PM: High-volume reversal

By Jani Ziedins | Intraday Analysis

Jan 08
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Stocks sold off for a second consecutive day, but they found support at 1451 in early trade and finished near the middle of the day’s range.  This was the third red day out of the last four, but stocks are only down 5-points from the Fiscal Cliff rally day’s close.  Volume was above average today, showing a fair amount shares changed hands.  One interpretation is today’s high-volume reversal was a capitulation bottom for this modest selloff.

MARKET SENTIMENT

Bears tried again to break this market but were spurned as we bounced off support at 1450.  Everything was there for a larger selloff, it just failed to take hold.  Maybe we are stair-stepping lower, but corrections from grossly over-bought conditions typically happen quickly and dramatically.  Using that as a benchmark, holding these levels for five-days seems to indicate this market is not grossly over-bought.  While it still might be over-bought, it is not grossly over-bought and we shouldn’t expect an imminent plunge.

A lot of people are shooting for this market and expecting a pullback.  Between the negative headlines and the massive run-up,  both fundamental and technical traders are wary of this market.  I have no doubt they are right, but in the market it isn’t so much about figuring out what the market will do next, but identifying and trading the exact timing of those moves.  In the markets early is the same thing as wrong.

TRADING OPPORTUNITIES

Expected Outcome:
Stocks continue showing strength even as we are down three out of the last four days.  The declines have been so modest in comparison to the 65-point, two-day rally that they can be counted as wins.  Everyone is expecting a pullback, but it isn’t happening.  Often this is a sign to take the other side of the trade.

While the market might head higher from here, we can’t become complacent and need to recognize that the next leg higher might be the last of this rally, so don’t get greedy and be prepared to take profits early.

Alternate Outcome:
We are a few points from a huge number of stop-losses sitting under 1450.  It isn’t out of the realm of possibility that market makers will nudge us through that level just to trigger all that trade.  After a certain point, selling can take on a life of its own as selling begets more selling.  And of course an unexpected news story could send the markets lower at any time.  There is no risk-free trade and we always need to have a plan to respond if the market moves against us.  It would be great to make money on every single trade, but that just isn’t realistic.

INDIVIDUAL STOCKS

AAPL actually closed in positive territory today.  Right now $520 seems to be the level where buyers will step in and accumulate shares.  If we hold this level, look for a move above $550 to create a bullish pattern of higher-lows and higher-highs.

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.