PM: Bears cannot dent this rally

By Jani Ziedins | End of Day Analysis

Feb 05
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The market had every excuse to collapse in an avalanche of selling, but it bounced back instead.  The trend is clearly higher.  AAPL could break into the gap on broad market strength, but don’t fall for that bull trap.  NFLX’s gains might not be sustainable over the long-term, but look for the stock to continue chewing up bears.

MARKET BEHAVIOR

Stocks bounced back and recovered virtually all of Monday’s losses.  Volume was above average and higher than yesterday’s selloff.  After a month of mostly steady and calm trade, the market has given us dramatic back-to-back-to-back reversals.  The market is still finding support at 1500 and the uptrend remains intact.  When in doubt, stick with the trend and that has been the right trade so far.

MARKET SENTIMENT

The market steamrolled bears that  jumped on the short bandwagon during Monday’s selloff in another example of the easy trade being the wrong trade.  A lot of people are rooting for this market to pullback, even collapse, but ironically they are the ones holding it up.  Bears and reluctant buyers create the demand needed to keep pushing prices higher.  As long as people don’t believe this rally, it will have an ample supply of buyers ready to chase or cover short positions.

Often people mistakenly think the contrarian trade is going against the trend, but it is really going against the crowd.  This is a small but important distinction because often they are different things.  Consensus is this market is overbought and prime for a selloff, meaning the contrarian trade is betting on a continuation, and that has been the smart position to date.

TRADING OPPORTUNITIES

Expected Outcome::
Bears gave it everything they had on Monday, but they couldn’t trigger wider selling.  Holders had every excuse to sell as the market broke under recent highs on a volatile down day, but bears were unable to shakeout many owners and supply dried up quickly.

The uptrend is clearly intact, the only question is for how much longer.  If we string together a couple more strong up days,  that will signal time to bailout and start looking for a shorting opportunity.  If the market calms down and consolidates in a sustainable way, look for a longer continuation.

Alternate Outcome:
This volatile trade could be the final gasps of the rally and we won’t see one last surge higher before buying dries up.  Watch support at 1500 and breaking this level over the next couple days will show bulls don’t have the support or follow-on buying to continue moving this market ahead.  A break of 1500 so soon after finding support will likely lead to a pullback to 1470 and possibly the 50dma.  How low a pullback goes largely depends on how quickly sentiment changes once the market starts selling off.  If the market stays stubbornly bullish, the dip will be deeper, but if panic follows any selling, look for a quick and sharp bounce.

NFLX daily at end of day

NFLX daily at end of day

INDIVIDUAL STOCKS

AAPL followed the market’s lead and bounced back from yesterday’s weakness.  The stock is forming a trading range between $460 and $435.  If the broad market surges in coming days, look for AAPL to break into the gap, but this is be a selling opportunity, not a buying one.

NFLX is holding recent gains nicely and this pattern is more conducive to a continuation than a top.  This trade looks like 2011 all over again with shorts betting against the stock and getting killed for it.  We might not see a new $300 high out of this move, but don’t short this thing because the trend is clearly higher and any strength will turn into another powerful short-squeeze.

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.

Jon February 5, 2013

Great follow through on tonight’s PM post. Hard not to get wrapped up in the drama at these levels, which is why I continue to appreciate your posts.

Bought on yesterday’s weakness and green for today but keeping stops tight.

Really enjoyed the $NFLX special coverage. Still can’t believe this one was trading under $90 in December. $NFLX post-earnings in many ways is the perfect parallel to the $SPX these past few weeks — bullish, but casting much doubt on its follow through at these levels. Well done.

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