AM: Bear trap?

S&P500 daily at 2:21 EST

AM Update

Bears have the perfect opportunity to break the market here and if they fail, look for higher prices.  AAPL is going the wrong way as buyers fail to show up and prop the stock up.

MARKET BEHAVIOR

Stocks opened weak after Friday’s big bounce, giving back all of those gains.  Early weakness is not a surprise since many people still doubt the sustainability of these record highs.  What is important is how the market responds to this dip.  Finding support and bouncing back in afternoon or Tuesday’s trade will signal a continuation.  This selloff is the perfect slow-ball pitch for bears and if they can’t this this one out of the park, look for the rally to continue, but if selling accelerates, this is the start of a pullback and look for a retest of 1470

More often than not, these rallies surge into their top and we have not see that type of nonstop buying yet.  (see Saturday’s weekly review post for more on this)  Often the final stages of a rally are volatile and the market frequently bounces back from what most assume is the expected breakdown.  In situations like this, the best trade is buying weakness and selling strength, not jumping on the breakout/breakdown.

S&P500 weekly at end of week

MARKET SENTIMENT

No one believes in this rally.  Even the most bullish expect a near-term pullback to digest recent gains, but markets are a function of supply and demand so we need to understand how these expectations affect the way people are positioned.

Chasing pushed this market to new highs, but these same holders are also very skittish and everyone is rushing for the exits on any weakness.  These mad dashes of selling are what refreshes a rally, clearing the way for new buying.

Today’s dip under 1500 is the selloff everyone’s been waiting for and they are selling into it, but the easy trade is rarely the right trade.  Once all the nervous are out and the aggressive short, selling will abate and that lack of further supply will send the market higher.  We need to fear markets where longs stubbornly hold on, not rush for the exit.

TRADING OPPORTUNITIES

Expected Outcome:
If tops were easy to spot, every trader would be fabulously rich.  Following this logic, if most people get tops wrong, then we should be extremely suspicious when everyone, including bulls, are expecting a top.

To get ahead of this market we need to be proactive instead of reactive.  Sell strength and buy weakness.  Sell when you don’t want to sell and buy when you don’t want to buy.  As we are seeing today, Friday’s breakout was a great time to sell and it seems today’s weakness is an interesting time to consider buying.  We don’t need to rush in and buy on the way down, but look for convincing support over the next couple days that shows the selling has exhausted itself.  We are entering a more volatile period of the market cycle, but the trend is still intact.  And most importantly, don’t lets these intraday swings make you buy high and sell low.

Alternate Outcome:
Sometimes the crowd gets it right, especially when it comes to lack of demand.  If buyers fail to show up, prices will decline and that weakness could trigger a follow-on wave of stop-loss selling.  As I write these words, the market is breaking through 1500 and no doubt triggering some stop-loss selling with even more stops lined up under the recent lows of 1496.  The market can peak and rollover at any time, but more often than not it surges before rolling over and weekly charts show this market is not at that point yet.

There is no reason to trade the last stages of a move since it is often more volatile and harder to get right.  For many traders the smart move is taking their profits and waiting for the next high probability trade.  But for the aggressive, this recent weakness is interesting buying opportunity and I sure as heck wouldn’t be piling on the short bandwagon here.

INDIVIDUAL STOCKS

AAPL failed to hold $450 and is testing $440.  Dipping under $435 and making a new low is clearly in the cards.  If anyone watching AAPL from the outside isn’t convinced of the value at $460, then it is highly unlikely they will come to the rescue at $425.   The question AAPL bulls need to answer is who is going to buy the stock and push prices higher?  The stock’s inability to bounce back from the post-earnings gap shows everyone who believes in this story already own all the AAPL they can hold.  Without new buyers, this thing will continue floundering.

Stay safe