PM: More left in the tank?

By Jani Ziedins | End of Day Analysis

Mar 13
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Stocks continue finding support, suggesting further upside.  AAPL still cannot get out of its own way and high-flyers keep flying higher.

MARKET BEHAVIOR

Stocks closed above 1550 for the 4th consecutive day and are building support for a potential continuation.  Volume was extremely light for the third-day as few are looking to buy, but even fewer are trying to sell.

MARKET SENTIMENT

Tops from unsustainable levels rollover fairly quickly.  The surge of buying pushes the price beyond what is reasonable and as soon as the euphoric demand exhausts itself, the market quickly reverses.  Present strength and support suggests there is upside left in this move.  If buying really was exhausting itself, we could not continue holding these levels.

This is a departure from what I’ve been talking about the last few days.  While the analysis showing this market is getting close to a top is still valid, recent price actions shows it is premature.  Market go further and longer than anyone expects and that seems to be the case here.  Picking tops is tricky business and there is no reliable way to do it.    The only thing we are left to decide is if we want to sell into strength on the way up, or wait for weakness and get out on the way down.   My style is selling early, but that is personal preference and everyone needs to figure out what works best for their personality and trading style.

TRADING OPPORTUNITIES

Expected Outcome:
We have to decide how much profit we need to be successful traders.  The market rose 3.3% the last two-weeks.  100% leverage doubles that return to 6.6%.  No one is going to get rich off of 6%, but what if we set a goal of capturing gains like this several times a year?    Nab a high-probability trade every other month and that adds up to a 47% ROI.  Do it once a month and it compounds to 115%!

Many traders have a hard time selling into strength because they can’t let go of missed profits when they cash-in too early.  What if waiting for those extra profits is what is holding them back?   Many would scoff at trading 3% swings in the indexes, but there is real money to be made in it.  We all have to ask ourselves why we are doing this.  Is it so we can brag to our neighbor that we bought AAPL or PCLN before they did?  Or are we in this to make money?  If the goal is making money, I’ll take boring 3% moves in the index all day long.

It is likely this market will continue higher.  We traded above 1550 for the fourth day and if it was going to breakdown it would have happened already.  If we hold 1550 again tomorrow, it is buyable for another dozen ponts higher.  If we break under 1550, that is likely the end of this rally; markets can only bounce so many times and this one is nearing its quota.

Locking-in profits here is preferable, but if a person must trade, buy support and sell a breakdown.  Keep any upside gains on a short leash, especially if the breakout is sharp and on high volume.

Alternate Outcome:
This could be the half-way point in a six-month monster rally.  There is no real reason for this market to breakdown other than running out of buyers, but the stock market rally and bond slide could keep pushing new money into stocks as the herd chases performance.  I am cautious at these levels because it seems like fear of a pullback is diminishing, but I will continue looking for signals that this move still has legs.

INDIVIDUAL STOCKS

LNKD daily at end of day

LNKD daily at end of day

AAPL gave up a strong rebound to finish flat.  The stock rallied to $435, but hit its head sold off into the close.  What else is there to say but great company, lousy stock.  The inability to mount a meaningful rebound show the high probability trade remains lower.

AMZN, LNKD, and NFLX all added to their ridiculously obscene valuation.  The market often humiliates those that spend too much time thinking about what it should do and not enough trying to understand what it does.  There are very legitimate reasons why AMZN, LNKD, and NFLX continue higher while AAPL continues lower.  Understand what moves markets and the mystery vanishes.

Stay safe

Follow

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.

Jon March 14, 2013

Something to chew on regarding AMZN, LNKD, NFLX that I read recently, “don’t try to beat the market, be the market.”

    Jani Ziedins March 14, 2013

    A lesson bottom and top pickers are learning every day in this market. Mistakes are part of growing as traders as long as we learn from them.

Chris March 14, 2013

You are mistaken about “Tops from unsustainable levels rollover fairly quickly.” Go back using Wyckoff’s method and review every major top over the past 100 years. You will see that all of them take months to play out. On the other hand, bottoms do tend to play out more quickly than tops.

    Jani Ziedins March 14, 2013

    I agree, but there is a difference between bull and bear market reversals and intermediate tops. I’m only looking for a 5-10% drop here and then a continuation. If we look at Feb 19th of this year, that was a single day breakout followed by a 35-point selloff. The Sept 19th peak immediately reversed and lost over 100-points. There is usually one up-day that breaks the camels back. A major top will spread out over months with double-tops or head-and-shoulders, but each individual peak is typically a spike reversal. Other recent examples include 5/1/2012, 4/2/2012, 10/27/11, 7/21/11, etc.

Comments are closed