PM: Bulls fight back

By Jani Ziedins | End of Day Analysis

Feb 22
S&P500 daily at end of day

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

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

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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.

Rob Butta February 22, 2013

You are making a courageous stand for the Bull case, with very sound arguments.
I assume that you are Long, going into the weekend and I totally respect that.
Thank You for your valuable insights, as always.
Take Care..

    Jani Ziedins February 23, 2013

    I am long, not because I know something, but because I believe supply and demand is on my side. Every trade involves risk and if I’m wrong I’ll take my lumps and move on to the next opportunity.

Peto1 February 22, 2013

At this point your “coverage” of Apple is repetitive and pointless (not to mention sad and sadder):

“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.”

So, for heaven’s sake, then just move on …

P.S. your “investment” thesis wasn’t flawed, your trading thesis was …

    Jani Ziedins February 23, 2013

    I write about AAPL because it is the most followed stock out there and a lot of retail traders are (stuck) in the name. I found over the years it is easy to make money in the markets, the hard part is keeping it. That is why I make such a big deal about selling both winners and losers. Retail investors don’t struggle because they have bad ideas, but they are more likely to suffer from poor execution of those ideas.

    As for flawed thesis or not, the market is the judge, jury, and executioner. The company and the stock are not the same thing. People buying AAPL’s dip because they love AAPL’s products are ignore how business and the market works. The big difference between technology companies and toothpaste companies is tech companies are only relevant for about ~10 years before they are replaced by the next innovator. AAPL killed the Sony Discman, Palm Pilot, Nokia, and netbook craze. In five-years someone else will come along and eat AAPL’s lunch. Google’s Glass will be a viable phone replacement in a few years and is more forward thinking than a pocket computer.

    If your ‘investment’ thesis includes holding AAPL for 5+ years, I’m not sure it is going to work out because the tech business just doesn’t work that way. Even the major tech players that stick around and remain dominant for decades like CSCO, MSFT, Dell, and INTC haven’t generated much in the way of appreciation. In fact anyone waiting for those stocks to recover old highs has been waiting a long, long time.

    I don’t mean to be critical, just honest. AAPL will be a great swing-trading stock going forward for anyone who buys the dips and sells the rallies, but buy-and-hold investors should realize the stock’s double and tripple days are behind it.

Jonathan February 22, 2013

Thank you for another insightful post. You are correct in stating that 1500 and 1475 will be support for this market. I really don’t know what the market will do next week. It can march higher or go down. Or stay roughly around 1515. Time will tell.

    Jani Ziedins February 23, 2013

    Yep, this would be so much easier if we had a crystal ball or time machine, but we are left trading probabilities. I think supply and demand is on my side here, but I could easily be wrong.

Amradio February 23, 2013

@Peteo: Investment and trading are two different things. They are not exchangeable, making your argument nonsensical. Secondly, it’s repetitive because that’s all there is to say on it. Until new information and developments take place, there’s nothing else to be said except whats already been said. They’re not here to fabricate new stories every day. If that’s what you want, watch CNBC.

@OP: Another solid article, but try to watch the flippant behavior. Not that I mind, but some “market participants” are big fans of certain stocks and are likely to be put off. Though their irrational behavior may steer you towards the path of tongue-in-cheek humor..try to resist. I do agree with your analysis

    Jani Ziedins February 23, 2013

    Thanks for your feedback. When I was bullish on AAPL before earnings people loved my commentary. Of course that was a major warning flag I missed, but I rationalized it away because I thought AAPL was suffering from structural selling due to unrelated tax law changes and the stock would bounce once that tax selling let up. The market proved me wrong and I fixed my mistake.

    One of the more interesting social experiments I’ve discovered from this blog is I am far more popular when I say what people want to hear. That is why so many of the popular TV gurus have lousy track records but huge fan bases. These gurus are not popular because of their insightful investing advice, but because they say what everyone already thinks.

    While I might ruffle a few feathers here and there, I’m not in this to be popular and hopefully the honest analysis will help me build credibility and respect over time. Some people might disagree with me, but if they see my ideas work out they might be more open minded next time. Other people will simply tune out anyone who disagrees with them, but I’m fine with that. I’m in this to #1 help myself trade better through thoughtful analysis and #2 help those that really want to learn how the market works.

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