PM: Reasonable and measured breakout

PM Update

Stocks finally broke 1473 and sent bears running for cover, but the price gain and volume was not enough to exhaust all the available demand and more fuel remains.  AAPL took the day off, but it is an earned and deserved rest after Wednesday’s powerful rebound.

MARKET BEHAVIOR

The S&P500 decisively broke through resistance on higher than average volume.  But while the day was significant, the 0.6% rally was far from overdone and represents a reasonable and measured move.

MARKET SENTIMENT

Bears and pessimists had another bad day.  When there is so much wrong with the world, but the market is rallying, you have to side with the market.  There are countless reasons the market should be weak from too-far, too-fast to the Debt Ceiling, and I can’t think of a single fundamental reason the market should rally 180 points over two months, but that is exactly what happened.

When a technician or fundamentalist looks at this market, all they see are reasons it should go lower, but if you judge the market by sentiment and supply and demand, it is pretty clear that the only place for this market to go was higher.  There is real psychology and economics behind this.  When everyone says the market should go down, they act on this expectoration and sell in anticipation of the market breaking down.  After all the pessimists get out, selling climaxes, supply dries up, and there is no where for the market to go but higher.  A lot of people say it is foolish or even impossible to predict the market, but that is just because they are doing it wrong.  If you know what to look for, the market’s behavior start making a lot of sense.

TRADING OPPORTUNITIES

Expected Outcome:
Thursday’s breakout was not overdone and the pullback from the day’s high shows this breakout was not overdone.  There is still some doubt and cynicism left and that is the fuel to keep the rally going.  But at the same time, don’t be greedy and get ready to take profits.  We’re in this to make money, not top-tick the market.

Alternate Outcome:
Nothing is certain and no doubt there is downside risk.  Every point higher elevates this risk and we need to be more cautious the higher we get.   Recent support at 1473 should provide support in the near term.  If the market rolls over on Friday and can’t hold the breakout, the market is most likely headed lower to at least 1450.  But more often than not, rallies like this end with surge higher on strong volume before reversing. A 0.6% gain and 10% above average volume are far from overdone in my book.

INDIVIDUAL STOCKS

AAPL traded mostly sideways, holding a slim margin above $500.  It missed the broad market’s rally, but given the huge surge yesterday, a rest day today is healthy and expected.  Most of the negative supply chain reports and analyst downgrades are out there and factored into the price.  By this point most bears and bulls have positioned themselves ahead of next week’s earnings.  Unless some new information comes to light, the stock will probably trade sideways into earnings.  The big advantage for bulls is the stock is at the lower end of the recent trading range, reducing the risk of a downside move on disappointing earnings.  Expectations have been dramatically lowered and the stock already cleared out all the stop-losses under $500.  While there are no guarantees in the market, it seems like there is less downside as compared to the upside.

Stay safe