PM: Can we still make all-time highs?

PM Update

Stocks couldn’t hold yesterday’s gains and closed under 1550 and the struggle to break all-time highs continues.  AAPL saw midday strength fade into the close as the stock is still looking for the incremental buyer.

MARKET BEHAVIOR

Stocks dipped and ended near 1545.  The all-time closing high is proving more difficult than anyone expected when we finished just two-points shy of that historic mark last week.  Volume was below average today and continues the trend of apathetic trade.

MARKET SENTIMENT

It’s not often we see the market dip nearly a percent on light volume.  There is something quite unusual about the lack of selling by holders as we break key technical support at 1550.  Are they are asleep at the wheel?

Light-volume means different things at different stages in the market cycle.  Low-volume dips always signal holders are resisting the temptation to sell into weakness.  As the rally is bouncing off previous lows, the market is primarily made up of value investors who trust their analysis and are less concerned with daily fluctuations.  This is why they willingly hold through volatility early in the rally.  Later on these value investors are replaced by momentum chasers as the rally continues breeding complacency the higher it goes.  But the key difference is on the buying side.  Early in a rally, cynicism rampant and these traders resist the young rally, meaning there is still ample supply of buyers available to push the market higher.   Late in the rally, most of the cynics have changed sides and jumped on the bandwagon, meaning there are few buyers left.  More simply, markets rally in the face of fear and decline on the back of complacency.

TRADING OPPORTUNITIES

Expected Outcome:
It is increasingly likely we won’t set new highs.  The market was rebuffed two-times after closing above 1560.  Friday might be the last shot we have at this historic level, but even then that milestone is a better short entry than breakout buy.

Alternate Outcome:
1550 is providing a sticky level and the market has bounced back from several dips below it already.  Part of the reason volume was so light today when we dipped through 1550 is Tuesday’s violation of this technical level already triggered most of the stop-losses, meaning there was less selling this time.  To continue higher, the market needs to prove it can break and then hold 1565.  The trend is still higher, but this late in the game it needs to show me it still has legs.

INDIVIDUAL STOCKS

AAPL’s midday strength faded into the close.  I’ve stopped paying attention to rumors so I really don’t know what caused the midday surge.  It seems the market is also increasingly cynical of these big intraday moves since this one didn’t even hold through the close.  Rumors of new products or cash distributions are the boy who cried wolf.  One of these days it will be true, but by that point the market will have stopped listening.

The 50dma is still the technical level to follow and breaking above this will trigger a wave of momentum, swing, and dip buying.   Ride the trade higher, but take profits early because these short-term traders will sell after a $40 move up to technical resistance.  On the other hand, failing to reclaim the 50dma shows no one is interested in buying the stock and it will breakdown to new lows, most likely $400.

Stay safe