AM: We finally did it

By Jani Ziedins | Intraday Analysis

Jan 17
S&P500 daily at 1:44 EST

S&P500 daily at 1:44 EST

AM Update

Stocks finally broke the logjam at 1473 and surged higher on all the autopilot buying.  Can we keep this up or is the market peaking?  Should we be concerned that AAPL is not participating in today’s rally?

MARKET BEHAVIOR

It finally happened, the S&P500 broke 1473 and continued higher through the morning.  This decisively set a new 52-week high and pushed us into levels we haven’t seen since 2007.  We clearly put the post-election selloff behind us and almost everyone with a diversified portfolio is holding winning positions.

MARKET SENTIMENT

The rally easily sailed through resistance at 1473 as early buying came from bears covering shorts and momentum traders jumping on the breakout.  Whenever you have a lot of people watching the same level, it makes for an exciting trade when we finally break through.

Today’s rally puts anyone afraid of the impending Debt Ceiling debate in a very uncomfortable position.  Do they chase the market higher or risk being left behind?  Fear of regret is a powerful emotion and isn’t exclusive to declining markets.  The bigger question is if the early buying from shorts and momentum buyers entices follow-on buying from a deeper pool of investors, namely those watching from the sidelines.

While those worried about the Debt Ceiling have legitimate concerns, they are obviously early.   There are a few week before the Debt Ceiling debate reaches crisis levels and in the market that is an eternity.  Expect the market to continue trading on the imbalance between supply and demand over the near-term.

The trend is higher because supply is scarce.  Those afraid of heights or headlines bailed their positions weeks ago.  The buyers that replaced these worrywarts demonstrated their willingness to own stocks in the face of these issues when they bought in spite of all that is wrong in the world.   Their confidence makes them more likely to hold through volatility and this holding keeps supply tight.  No matter what the fundamentals, when supply is tight, prices go up.

TRADING OPPORTUNITIES

Expected Outcome:
Owners of this rally have a far better decision head of them, lock in profits or hold for more gains.  Those are the trading decisions we love to make.

Markets moved decisively higher on the automated buying triggered by the breakout, but the chase hasn’t reached epic proportions and today’s rally is still far less than a 1%.   While making a new high is significant, the resulting move is reasonable, measured, and still a ways from capitulation levels.  Swing-traders should raise their stops and keep an eye on the exit, but it is still okay to continue holding for the time being.  If the buying accelerates we will need to reevaluate.

Alternate Outcome:
Will real buying follow today’s autopilot rally?  If most traders are more afraid of the Debt Ceiling than being left behind, this rally will stall and collapse.  But that is the rational trade and often emotion gets the better of traders.  Humans are naturally wired to feel more comfortable in the group, and if it appears like the group is not afraid of the Debt Ceiling and moving on, then many traders will forget about their concerns and run to catch up with the safety of the herd.  It is okay to hold stocks here, but watch out for stalling.

AAPL daily at 1:45 EST

AAPL daily at 1:45 EST

INDIVIDUAL STOCKS

AAPL is resting after yesterday’s monster rebound from $484.  It isn’t participating in today’s breakout, but given what it did on Wednesday, we can cut the stock some slack.  It is still holding above $500, but Tuesday’s dip greatly diminished the importance of this level since most of the stop-losses were triggered and are no longer there.

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.