AM: $#!+ or get off the pot

AM Update

The market is flirting with 1473 and AAPL bounced back from yesterday’s dip under $500.  So far it is shaping up to be a good day.

MARKET BEHAVIOR

Stocks opened lower, rose to 1473, and are pulling back slightly in the early afternoon.  The pattern of weak opens continues, as does hitting our head on 1473.  Is the market resting before making an aggressive assault on 1473 by the end of the day?  Bulls are hoping so, but stalling for fourth day at 1473 is becoming a concern.

MARKET SENTIMENT

Buying dries up at 1473 and the sideways trade continues.  A longer consolidation often means a stronger move when it does happen.  This is because a particular resistance level becomes followed by more and more traders with each passing day.  1473 is quickly becoming a key buy signal for both momentum traders and a stop-loss for shorts.  That concentration of trades around one level sets the stage for an explosive move when we finally penetrate that level.  AAPL’s trade yesterday was a perfect example of this phenomena as the stock broke under $500.

The longer we hold these levels, the more confident both sides become.  Bears are emboldened by the inability to break 1473, while bulls see each failed selloff as a victory.  There is a good mix of bears and bulls in the market, so we don’t have a strong asymmetrical trade to take advantage of.  Under balanced conditions, the side that usually wins is the one that goes with the trend.  The trend is higher and that could ultimately break tie in this stalemate.

But the more balanced sentiment in the market limits the upside potential of a continuation.  Bears and pessimists fuel rallies, and without an overabundance, the rally can’t drive too far.  An upside breakout will draw in many of the sideline watchers and chases out the last shorts, but after that buying exhausts itself, we could fall under a vacuum of new demand.

TRADING OPPORTUNITIES

Expected Outcome:
For those that are long, stay long and wait for the expected breakout.  This is a bad place to be short right now and wait for further signs of weakness before getting in front of this market.  Trading against the trend is a really hard way to make money and I don’t recommend it.

Alternate Outcome:
Failing to break 1474 today would be a red flag and if we can’t grab that level by Thursday, we need to reevaluate our position.  For the longer-term trader this is trivial because it doesn’t matter if you zig and then zag, or zag and then zig.  But for those of us swing-trading these minor moves it makes a world of difference.  If we get turned back from 1473 again, watch for a dip back into the trading range and possibly a test of 1450.

INDIVIDUAL STOCKS

AAPL bounced back and recovered $500.  This doesn’t mean the coast is clear, but it is extremely encouraging to see the selling exhaust itself and reverse.  Anyone who follows this blog knows there was not a lot of supply under $500 and selling would stall once the stop-loss selling ran its course and that is exactly what has happened.

AAPL is buyable here, just like it was buyable three-days ago.  This is a longer-term trade and anyone in this name needs to expect some near-term volatility.  If you find yourself with such a large position that you can’t sleep at night after days like yesterday, then you need to lighten up.

It will be interesting to see if AAPL retests $485 or if this was the last major shakeout before earnings.  The one thing that makes me cautions is so many people viewed this dip as a buying opportunity and that makes the contrarian in me nervous.  But if these new buyers are willing to hold the stock through some volatility, that keeps supply out of the market and we should rally.  Sometimes the contrarian trade is going with the market and this might be one of those times.

Stay safe