PM: The squeeze is on

By Jani Ziedins | Intraday Analysis

Jan 10
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The market likes to frustrate the greatest number of traders at any given time.  Since the popular sentiment was waiting for the post-Fiscal Cliff pullback, the market is rallying instead.  But how long can this last?

MARKET BEHAVIOR

A wild day as we gaped up at the open, retreated back to break-even, before finally surging to new highs into the close.  Volume was a bit higher than average and the highest volume we’ve seen since the Fiscal Cliff rally day.  The last couple hours of sent bears running for cover as the expected breakdown turned into a powerful rally instead.

MARKET SENTIMENT

Little doubt the last two hours of trade took bears’ breath away.  Many lost their nerve and bought back their shorts, adding fuel to the fire.  The big question is how much fuel is left in this fire?  Are we just getting started, or are we running on fumes?

The market set another closing high and is less than 0.2% from the intra-day high set back in September.  It is getting really challenging for perma-bears to keep holding their short positions and many are defaulting to the attitude “the market can stay irrational longer than you can stay solvent” and pulling the plug on their shorts.

Tomorrow will most like hit a new 52-week high, but we have to watch how the markets respond after this closely watched event.  Will anyone actually buy this market other than bears covering shorts?  Are sideline watchers starting to chase, fearing this market is leaving them behind?  It would be hard to argue value investors are buyers at these  levels, so who else does that leave?  Without follow-on buying gravity will take over, so the key rests in figuring out if there is a follow-on buyer to keep this rally going.  And while it is easy to discount chasers, they drove the three-month Q1 rally last year so without a doubt chasers can push things far further and longer than anyone expects.

 

A lot of people assume this market will head higher in the near-term, but pullback not long after.

TRADING OPPORTUNITIES

Expected Outcome:
So many questions and so few answer.  As I stated above, the market could be running out of gas, or just getting started.  For a while I’ve called for one last short-squeeze before breaking down and today could very well be that day.  Or it could be the start of a larger squeeze.  Or it could be the start of a larger and longer move higher.  There is too little information  to make an intelligent decision and the next couple trading days will be key in signaling what the market thinks and how it is positioned.

I would be highly reluctant to add new money here.  If you are sitting on cash, stay in cash and wait for the next trade.  It is better to miss a trade than force it.  The year is just getting started and there will be countless other profit opportunities.  For swing-traders sitting on some profits, watch the market closely because we are getting close to the time to start reeling in those profits.  A strong surge higher wold make me a seller or at the very least set up a trailing stop, I would sit through a modest gain or pullback, and a big selloff through 1450 would get me short.

When in doubt, stick with the trend.

Alternate Outcome:
Since the expected outcome is so ambiguous, there really isn’t an alternate outcome and we are simply waiting for further information.  I remain bullish on the economy and market over the longer-term, it the timing of the near-term pullback that is so hard to pin down.  But there is no reason to hold out for top dollar.  Take your profits and wait for the next trade because there is no greater shame in the market than letting hard-earned profits evaporate into thin air.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS

The market rebound breathed new life into AAPL and it recovered nicely from the intra-day lows. And so the swing-trade continues.  AAPL goes up and AAPL goes down.  If you are following the crowd in and out of this trade, you are losing your shirt, but if you go the other way and buy the dips and sell the rallies, you should have a nice profit cushion that could mitigate the risk of holding through earnings.

This is nothing more than a hunch, but I think AAPL has seen most of its selling already and will rally into earnings as more optimistic traders buy the stock in anticipation of AAPL blowing away expectations yet again.  But if the stock does rally into earnings, that changes the risk/reward and makes it a lot more vulnerable to a pullback if earnings disappoint.  But that is a little premature and we’ll cross that bridge when we get 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.