AM: Consolidation is good

AM Update

Stocks consolidate after yesterday’s breakout and AAPL struggles to find new buyers.

MARKET BEHAVIOR

Quiet morning in the markets.  We opened higher, but are trading closer to break-even by midday.

MARKET SENTIMENT

This tight trade shows neither sellers nor buyers are showing up in force and we continue consolidating recent gains.  Holders continue holding for more gains and resist the temptation to take profits.  Buyers remain hesitant to chase this market.  This is how traders behaved over the last two-months, so we should expect the current trend to continue until there is a material change in the attitude of either side of the market.

TRADING OPPORTUNITIES

Expected Outcome:
We are looking for one of two possible scenarios; consolidation supporting a continuation, or a surge higher into exhaustion.  Today’s price action supports consolidation and continuation.  Resisting the urge to break 1550 exhibits restraint as slow and steady wins the race.  Staying between 1530 and 1550 for the remainder of the week is bullish.  On the other hand if the market takes off in a frenzy of buying, lock in profits because that surge is not sustainable.  We will never be able to sell the top and the market will inevitably head higher after we sell.  The most successful traders insist the key to their success is selling too early and if it works for them, it works for us.

Alternate Outcome:
The market can breakdown at anytime and bullishness and complacency is increasing with each new high.  The high-probability trade remains higher, but even if the chances for a continuation are 75%, that means 1 out of 4 times the market will fail under these exact conditions.  75% is a great trade to take, but we need to manage downside risk because 25% still a likely outcome.  1515 is a good trailing-stop and we can move that up to 1525 once the market holds 1550.

This market is quickly running out of both upside and time.  At most there are a couple dozen ponts of upside and a few weeks left in this rally.  Its been good run since the November lows and the market needs a break.  Use this time to plan your exit.

INDIVIDUAL STOCKS

AAPL is giving back some of yesterday’s gains.  After the short-squeeze and bottom-fishing, the stock is struggling to find follow-on buyers.   Today’s pause shows just how shallow the pool of potential buyers is and why the high probability trade remains lower.

A short can use $435 as a stop-loss and target a pullback to $400.  Because this stock is so volatile and could explode higher on a news story, the safest way to play this is through options.  Right now a March 28 $420 to $400 put-spread costs ~$6 and has a max profit of $14.  The time aspect of options adds a whole new dimension to trading and can lead to some unexpected behavior before expiration.  Only do this if you are experienced with options, or alternately experiment with a small position to build experience with options.

The above option trade isn’t just for bears either.  It can be used by nervous bulls looking to buy a little insurance against further losses.  The raging bull could further offset the cost of the insurance if he sold two puts at $400 if he is convinced he wants to buy even more AAPL if it falls to $400.  I’m not recommending this trade, just offering it up as a creative way for bulls to manage their position.

Stay safe