PM: Stocks struggle with 1473 again

By Jani Ziedins | Intraday Analysis

Jan 16
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Market recovers early losses and closes at above 1470, but still can’t break above 1473.  AAPL is everyone favorite stock again as it bounced back from the yesterday’s panic selling.

MARKET BEHAVIOR

Stocks closed above 1470 for the fifth straight day and in typical fashion sold off early before rebounding.  The S&P500 is magnetically attracted to 1472, but can’t break above this hard ceiling.  Volume was below average, but in line with yesterday.  The low volume suggests many traders are waiting for the market to make its next move.  This pause is like a dam slowly building pressure, the longer we sit here, the larger the resulting move will be.

MARKET SENTIMENT

It is interesting to watch the market stall every time it bumps into resistance at 1473.  Traders support this market every time it dips, yet they won’t step over that line and buy 1473.  With five-days at this level, it is quickly turning into an endurance event between bears and bulls.  Who has the bigger war chest to either prop up stocks at these levels, or prevent them from advancing any further?

Most often you see a hard-line like this in an individual stock when a major shareholder instructs his broker to buy any time the stock dips to x, or sell any time it rises to y.  But the S&P500 is far too large for any single manager to put a lid on and it is largely a coincidence that so many traders are making identical trades at the same levels.  (Some people might have more sinister conspiracy theories, but I don’t buy into that.)

Other forms of resistance are due to a stock’s ‘memory’.  You see this when a stock is recovering from an earlier selloff and underwater  holders are finally able to get out at break-even   But that doesn’t apply here because at four-year highs, virtually everyone is sitting on a profit.  So who is selling at 1473?  It might be bears expecting a double-top and shorting ahead of the expected pullback.  Maybe it is some conservative traders locking in profits.  It is hard to think of another major group selling here..

But selling is only half the equation.  We could also be hitting our head on resistance from a lack of follow-on buying.  But the thing that’s curious is why is the market is buyable at 1469, but not at 1473?  If a person was expecting a correction and wouldn’t buy at 1473, surely they wouldn’t buy at 1469.  So I still don’t understand why we keep bouncing back to 1473, but can’t break through.  Often the market works in mysterious ways.

TRADING OPPORTUNITIES

Expected Outcome:
With everything else being equal, stick with the trend.  With each passing day 1473 becomes a bigger deal.  If I were a short, 1473.5 makes for an obvious stop-loss, and you better believe everyone else is using that same convenient stop.  Breakout buyers are also eying that exact level.  The more obvious and watched a level, the bigger the move through it will be.

Alternate Outcome:
While the trend is higher and holding this price level for five days is supportive, the inability break 1473 is concerning. There are a lot of buyers sitting in the wings waiting for the breakout, but if it doesn’t happen, the market can slide under its own weight if buying dries up.  The longer we hold here, the more likely it is support will crumble under our feet.  If we don’t break through and hold 1474 tomorrow, I’m going to reevaluate my expectations of an upside breakout.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL made headlines again, this time for bouncing back decisively from yesterday’s plunge.  No doubt a lot of the aggressive shorts that laid into the stock as it broke under $500 were stung this morning when AAPL turned their world upside down.  Easy come, easy go.

AAPL might dip under $500 again, but if the stock recovers to $600 in a few months, does it really matter?  Yesterday’s plunge was scary and shook out most of the weaker hands.  Anyone without strong conviction and confidence in AAPL sold yesterday, so that greatly reduces the chances of it happening again simply because all the sellers are already out of the stock.  For this reason, I expect AAPL will likely hold between $500 and $520 leading into earnings.

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.

Fil January 16, 2013

Hi Jani,

Today was the reverse of Monday and Tuesday. This morning all the buying happened during the pre-market and the first five minutes. I only see two block trades of 20k shares each of buying. The big boys are hibernating till earnings. So any dramatic moves will be false moves. I agree with you particularly on two things.

1. It will stay above 500 before ER, even if it dips below 500. This is because any dramatic moves are driven my emotion of the small guys and should be rendered as meaningless moves.

2. Selling is dried up and upside potential a lot bigger than downside potential. For now, people holding onto the shares are the stronger hands.

Best regards,
Fil

    Jani Ziedins January 17, 2013

    Well put.

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