PM: Bulls fight back

S&P500 daily at end of day

PM Update

The market ended the selling and found support at 1500, bouncing back to resistance/support at 1515.  AAPL stopped the losing streak, but is just leading on hopeful holders and NFLX is taking a much-needed break.

MARKET BEHAVIOR

Stocks recovered all of Thursday’s losses and finished at the highs of the day.  Volume was fairly average, but quite a bit less than the elevated selling over the previous two-days.

The last few days of trade brought volatility back to the market and most tops involve elevated volatility leading up to the reversal point.  That doesn’t mean the market is about to collapse, we just need to be aware we are approaching that point.

Today shows 1500 continues to be a point where buyers are willing to step in.  The market finished at 1515, a level that provided both resistance and support going back to the beginning of the month.

MARKET BEHAVIOR

Today’s rally ended the selling streak and rewarded holders that sat through the weakness.  Low-volume show few were excited to buy, but more noteworthy is fewer were willing to sell as supply dried up and the market bounced hard.

All the hype that said this was the start of a big selloff spooked out most weak holders.  Once the paranoid finished selling, longer-viewed investors that already sat through the Fiscal Cliff and a negative GDP report were not spooked by some meeting minutes.  That bodes well for the continuation and supports the thesis that this market will top due to running out of buyers (optimism), not negative headlines (fear).

TRADING OPPORTUNITIES

Expected Outcome:
I still expect the market will make new highs before the end of the quarter, meaning we have at least another 15-20 points of upside left.  In reality the market will likely blow past the old high of 1531 as it triggers a new wave of short-covering and breakout buying.

Don’t get me wrong, I am not a raging bull and think the market is in the process of topping, I just don’t think the top is in yet.  For various psychological reasons markets most often reverse in double-tops, head-and-shoulders, and exhaustion surges.  So far I don’t see any reason this time will be different.  That means Tuesday’s high is not the top and the high-probability trade remains buying the dip.

Alternate Outcome:
Today’s rally could be a head-fake to suck in bottom-pickers before steamrolling them with another crushing down-day on Monday.  I don’t dispute the real possibility of another horrible week.  There are no grantees in the market and every trade involves risk, the difference is the savvy trader uses probabilities to move the odds in his favor.  I could be wrong about buying this dip, but that doesn’t make it a bad trade.  Savvy traders manage risk by looking for the high-probability trade and using stop-losses to protect against unexpected losses.

If weakness continues next week, look for a dip to 1475, but that will be another potential rebound point.  Failing support at 1500 doesn’t kill this rally, but dropping through 1475 does.

NFLX daily at end of day

INDIVIDUAL STOCKS

AAPL finally saw its first up-day since Cook crushed investor’s hopes for an increased dividend/buyback.   If people are buying this bottom, I have a bridge to sell them.  I shouldn’t be so flippant because so many people are stuck in this trade, but I’ve warned about this for weeks now.  I was sucked into the AAPL earnings story just like everyone else.  The difference is I took my lumps after earnings came out, realized my investment thesis was flawed, sold out, and moved on.  We are in this to make money, not own stocks.  If something isn’t working, stop doing it and find something that is.

NFLX ran into some selling the last couple days.  Holding out for more than a 100% gain is just plain greedy.  It was obvious the stock would continue higher after earnings, just like it is obvious it will pullback after hitting ~$200.  That doesn’t mean the story is dead, the stock simply needs to catch its breath.  Look for a pullback to at least $160 before resuming the rally higher.

Stay safe