AM: Testing support at 1500

By Jani Ziedins | Intraday Analysis

Feb 21
S&P500 daily at 1:31 EST

S&P500 daily at 1:31 EST

AM Update

Stocks dipped and are testing support at 1500.  We could see a little more weakness, but this is a buy-the-dip moment, and those piling on the short bandwagon are going to have a bad time.

MARKET SENTIMENT

There are two kinds of holders, those that sell a 2% pullback and those that don’t.  Today we find out how large each contingent is.  New buying largely dried up because anyone already reluctant to buy the recent rally is not rushing in when the market is “melting down”.  The key to this pullback rests firmly in the hands of holders and how many are running for the exits versus those saying this is no big deal.

So far all the headlines say “buy protection while it is cheap”, “the pullback could be ugly and deep”, “correction”, etc.  It really is hard to find anyone shouting “buy the dip”.  When everyone thinks this is the real correction, I’ll take the other side.  I’m not saying this is the bottom and no doubt we could easily see further selling, but I do think we will make new highs before the end of the quarter.  That makes this a buy-the-dip opportunity, we just need to find the right timing to buy that dip.

Real tops happen when everyone is complacent and buying the dips.  When the guy running around saying the sky is falling is labeled Chicken Little and ignored.  Right now the guy promoting the rebound is the oddball and more likely to be ridiculed than the one saying the market is on the verge of collapse.

Why this matters is it gives us insight into how traders are positioning their portfolio.  Anyone who expects a major selloff is already out of, or short stocks.  These were the people who sold yesterday, but once they are out, they no longer have vote in what direction the market goes.  The only people with a say are those still holding and those contemplating buying the dip.  Those are the two groups we need to focus on when determining how to trade this market.

So far holders sat through too-far, too-fast, a negative GDP number, and everyone knows sequester is just around the corner.  I think it will be harder to shake these core holders out and this wave of selling could be short-lived.  The market is already finding support at 1500 as the selling is temporarily abating.  We have to be careful of the stop-losses sitting under 1500 because that could trigger one last wave of selling, but that will be the last of it.  Once those autopilot sell orders work through the system selling will climax and we will bounce higher.

Holders are just half the equation, we also need to consider who will buy this dip.  There are a lot of big money managers still underweight this market, wishing they bought the rally back at 1500.  Here is their chance and no doubt some are taking advantage of it.  Expect the buying to intensify if the market starts making new gains and big money fears being left behind for a second time.

This rally since November is running out of steam and we are closer to the end, but this is not that end.  Look for a more typical double-top or head and shoulders pattern before we see a bigger pullback.  That means new highs in the near-term and this dip is buyable.

TRADING OPPORTUNITIES

Expected Outcome:
I am looking for buying opportunities here, not shorting ones.   This selloff is too easy and once all the weak hands bailout, supply will dry up and we will continue higher.  I like going against the crowd, but that is different from catching a falling knife.  We need to look for a valid entry to buy back in.

The low of this pullback will be somewhere between 1500 and 1475.  If you are okay with another 25 points of weakness, buying now is not a bad thing.  Another strategy is putting a trailing buy-trigger just above the market.  Right now that could be 1506 or yesterday’s close of 1511.  This would let you ride the market down if it continues sliding, but will get you in when it is trying to rebound.  Another strategy is to wait a few days and let this market find and hold support. But either way I would not be short this market here, the high probability trade is a rebound, not a collapse.

Alternate Outcome:
The market can do whatever it wants and doesn’t stick to a standard playbook.  While most markets top with exhaustion, volatility, double-top, or head-and-shoulders, there is no rule that says it can’t just roll over one day and die.  While this is certainty a possibility  it is not the high-probability trade.  If you need a guarantee, get a savings account.  If you can handle a little risk when the odds are in your favor, look for the eventual top to be more consistent with history, making this a buy-the-dip opportunity.

INDIVIDUAL STOCKS

AAPL just cannot find a bid and is now under $445 now.  That is a 10% decline in 10-days.  Buyers are just not showing up because everyone who wants this stock already has some.  The high-probability trade is waiting for new lows and swing-traders to jump in and buy the dip after the stock hits $430.  This could lead to another bounce to $450, but that will be a selling opportunity.  There are still far too many hopeful holders in this stock for it to rebound and it will take time and volatility to grind that out.  Some people won’t ever give up, like the CSCO holders waiting for the bounce back to $50.  But that is a vice, not a virtue in the markets.

Stay safe

Follow

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.

Jon February 21, 2013

Went to 100% cash today as all my stops were taken out.

I’m currently watching for 1495-1500 support after yesterday’s bearish engulfing candle and today’s heavy selling. My thoughts are yesterday was the profit taking day on Fed QE news (not necessarily panic selling of a top) and today is the follow through selling (slightly panicked) by recent buyers and any other last-minute holders who were hoping to cash in at the “speculated” top but failed to sell and sold on further weakness today. The rest are holding or new buyers stepping in on this dip. Those that sold (like me) are now looking for a safe place to jump back in.

1500 seems like it will be the zone of rotating ownership and subsequent range bound trading. Closing below 1495 signals for me a more significant correction towards the next area of support in the 1474-1476 zone. That puts us near support for this uptrend going back to November and within range of the 50 MA currently at 1473.50. Somehow, I personally feel more comfortable buying in this zone defined by the longer term trend rather than today’s support test of 1495-1500.

The only other zone I’d feel comfortable buying in at these levels is a close above 1531 in a medium trading range. Kind of like how we took out 1500. So between 1500 and 1530 I’m more or less out, unless I spy a really interesting opportunity.

    Jani Ziedins February 21, 2013

    I agree with everything you are thinking/seeing, although I’ll probably ride a trade up to 1530. In my mind once the selling dries up there is nowhere to go but higher. I still expect a change in personality in Q2 and there might not be a lot of upside beyond 1530 so I want to get in ahead of it. In Q2 we will probably see a 5%+ pullback after a double top or head and shoulders and hopefully I’ll be able to ride that move down too.

spearchew February 21, 2013

I’d also like to say I agree with everything I read here + I like your style of writing.
Will continue to read this blog with interest.

    spearchew February 21, 2013

    … and hopefully without sounding too inane – I just don’t see the market topping on “bad news” (FOMC Minutes). That would be too tidy! When the top does come I’m expecting it to be accompanied by a bit of bullish hysteria, more like.

      Jani Ziedins February 21, 2013

      I agree. This market has been immune to bad news (Fiscal CLiff, negative GDP, etc), why would its personality change overnight? Much like you, I expect this market will top by running out of buyers (bullishness), not bad news. We are getting close and one more rebound will make the bears give up and join the bulls. That will be the end.

Comments are closed