AM: Cannot hold 1550

S&P500 daily at 1:12 EST

AM Update

Selling continues for a second day as the market fails to hold support.  AAPL hit its head on the 50dma and is down with the rest of the market.

MARKET BEHAVIOR

Stocks are struggling with support at 1550.  This is a key level that provided support the last couple weeks and failing to hold it has the sharks circling.

MARKET SENTIMENT

Today’s dip under 1550 triggered a swift wave of stop-loss selling and invited shorts to pile on.  The question is if this selling will achieve critical mass and continue lower, or bottom and rebound yet again.  Either scenario entirely plausible.   It wouldn’t be a surprise to see early bears get rebuffed for the umpteenth time as we finally take out the all-time high, but this would be the last gasp of a dying rally, not signs of unbreakable strength.   Alternately stalling 2-points shy of the record last week could easily be the top of this rally leg.  Either way we have far more down ahead of us than up.

I’m not promoting a collapse and remain constructive on the economic recovery, but markets move in a zig-zag pattern and after every period of zigging, is normal and healthy to zag.  We came a long way and this is a reasonable place to take profits and wait for the next trade.    Even the most bullish years see dips of 5 and 10% and we should expect something similar here.

There is one more piece I can add to the contrarian puzzle.  Two-weeks ago I was still behind the rally and receiving a lot of positive feedback from readers.  But since I grew more cautious and bearish, its gotten quiet around here.  I’m not doing this to be popular and am comfortable going against the current, I only point this out as yet another sign of how popular this rally has become.

TRADING OPPORTUNITIES

Expected Outcome:
One of the upcoming dips is not going to bounce, is this it or will it be the next one?  This is not an exact science and no one knows for certain where and when a market will top.  The best we can do is get close enough and call it a day.  Everything I see says this is close enough.  New highs are still on the table because market tops are often volatile and one of these swings could easily take us to new highs, but that doesn’t constitute a high-probability trade.  I’m in this to make money, not pick tops, so I’m quite pleased with how far we came and am happy to cash in here.

The aggressive trader can start looking for a good short entry, but use prudent stops and don’t stubbornly argue with the market if it moves against us.

Alternate Outcome:
Markets are never easy and it takes more luck than skill to spot a top.  Without a doubt I could be 50 or 100-points premature in selling this rally.  But just because I sold doesn’t mean I have to sit out remaining upside.  I am still looking for signs of continued strength and am more than willing to admit I pulled out too early.  The great thing about sustainable rallies is they give plenty of opportunities to get back in.  Long-term success in the markets is less about offense and comes down entirely to great defense.  The only way to make money in this game is selling winners.

INDIVIDUAL STOCKS

AAPL daily at 1:13 EST

AAPL bumped its head on the 50dma and is selling off with the rest of the market.  Talking about AAPL is like discussing politics and religion with family, it just cannot be done without upsetting someone.  This shows just how emotionally charged this trade remains.  Neither bulls nor bears care about anything other than the data that supports their emotionally held position.  Fundamentals just don’t matter in this stock like this and it continues trading on sentiment.  It will surge on any new product rumor or cash distribution scheme and fall when follow-on buying fails to materialize.  AAPL is setting up for a great sentiment driven swing-trade, but it will be a while before this stock is investment grade again.

For a swing-trade, jump on a break of the 50dma and get out around $485.  AAPL has quickly gone from a Return ON Investment to a Return OF investment stock.   Most people no longer dreaming of huge profits and simply want to get out at break-even   This selling will put a lot of pressure on any rally.

Stay safe