AM: Testing the recent consolidation

AM Update

MARKET BEHAVIOR

Stocks are selling off this morning, but still within the recent consolidation.  Holding support for a 3rd day in a row would be bullish and signal a continuation of the rally because breakdowns from significantly overbought levels happen fairly quick.  We need a material breach of the 1450-1455 level before confirming a breakdown.  We are close, but it will all depend on how the market closes this afternoon.  Failing to hold support could send us back to the 50dma, but a bounce could signal another round of short-squeezing.

MARKET SENTIMENT

A lot of people want to see this market selloff after last week’s sharp rally, the question is if the market wants to cooperate.  Right now it feels a little too easy to short this weakness and that doesn’t bode well for bears.  The best trades are often the hardest ones to make and right now buying seems to be the hardest thing to do.

Often the best way to determine what the market will do next is figure out what movement will create the greatest pain for the largest number of traders.  A breakout from here would please the bulls.  A breakdown would please the bears.  That’s too easy.  How about a whipsaw to zing both sides and make everyone look stupid?  A breakout above resistance will squeeze out all the shorts and tempt in the breakout buyers, but then reverse lower from the new highs to make everyone look stupid.  That is why I think the high probability trade is one more short squeeze before selling off.

MARKET OPPORTUNITIES

Expected Outcome:
In spite of today’s weakness, we are still holding the recent support area and this is bullish for higher prices.  We are so close to new highs that the market will invariably be drawn to breaking them even if the next move is lower.  Look for one more leg higher in the near-term, but then watch out for the pullback.  This setup is hard to trade and most would be better off waiting for a higher probability trade and just sitting this one out.  Longer-viewed traders can continue holding, just expect some near-term volatility and don’t let that shake your confidence.  Headlines are about to get ugly again over the Debt Ceiling, but this creates buying opportunities and is not a reason to sell.

Alternate Outcome:
The market can selloff for any reason and doesn’t always do what it is supposed to do.  A material break of 1450 would signal a lack of willingness form buyers to step in and we could see the slide everyone is expecting due to a lack of demand.  But don’t get short the market until we beak support and take profits quickly because this is just a counter-trend trade, not a material selloff.

INDIVIDUAL STOCKS

AAPL saw early weakness, but bounced back above $520 by late morning.  It is encouraging to see the stock find some footing after the last couple days of selling.  It looks like the stock wants to chop sideways until we get better clarity from the earnings report in a couple of weeks.  So far the stock has been a safe buy near the $500 level, but that won’t help if earnings disappoint.  I think the stock has seen a lot of selling ahead of this earnings report and most of the pessimism is already priced in, meaning most of the downside risk has already been realized.  On the other side, a positive report will launch the stock higher.  Limited risk on the downside, explosive upside potential, sounds like a great trade.   But there are no guarantees in the market so always practice prudent risk management.

Stay safe