WR: What selloff?

By Jani Ziedins | Intraday Analysis

Jan 12
S&P500 weekly at end of week

S&P500 weekly at end of week

Weekly Review

Stocks added to recent gains and the imminent selloff has not materialized.  If everyone is expecting a selloff, the market will often rally instead, and that is what is happening here.

MARKET BEHAVIOR

Stocks finished the week modestly higher and added to the Fiscal Cliff’s big move.  But more important than the 0.4% gain was seeing buyers come in and support the market after such a strong and quick run from 1400.

Looking at weekly charts over the last three years, most rally legs had a string of countless up-weeks, most often in 13 week chunks.  What makes 13 weeks special?  That is the length of a quarter.

We are just a few weeks into this rally and this market is anything but overbought based on historical precedent.  The value of weekly charts is they  filter out the daily noise and show what the market is really doing.  While the daily chart looks scary, the weekly chart doesn’t look so bad.  No doubt we will see intra-week volatility in coming weeks and months, but as long as the weekly chart is going from the lower-left to the upper-right, longer-term holders will be rewarded.

MARKET SENTIMENT

The market has gone from obsessing over negative news to completely ignoring it.  That is why you can’t trade the news, instead trade other traders.  Sometimes fundamentals matter, other times they don’t.  Sometimes technicals work, other times not so much.  But the one thing that never changes is the human element.  Supply and demand is the only driver in the markets and once you understand how other people are positioned, the seemingly random moves start making sense.

A lot of traders still assume this market will pullback in the near-term and are waiting for that correction before buying back in.  Everyone knows it is foolish to chase the market, but what happens if the market doesn’t pullback and continues higher instead?  How embarrassing would it be if money managers missed a big Q1 rally two years in a row?  The market has a habit of humiliating traders and a continued rally would make a lot more people look bad than a pullback.  This simple idea lends a lot of credibility to the continuation.

AAPL weekly at end of week

AAPL weekly at end of week

TRADING OPPORTUNITIES

Expected Outcome:
The trend is higher and there are no signs the market is breaking down yet.  When in doubt, stick with the trend.  Holders should keep holding and bears should stay on the sidelines.  The harder call is for those on the outside watching this market rally without them.  While it is tempting to rush in and buy the breakout, wait a couple of days and see how this market develops.  If we continue building support over the coming week, look to buy that support.  But if the market does anything crazy higher or lower, stay away.

Alternate Outcome:
If the expected outcome is a sensible rally, then the alternate is anything other than that.  Unexpected weakness or strength should be met with an abundance of caution.  Longs should look to lock in profits if the market’s personality starts changing and bears can begin looking for a shorting opportunity.

INDIVIDUAL STOCKS

AAPL continues working on its base around the $500 level.  The volatility doesn’t look nearly so scary on a weekly chart.  If someone is having a hard time holding AAPL, try following the weekly charts instead, and without a doubt turn off the intra-day charts.

How did I do?

How did I do?

SCORE CARD

A review of recent calls from this blog:
December 28th, 2012  “Churning sideways at 1410, but the asymmetric trade remains to the upside as most traders fearing the Fiscal Cliff already sold and holders are willing to hold in the face of this risk.”

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 12, 2013

Hi, I always appreciate your great insight on the market and especially AAPL. Given many people expect a big move one way or another upon the AAPL ER; the contrarian view supports the idea it will trade sideway instead. However, the price is in fact pinged, bear flag (bearish), falling wedge (bullish), or whatever you call it. Do you still believe a big move is coming soon? and why?

    Jani Ziedins January 12, 2013

    Good question. I think a lot of the selling has already happened in AAPL and even with a disappointing earnings, the stock doesn’t have a lot of room left on the downside. Maybe there will be an initial knee-jerk lower, but it will recover because no matter what, AAPL is a money printing machine and the valuation is very reasonable. In my mind this sets up for a great asymmetrical trade. Lots of upside on an earnings beat, but limited downside on a miss.

    As for the thought about trading sideways, that also occurred to me, but it seems like the viewpoints on AAPL are too polar to just meet in the middle. It is like giant game of tug-of-war between these two vastly different views on AAPL’s future. One side will most likely be proven wrong and run over by the victorious side. The one possible reason the stock could stay down here is if earnings do in fact disappoint, but the stock stays flat at $500 because it has already been priced in with the recent slide. But that option makes owning the stock even more attractive; big upside for a beat and sideways trade for a disappointment.

    There are no guarantees in the market, so always trade in such a way that if you are wrong, you live to fight another day.

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