AM: Market finds support

S&P500 daily at 1:06 EST

AM Update:

AAPL and the S&P500 are giving traders whiplash.  In both cases look for the trend to continue, but take profits early and often.

MARKET BEHAVIOR

Stocks bounced back from yesterday’s sharp selloff and the whipsaws are chewing up impulsive traders.  The market usually gets more volatile near turning points as power transfers from one side to the other, but look for one a final push higher before trading against the rally.

MARKET SENTIMENT

The market is filled with regret after the last few days of volatile trade.  Anyone reacting to the market’s moves is having a bad time because breakouts and breakdowns are failing left and right.  Clearly the best trade is selling strength and buying weakness, but often that is the hardest trade to make.

Last week started with three out of four days in the red.  Many thought that was the obvious top they were waiting for and felt save safe going short.  Then Friday’s market blew out all the bears and seduced plenty of breakout buyers to jump on the bandwagon.  Yesterday’s pullback made those breakout buyers look foolish and this time the breakdown was for real because it broke recent support.  And here we are today with yet another whipsaw day back to the upside.  The lesson is don’t get in the way of this meat-grinder.  Trade proactively not reactively.  Take profits early and often because they are going to disappear in a matter of days or even hours.

TRADING OPPORTUNITIES

Expected Outcome:
There is no reason to ride this roller coaster and if it is playing games with your emotions, step to the sidelines and wait for more stable trade.  The mistake many traders make is felling compelled to trade every market.  Most can make money, but they shoot themselves in the foot by sticking around too long and giving back all their profits.  For those ambitious enough to trade this market, when in doubt, stick with the trend.  We haven’t seen a blow-off top so continue going with the rally, but in this more volatile period sell strength and buy weakness.

Alternate Outcome:
While the market often exhibits patterns, there are no absolute rules in trading.  This volatile trade could be the top and we won’t see a final push higher.  Markets exhaust themselves when buying dries up.  Typically this happens on a final surge higher as the last of the shorts are runoff and momentum chasers buy in  but this is not the only reason buying dries up, especially with intermediate pullbacks.  The high probability trade remains to the upside, but cover your backside with stop-losses if the market fails to hold support and downside selling accelerates.

AAPL daily at 1:07 EST

INDIVIDUAL STOCKS

AAPL is also jerking traders around as it regains $450 this morning.  The sharp directional trade has arrested itself and we should no longer fear a huge rebound or selloff in the near term.  The stock is consolidating around $450, but look for a drift lower to demoralize the remaining hopeful holders.  While it will start slowly, the selling will pick up as regret builds in the stock.  Only after it becomes the most hated stock on Wall Street will it finally be a safe buy.  But at the same time, the big gains in AAPL are behind it without a new revolutionary product or strategy shift.  AAPL is transitioning into the typical stagnant mega-cap trading range and we could see AAPL trade sideways between $450 and $550 over the next 10 years.

If buy-and-hold is dead in AAPL, look for other strategies, such as swing-trading and selling options to make money going forward.    If you want to buy more if the stock on dips, consider selling puts under recent lows when the stock dips.  If you have stock you don’t want to sell, try selling covered calls above recent highs when the stock goes up.  These are expert strategies so make sure you understand all the risks before trying them.

Stay safe