AM: Buy the dip?

By Jani Ziedins | Intraday Analysis

Feb 26
S&P500 daily at 12:57 EST

S&P500 daily at 12:57 EST

AM Update

Selling abated and buyers are waiting for better prices.  AAPL is within a whisker of setting a new low as its underperformance continues.

MARKET BEHAVIOR

Selling took a break this morning and the market is vacillating between gains and losses.  While it is good the market broke the fever of impulsive selling, a material dip under Monday’s lows could set off another wave of reactive selling, pushing the market to the 50dma/1475 level.

MARKET SENTIMENT

While the market is still on edge, holders are no longer rushing for the exit and everyone is waiting to see what happens next.  Selling dried up but prices remain flat because opportunistic buyers are waiting for even more attractive prices before jumping in.  Over the near-term the most likely buyers are late shorts forced to cover on any strength.  While this is not sustainable buying, it will be enough to seduce dip-buyers to jump on the bandwagon.

TRADING OPPORTUNITIES

Expected Outcome:
Recent selling does not prove this market will not top in a more traditional double-top, head-and-shoulders, or exhaustion surge.  This dip is potentially forming the left-shoulder of the H&S or the middle pullback of a double-top.  Further, this might simply be an intra-rally check back to the 50dma, something common in extended rallies. Either way, expect new highs in the near-term.  Look for the market to bounce somewhere above 1475.  A lot of selling has already occurred and we are closer to the end of this dip.  While we might have a little further to go, shorts should lock-in profits before a short-squeeze wipes them out.

The most aggressive traders can buy this pause and use 1475 as a stop, but the safer move is waiting for the market to reclaim 1500.  The size and volatility of this dip did a good job of refreshing the rally and if we continue higher, look for 1550 or even all-time highs at 1575.

Alternate Outcome:
This really could be the selloff everyone’s been waiting for and talking about.  While I am suspicious of anything widely believed, sometimes the crowd is right.  There are countless reasons for this market to implode and yesterday’s Italian election added to the list.  Every rally ends and this could be the early stages of a massive correction.  While I don’t buy this story, stop-losses are the best way to protect my portfolio from hubris.  I’m okay with calculated 10-point losses when a trade doesn’t work, but that is a far different risk profile than holding through a 200-point collapse because I refused to admit defeat.

No matter which side of this trade you are on, plan your trade and trade your plan.  Identify buy/short points, stop-losses, and levels to take profits; then stick to these.  If the market reaches your buy point, buy.  If it reaches a sell point, sell.

AAPL daily at 12:58 EST

AAPL daily at 12:58 EST

INDIVIDUAL STOCKS

AAPL was within a dollar of making a new low.  In a day where the market is practically flat, AAPL fell nearly 1% in early trade.  Breaking $435 will trigger another wave of stop-loss selling and shorting by bears.  At this point even a broad market rebound cannot save this stock.  While it might initially bounce on market strength, look for the stair stepping lower to continue.  $400 is a major psychological level and expect the market to test it.  That is another 10% dip from here.  Current holders need to ask themselves how much further they are willing to ride this down.

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.

Jonathan February 26, 2013

The market is recovering nicely today. Market is still hesitant to make it above 1500. This will either prove to be support or resistance in the coming days.

    Jani Ziedins February 26, 2013

    Agreed. This is a level both bulls and bears are watching closely. A break above will trigger a wave of buying from short-covering and technical traders pretty much ending the dip. Failure to regain it shows lack of interest from byers and the selling isn’t done. I’m optimistic, but prepared to be wrong.

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