PM: Holding 1500 for now

By Jani Ziedins | End of Day Analysis

Feb 21
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Stocks find support at 1500 and finish off the day’s lows.  Is this the last chance to bail out before crash, or another golden buy-the-dip opportunity?  AAPL still cannot find a buyer and will likely see another leg lower before finally bottoming.

MARKET BEHAVIOR

The slide continued and the market tested support at 1500.  It briefly traded under this key level, but was able to regain it by the end of the day.  Volume was elevated as selling flushed another round of previously complacent holders out of the market.

The absence of a huge wave of stop-loss selling after dipping to 1497 is encouraging.  The other benefit is this knocked out stop-losses right under 1500, relieving potential selling pressure going forward.  If we dip under 1500 tomorrow, it will be less of an event because many of those stop-losses are gone.  If the market cannot hold 1500, the next level of support is the 50dma around 1475.

MARKET SENTIMENT

Is this selloff just getting started and we should load up on shorts, or are these the last gasps of selling and we should buy-the-dip?

Last week I talked about the need to lighten up and take profits, and seven-consecutive up-weeks is about as far at the market goes without a red-week.  I didn’t say these things would lead to market crash, but a healthy and normal pullback as part of continuing higher.  So far I’ve been right about the first part and the second part still on track

The dramatic dip over the last two-days combined with the uneasiness many have had with this market lead to a large number of weak holders bailing out   Shorts are also pouncing on what they see as the obvious trade lower.  What is the most unexpected outcome after the biggest two-day losses in months?  New highs, and that is where we are headed.

If we hold 1500 Friday, that means most of the selling has already taken place.  Without new supply to keep pressuring prices, there is no place to go but higher.  Once the market recovers 1530, look for shorts and underweight traders to scramble on board the rally bandwagon, but ironically their buying will bring us one step closer to the dip that doesn’t bounce back.

TRADING OPPORTUNITIES

Expected Outcome:
Rallies don’t simply roll over and die.  The change of power from bulls to bears is a messy process that includes lots of volatility.  We are seeing some of that volatility here, but we have not seen the last of the new highs yet.  I am not a raging bull, just an opportunistic trader.  I know markets don’t top like this and most often we see double-tops and head-and-shoulder reversal patterns.  The thing about both of these patterns is the market makes a new high after the initial selloff.  As the opportunistic trader, that means the high probability trade remains buying-the-dip.

Obviously we need to be careful when dealing with volatility like this, but if the market holds 1500 tomorrow, consider buying and holding through 1540 and using 1495 as a stop.  Depending on where we open, this is a pretty favorable risk/reward; 10-points of downside for 35-points of upside.  Of course if the market cannot hold 1500 in early trade, all bets are off and look for the market to test 1475, but then 1475 becomes the next buying opportunity.  If we cannot hold 1474, the rally is dead.

Alternate Outcome:
The market can keep sliding and that is a fact of life.   It doesn’t matter how creative and thoughtful our analysis is, the market is going to do what it wants to do.  We always need to use protective stops to mange risk incase we get the trade wrong.  But even if the market continues lower tomorrow, I still think this makes for a poor short.  If anyone is lucky enough to have short profits, harvest some of those gains because they might not be around much longer.

AMZN daily at end of day

AMZN daily at end of day

INDIVIDUAL STOCKS

AAPL is back under $445.  The quick rebound everyone was hoping for is deader than dead and it will take a long period of healing before this stock recovers.  In fact there is probably one last flush lower before this stock finally finds a bottom.  The stock peaked on the nice round number of $700 and it might finally bottom on the nice round number of $400.  Of course that is one of the better outcomes.  A 50% selloff to $350 is not out of the realm of possibility as many high-fliers drop 50, 60, even 70% after peaking.  What cannot get any cheaper usually does.  People will point to the fundamentals, but the company and the stock are not the same thing.

Even with all the broad market weakness, AMZN is still hanging above the 50dma.  There is not a lot of cushion left, but the expected rebound in the indexes will drag AMZN along with it.  This is a speculative trade and not many people should own it here, but please don’t short it.  There are far easier ways to make money than argue logic with the market.  Same goes for LNKD and NFLX, what cannot go any higher usually goes 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.

Jon February 21, 2013

Hey Jani, I think you mean 1500?

“If the market cannot hold 1550, the next level of support is the 50dma around 1475.”

Thanks for the PM update! Will be watching these levels tomorrow.

    Jani Ziedins February 21, 2013

    Yes, thank you for the heads up.

Jonathan February 21, 2013

It looks like we are going higher tomorrow. Depending on what happens next week, I can see us getting back to 1530 in no time. I am thinking we will top out around 1550 or a bit higher. Then the correction will begin in earnest.

You have a typo in your post.You said – “If the market cannot hold 1550, the next level of support is the 50dma around 1475.” I think you mean 1500.

    Jani Ziedins February 21, 2013

    Thank you for the correction and I updated the post. I agree, 1550 is very doable if buyers start chasing in earnest.

spearchew February 22, 2013

I recently re-read Jessie Livermores books, and, bearing in mind he was supposedly one of the greatest speculators who ever lived, I have really attempted to take his general lessons to heart.

As result, I no longer allow myself to speculate about where the top/bottom might be. I look at the general picture probably in the same way a child would, and in the case of ES, FOMC Minutes aside, I see an up-trend. I think it is certainly consistent with Livermore to say: rallies don’t simply roll over and die.

Jessie: “I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling other customers; ‘well, you know this is a bull market!’ he really meant to tell them that big money was not in the individual fluctuations but in the main movements.”

http://s18.postimage.org/4mp0npy61/jessie_livermore_buy.png
Now when I was first taught about Fibonacci’s in trading, I literally burst out laughing in the classroom – but for illustrative purposes, would it be so much of a stretch to imagine the market could pull down as low as 1450 and the 9 month rally still be in place? IMO yes.

Great blog btw.

    Jani Ziedins February 22, 2013

    Nice tie in with JL. It’s been a while since I read RSO and I should pick it up again, but I do remember the quote you mentioned. Market moves last longer than anyone expects both on the upside and downside. I also agree with your point that big money dosen’t cause many of the daily fluctuations we see. The average holding period for a mutual fund is close to a year. It is the much smaller group of highly active traders that pile in and out of stocks every other day. That is why we can see dramatic two day dips, but if big money doesn’t join the selling, supply dries up and the original trend continues.

    This market will run out of steam, but not when everyone expects it. There is a lot of psychology and human nature in double-tops and head-and-shoulders that makes it such a repeatable pattern. The obvious selloff is rarely the real selloff and the obvious continuation is rarely the real continuation, all the money is made by knowing the difference between the two.

spearchew February 22, 2013

That is to say, IMO yes the rally could continue after such a large reaction.

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