PM: Support is holding up

PM Update

The market continues holding the Fiscal Cliff highs in spite of the negative headlines and those saying we need to pullback.  The more negative sentiment is, the more supportive it is for a continuation.

MARKET BEHAVIOR

Stocks were higher after two days of selling, but they gave back some of the early gains and closed off the day’s highs.  Volume was above average and slightly ahead of Tuesday’s selling volume.  The market is still flirting with the 1460 level that proved too difficult for last fall’s rally to hold.  From this a bear sees a double top and bull sees higher-highs and lower-lows.   Part of what makes chart reading so difficult is a trader can see whatever he wants to see.

MARKET SENTIMENT

We continue holding the Fiscal Cliff rally and resist the pressures of profit-taking and pessimistic headlines.  But while we are not selling off, not many people are buying this market either, leaving us in no man’s land as both sides are waiting for the confirming breakout/breakdown.

The one thing that pushes the needle in the bulls favor is bears are actively trying to break this market and failing to do so.  Bulls are cautiously holding, but not overly vocal about their confidence in the move higher.  If the easy trade is the wrong trade and the hard trade is the right trade, then I’d have to say owning this market after an explosive move higher is a lot harder than shorting it.  Selling the 65-point rally is the obvious trade, while buying the 65-rally doesn’t make a lot of sense intuitively and triggers a fear of heights in most rational people.  But if the markets made intuitive sense we’d all be rich right now, so maybe the non-intuitive (ie contrarian) trade is the one to make.

TRADING OPPORTUNITIES

Expected Outcome:
Not much has changed over the last several days, so my expectations remain the same.  We are holding these levels which is supportive of a continuation.   Selloffs from grossly overbought levels happen quickly and this support shows we are not grossly overbought   Further, breaking above recent highs will trigger a short-squeeze and push the market even higher.

Alternate Outcome:
I’m just making up numbers here to demonstrate a point, but lets say the probabilities of a continuation are 80% and selloff are 20%.  To keep things simple, lets assume the potential upside and downside moves are of equal magnitude.  Under these circumstances, the smart trade is going with the continuation.  And while more often than not this trade will make money, one out of five times the low probability trade will come out on top.  But this is supposed to happen and doesn’t mean you or your analysis are wrong.  If the low probability trade didn’t happen 20% of the time then it does mean something is wrong!

In the market it is normal, healthy, and expected to be wrong.  (The danger comes from staying wrong.)  Stick with the high probability trade and you will make more money than you lose and don’t let the frequent strike-outs discourage you as long as you practice prudent risk management

INDIVIDUAL STOCKS

Much like the indexes, not a lot new is happening with AAPL.  The most significant thing is the stock lost a few dollars and closed under $520, a level it was finding support at the last few days.  But this was only minor support.  The primary support is down at $500 and the story remains intact as long as we still hold above this level.  But the stock is quickly becoming a binary trade revolving around the upcoming earnings.  The stock will pop or plunge on earnings because there is just too much disagreement over the future of this company and earnings will prove one side right and the other wrong.

Stay safe