AM: Modest selling

AM Update

The S&P500 is trying to recover from early weakness, but selling is modest given the size of yesterday’s rebound.  AAPL popped, but is struggling to hold those gains.  NFLX is humiliating bears again AMZN is finding support.

MARKET BEHAVIOR

Stocks started weak, but bounced back by late morning.  Earlier in the up-trend the market opened weak and finished strong.  We will watch afternoon trade to see if this pattern is making a comeback.

MARKET SENTIMENT

Bull markets often experience early weakness followed by strength.  Many participants are still suspicious of the rally and sell new highs in anticipation of the “inevitable” pullback.  This view is widespread enough that it gains some initial momentum, but selling tapers off because most cynics are already out of the market. Once supply dries up, prices rebound and make new highs.  This pattern repeats until most cynics have given up and jumped on the bull bandwagon.

This pattern is not exclusive to intraday periods and is seen across days and weeks too.  All through January early weakness was overcome and the market strung together countless up-days, but more recently the market closed on the day’s lows only to see it snap-back the next day.

This market will eventually top because every market does, the challenge is figuring out when.  Markets rally on the back of pessimism and as long as cynics are holding out, look for the rally to continue.

TRADING OPPORTUNITIES

Expected Outcome:
Most traders should take their money and run from this volatile market because it is too easy to buy high and sell low when the market is whipping around.  There is upside left, but it is really hard to tell the difference between a bear-trap and a real breakdown.  This market will be buyable if we see more sideways trade around 1500 or a retest of recent support at 1475.  This is the refresh the market needs to continue sustainably.  Without this, be suspicious of any strong advance.

If someone has to trade this market, go against the crowd by selling strength and buying weakness.

Alternate Outcome:
It is hard to escape the opinions of people who don’t believe in this rally.  They quote all kinds of fundamental information and while their logic is sound, the market is not worried about it.  There are two possible explanations, one is the market already discounted those risks and it is included in the price.  The other is the market is choosing to ignore it and that can last for only so long.  I’m firmly in the bull camp, but I don’t intend on going down with the ship if this market starts sinking.  Finding support at 1470 is healthy, breaking this level means I need to reevaluate my bullish thesis.

INDIVIDUAL STOCKS

AAPL surged $14 over a few minutes this morning, but the rally ran into a wall at $465 and is drifting lower.  This is a trading stock now and most moves should be met with suspicion.  An interesting trade for an AAPL owner at $465 would have been selling the Feb 15 $470 call for $5.  As I’ve shared, I’m not in AAPL, but for those who cannot bring themselves to sell, covered calls and selling puts could be one way to squeeze some money out of a stock stuck in a trading range.  Obligatory warning: selling options is dangerous and make sure you understand the risks before trying this.

NFLX is up another 5% as more bears are getting skinned.  The stock broke above recent resistance near $175 and the ironic thing is bears are the ones pushing this stock higher with their short covering.  Bears might eventually be proven right in this stock, but we must remember early is the same thing as wrong.

AMZN has some volatility following earnings, but it is finding support at the 50dma.  A high-volume bounce off of this moving average can be bought for a shot trade, but watch out if the market lets this stock dip under this key level and technical support at $260.

Stay safe