAPL daily at 1:16 EST

AAPL daily at 1:16 EST

INDIVIDUAL STOCKS

AAPL is having a tougher go of it this morning as it gapped higher at the open, but its slide took it into the red and it hasn’t seen the same bounce the S&P500 has and it continues trading near the lows of the day.  Right now the stock is plagued by momentum investors that are jumping all over each rally and pullback.  These swing traders don’t care for the underlying value and are just playing a game of Chutes and Ladders.  Even if you don’t play that game as a trader, it is helpful to understand the rules so the resulting volatility doesn’t shake you out at the exact wrong time.  For the last three months the best trade on AAPL has been buying the dips and selling the rallies.  If this continues, the smart call is buying weakness and selling strength, so rather that sell AAPL here, look to buy or continue holding instead.

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.

Jon January 10, 2013

I follow your daily posts religiously. Love the nuanced analysis of the market participants.

This is where I currently view the $SPX. Any thoughts?

https://www.tradingview.com/x/g8TQPDVi/

    Jani Ziedins January 10, 2013

    I’m glad you enjoy the posts.

    I agree with your charts. From a sentiment analysis, there are a lot of people who will feel more comfortable buying and holding the market once a breakout is confirmed and that will drive the rally past 1470. The question is how much steam a breakout will have. Markets always pullback, so will that pullback happen shortly after the breakout, or will we rally like last year’s Q1 that didn’t pullback for over 3 months? It all depends on how quickly sentiment shifts once we breakout. The quicker people jump on board, the shorter the duration of the rally.

Jon January 10, 2013

Your conviction seems higher, the only question is at what rate. Thanks though for always providing the alternative outcome.

Just curious how you’re managing risk here at these levels. Are you currently holding any positions at this point? I am currently 26% invested (principally small/mid cap) and 74% cash.

    Jani Ziedins January 10, 2013

    I’m fully invested here. I swing-trade the S&P500 so I tend to jump in and out a lot. I bought Tuesday’s dip and am already looking for a place to exit. I’m not sure how high or long this breakout will go, so I will simply watch it closely, letting the market and sentiment tell me when it is time to get out. Writing the blog posts is my way of talking through the market and building a picture for myself. The process is largely self-serving and I do it for my own trading, but I also enjoy sharing the insights with other people.

    But what I do is only right for me. Every person has a trading style that works best for them and their personality, view of the market, experience, risk tolerance, goals, and time they have to spend on the markets. If you are only 25% invested, I wouldn’t suggest jumping in and buying a lot of stock right now. There is a saying, it is better to miss the bus than get hit by the bus. There will be plenty of great trading opportunities over the next 12-months, no need to force something here.

    There are two ways I see the breakout developing, one it is a blow-off top as the last shorts get run off and then we finally pullback to the 50dma. The other is we slowly grind higher. The grind higher is far more sustainable and will go further and longer, but it will also develop slowly, giving a trader plenty of time to jump on board. Give it a couple days to play out and see which of these two situations develops.

Jon January 10, 2013

Do you only trade $SPY or any other market indexes funds? Would be awesome to know when you finally close this position.

I also bought — with confidence — Tuesday’s dip based on your assessment of the current trend. Buying here at this level (even though it’s ripe for pullback) has definitely been less stressful than buying 2 weeks ago (even though those gains worked out very well).

I’m trying to manage intermediate risk by only buying on pullbacks and in industries that are currently leading (e.g. money center banks, major airlines, etc). What I am not doing is averaging up on gains. Instead, I’ve been peeling profits as prices advance. Once I’m 100% out, I only enter new positions on pullback to support. I plan to take a more decidedly aggressive approach to portfolio positioning once the market finally reveals its longer term trend. But in the intermediate future at this level, I’m willing to risk a nominal amount of my total investment capital for potential gains running up to the 1500 level. And buyers here have to believe the 1500 level is possible in the near future or you probably wouldn’t be long any positions at this point. In that respect, I feel my entries on pullback will continue to advance even at this current level as long as the broader $SPX continues its move towards the 1500 level. In the long-run over the year, I think we are going to retest all-time highs and as you’ve stated before, I’m one of the buyers who are willing to sit through some volatility.

I agree with your assessment of the 50MA. I think that’s where the pullback will take us before moving higher. Perhaps we get a pretty decent violation of the 50MA during the trading session, but we close very close above or below the 50MA. The idea at that point is to be all cash and take positions around the 50MA. And of course, I hope you’ll have some great analysis to forecast the next move up or down.

I’m even more confident after today’s end of day move! A close above 1,470, awesome.

Keep up the amazing work here my friend!

    Jani Ziedins January 10, 2013

    It sounds like our views on the current market are pretty closely aligned. As for the SPX, I’ve traded a lot of different things, but I find myself attracted to the simplicity of focusing on one thing and getting really good at it. Since so much of what I do is behavioral based, it helps to become intimately familiar with what I trade and the fewer things I focus on, the better I get at it. I use leverage to spice up the returns and big picture wise it doesn’t take a lot of profit each month to add up to a decent chunk of change at the end of the year.

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