AM: Early weakness is bullish

AM Update

Markets opened lower, but found their footing in midday trade.  AAPL broke $500 today, but it was a nonevent this time and already found support.

MARKET BEHAVIOR

Stocks opened modestly lower and the S&P500 slipped back under 1480, but the slightly negative trade is supportive of the recent breakout.  The market is still above previous resistance at 1473 and a slight pullback shows buying isn’t getting out of hand.  The most sustainable rallies are two-steps forward, one-step back.  Markets that lunge ahead without pauses are more prone to breaking down.

The recent pattern is trading down in the morning and rebounding in the afternoon.  We will see if this trend continues, but even if it doesn’t rebound today, closing above 1473 and bouncing back on Monday will still be supportive of a continuation.

MARKET SENTIMENT

The pessimists are already shooting holes in this breakout because of this morning’s selling.  “A one-day breakout that fails immediately is not a positive technical sign.” @bespokeinvest  But I am on the other side, I see early weakness as a sign of strength and continuation.  Rallies are fueled by cynicism and I will be most concerned when we run out of naysayers.

The least sustainable move the market could make is two more strong up-days.  That would suck in all remaining buyers and the market would collapse on the subsequent lack of demand.  While that would have been and ideal setup for a swing-trade, our current dip is more supportive of a continuation.

The market is setting up for a near-term correction, most likely triggered by Debt Ceiling bickering, but the market is not ready for that trade just yet.  Ironically, the Debt Ceiling correction won’t happen until everyone forgets about the Debt Ceiling.  When the market is rallying, the financial news is generally upbeat.  Between the positive price action and improving sentiment, traders will be lulled into complacency.  When the group appears calm, the individual tends to relax too, but the instinct that worked so well for our ancestors is ill-suited for the world of high finance.

TRADING OPPORTUNITIES

Expected Outcome:
As long as we hold 1473, that supports a continuation.  We can’t go up every day and dips are a natural and healthy part of going higher.

Alternate Outcome:
There are two things that will kill this rally, 1) a huge surge higher and 2) complacency.  Keep an eye out for either of these.  The Debt Ceiling debate is around the corner and that could be the catalyst to kick off the corrective wave.

INDIVIDUAL STOCKS

AAPL traded under $500, but just like we described yesterday, the stock has already been-there-and-done-that, so a violation of this level didn’t trigger a second large wave of stop-loss selling.  Dipping to $496 this morning was a non-event and the stock already found support is trying to regain $500.   Success in this game is knowing what the other guy is thinking and how he is positioned.  It isn’t hard, you just have to know what to look for.

Stay safe