AM: Cannot hold 1550

By Jani Ziedins | Intraday Analysis

Mar 19
S&P500 daily at 1:12 EST

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 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

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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.

Happy One March 19, 2013

Thank you!

    Jani Ziedins March 19, 2013

    Glad you enjoyed it.

eddie March 19, 2013

This rally has become very popular, I over heard some ladies at the gym talk about how their employers recommended to add to their 401ks and how sp500 is up up and up, this was wednesday last week. Since then 1st 3 red days in a row.

    Jani Ziedins March 19, 2013

    Main street is always the last to know. For the 401k investor, nothing beats dollar cost averaging from every paycheck no matter what the market is doing.

spearchew March 19, 2013

http://s14.postimage.org/nw36roimp/fundamentals.jpg

What value to be found in tracking the US monthly economic data releases? Tonnes of info out there, but how many non-institutional speculators are actually taking notes of it, beyond “what ES did on the day NFP came out”.

I look back at the state of play leading up to the 08 meltdown… there are no striking “signals” per se, although NFP was weak for several straight months before the ES finally caved in below 1200.

My current assessment, just purely looking at the data over the last 6 – 12 months, is that things are neither particularly good/bad, just cruising along in 2nd gear.

    Jani Ziedins March 19, 2013

    Everyone misses the curve otherwise they would all sell at the top. Only after the fact can we put the pieces together that make everything look so obvious. But as obvious as it looks in hindsight, it never feels that way in realtime. No matter the market, there is always good and bad news to choose from, the challenge for the speculatore is figuring out how everyone else is positioned and how that affects the next move.

    I see a 5-10% pullback strictly on supply/demand and sentiment imbalances. This is a painfully slow recovery, meaning the rally will also last longer than normal too. Only after the economy has a chance to overheat will we see the next big correction. Given how paranoid business is, I doubt we will reach overcapacity any time soon.

Greg from Japan March 19, 2013

In my opinion, what got people spooked, is the S&P rally stopping at only 2 points from “a sure done thing” (1565). Shorts waiting above not fulfilled, and bulls pushing from below, disappointed. At current point, very hard to say which way we are going, but people like Mila Kunis or Rachel Fox promoting stocks on CNBC news, seems quite scary.

Anyway, great job Jani.

    Jani Ziedins March 19, 2013

    Thanks. Markets often do what is unexpected because everyone is positioned for what is expected. Without further buying or selling the expected never happens.

Greg from Japan March 19, 2013

By the way, what is your opinion about Max Pain theory, in regard with weekly closing price of AAPL stock. Am I wrong in seeing AAPL Friday price strangely near Max Pain level, on most weeks? Wonder if it would be wise, to use this data to swing/day trade the stock.

Thank you

    Jani Ziedins March 19, 2013

    AAPL does finish at the weekly extremes, confirming max pain theory for those on the wrong side of the trade that week. Right now AAPL is hurting bears and exciting bulls. Next week it could flip the other way if bulls get too excited.

BT March 19, 2013

Thanks for the insights. Always a great read.

    Jani Ziedins March 19, 2013

    Thanks!

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