AM: A rest day

S&P500 daily at 1:23 EDT

AM Update

Early weakness threatens the seven-day winning streak.  AAPL struggles to add to yesterday’s gains.

MARKET BEHAVIOR

Stocks are modestly in the red this morning, but a down-day shouldn’t surprise anyone given the streak of seven-consecutive up-days.

MARKET SENTIMENT

Is this weakness another buy-the-dip opportunity or the start of something bigger?  Dips are buyable until they aren’t.  Every diversified portfolio is showing profits as the market keeps notching 5-year highs, but we all know this cannot last forever.  Weakness here is a no-brainer after running 70-points, but do we buy, hold, sell, or short this dip?

The most conservative option is to sit this one out.  Tops are often volatile and flush out the uncommitted at the exact wrong moment.  Changes in trend are one of the hardest times to trade because of the whipsaws and head-fakes.  The easy trade is cashing in profits and waiting for the next high-probability opportunity.

1565 is a very seductive level and traders are fixated on all-time highs, but that could cause the market come up short.  To figure out where the market is headed, we first need to understand what everyone is thinking and how they are positioned.  If everyone expects us to reach theses all-time highs, they are still holding on.  If bears also expect this, they will resist shorting.  But if everyone is holding and no one is buying, the market will stall and gravity will take over.

While earlier pullbacks bounced, selling was fueled by nervous holders and aggressive shorts. Markets quickly reversed because both of these groups lack the firepower to sustain a move.  But if the market starts selling-off here, it isn’t driven by either of these groups that are waiting for all-time highs.  Instead, this could be the start of real and sustainable selling.

TRADING OPPORTUNITIES

Expected Outcome:
The rally trade is getting a bit obvious and we should expect a pullback to at least 1550.  How the market responds to this level will give us more information about where it is headed.  Support at 1550 is constructive for a near-term continuation through all-time highs.  Failing support at 1550 would form the right-half of the head in a bearish head-and-shoulder pattern.

Either way traders with profits should consider locking them in.  We are in this to make money and the only way to do that is by selling winners.  Obviously the market will continue higher once we sell, but the goal isn’t to make all the money, just the easy stuff.

Alternate Outcome:
The market is on hot streak and there is no reason it has to end at seven-days.  We could easily see nine, ten, even twelve days in a row, especially when everyone is fixated on new all-time highs.  The race is between drying up demand and scarce supply.  Will confident and ambitious holders pull in supply faster than we use up available buyers?  Or will buying dry up and be unable to swallow the normal supply that hits the market every day?  I wish I had an answer for everyone, but this is the market and we have to make educated guesses.  At this point a couple of rest days seem more likely than extending the streak.

AAPL daily at 1:24 EST

INDIVIDUAL STOCKS

AAPL gave back most of yesterday’s surge and is holding just above $430.  The key level remains $455 and buying before then is trying to catch a falling knife.  In every instance until now these strong surges were selling opportunities.  This stock is full of hopeful holders that are excited by every rumor that makes the rounds.  This shows way too much bullish and optimistic sentiment remains in the stock to sustain a meaningful rebound.  AAPL topped as the most loved stock in the market and it will likely bottom after it becomes the most hated stock and people are ashamed to admit they own it.  We are clearly not there yet.

Stay safe