AM: Looking good

S&P500 daily at 1:28 EST

AM Update

Stocks are consolidating near recent highs and signaling a continuation   AAPL is testing $485, AMZN can’t hold the 50dma, and NFLX is pulling back.

MARKET BEHAVIOR

Stocks are trading flat and supporting Friday’s breakout to new highs even if we are slightly in the red.  Consolidation is an important part of moving ahead in a sustainable way and this is more bullish than had the market jumped 15-points this morning.

MARKET SENTIMENT

The “obvious” pullback following the Fiscal Cliff pop has not materialized and we find ourselves another 65-points higher.  This is yet another example where the contrarian trade is sticking with the trend, not going against it.  There is no fundamental or technical reason for the market to rally, but that is exactly why it did.  Traders who focus on these aspects of the market are often confused by the market’s irrational behavior.  Prices are not determined by fundamentals or technicals, but by people buying and selling stocks with each other.  Understand what people are thinking and how they are positioned and all of a sudden the market starts behaving a lot more rationally.

We are rallying because most traders are afraid of the fundamentals and technicals.  Everyone who fears the future already sold and is in cash.  Once all the pessimists were out, supply dried up and there was nowhere to go but higher.  Further adding fuel to the fire, all of the pessimists in cash can only do one thing, buy the market.  Tight supply and a huge pool of potential buyers is the exact recipe for a 200 point move and that is what we are seeing.  Don’t follow the data or charts, instead look at the markets as a collection of people and understand what they are thinking, how they are positioned, and how they can trade the market going forward.

TRADING OPPORTUNITIES

Expected Outcome:
Keep doing what is working.  This pause after Friday’s breakout is healthy.  It shows traders are not selling the new highs, but the breakout is also not surging unsustainably.  Keep holding as long as the market stays above 1505 and doesn’t race ahead 20 or 30 over a couple of days.

Alternate Outcome:
This market will pullback because all rallies eventually end, but in the market early is the same thing as wrong. It is okay to expect a pullback, but it is wrong to jump in front of this market.  We need to wait for clear signs this market is topping before trying to short it.  Last week’s three-dips to 1500 flushed out a lot of weak hands and largely exhausted selling at these levels.  If we fall back down there, that means buying is also running low and we should anticipate further weakness.  A few pullbacks to support is healthy and signals a sustainable continuation, but more than that and it becomes topping.

We also need to be wary of the market racing ahead because this signals the last of the emotional and formerly reluctant buyers are chasing this market.  Once they are in, there is no one left to buy and we head lower on lack of demand.  Successive strong up-days shows the dam burst and anyone sitting on their hands has plunged in.  That will be our signal to get out.  I don’t know how far this rally will go or when it will end, but I do have a good idea of what the end looks like, so we just keep watching for those signals.

INDIVIDUAL STOCKS

AAPL daily at 1:28 EST

AAPL continues its rebound and touched $485, a technically significant level because that was the low prior to earnings.  The market expects the dividend and buyback will be boosted by ~30% in coming days and that is the justification for this rally.  Is that enough to get the stock back on track or is this a buy-the-rumor, sell-the-news event?  Only time will tell.

NFLX is selling off and testing support at $175.  It will be interesting to see how the stock responds.  The trend is still higher, but this is a volatile stock and there will be some wild swings no matter which way it eventually goes.  I’m not in this stock, but if I had to choose sides, I’d buy it here.  When in doubt, stick with the trend.

AMZN failed to hold the 50dma and is selling off.  This shows why we wait for a confirmation before jumping in.  We were looking for a high volume-bounce off the 50dma and it never happened, keeping the disciplined trader out of this stock.  We could see a rebound in coming days so don’t stop following this stock, but watch from the outside and wait for the right entry.  If the 50dma starts acting as overhead resistance, this could make for a quick and nimble short, but don’t get greedy because a stock like this will bounce after any weakness.

Stay safe