PM: Sell the breakout?

By Jani Ziedins | End of Day Analysis

Mar 05
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

New highs, but everyone is still waiting for the pullback.  AAPL finally bounced after selling off for 12 of the last 15-days

MARKET BEHAVIOR

Stocks launched ahead 1% and finished at fresh 52-week highs.  The interesting thing is stocks traded mostly flat after 11am , neither selling off nor adding to early gains.  Volume was higher than yesterday, but still only average.

MARKET SENTIMENT

I don’t follow the Dow because it is a poorly constructed index, but the media and non-investing public does, making it noteworthy from a broad sentiment standpoint.  The Dow set an all-time high today, eclipsing the old record from 2007 and is the first major index to achieve this momentous milestone.  The Financial Meltdown is officially history and this is a significant step in healing the emotional wounds scarring an entire generation of investors.  But this is a multi-year story and it will play out over the next decade as these shell-shocked investors start wading back into equities.

A lot of traders remain reluctant to buy the new highs and are waiting for the inevitable pullback.  It didn’t happen today, but maybe tomorrow, or so the logic goes.  The truth is we will continue higher until people stop waiting for the pullback.  Right now stock holders are feeling good about themselves.  Anyone with a broadly diversified portfolio is sitting on profits and are eagerly awaiting additional gains.  Traders out of the market are feeling the pinch as they wait in vain for the breakdown that still hasn’t happened .  Obviously no one want to chase a breakout to new highs, but how much longer can they watch the market go without them?

While the last three-days of gains were decisive, they came on low-volume.  This rally isn’t a story of frenzied buying, but scarce supply as holders are not interested in selling.  Sometimes low-volume is a warning sign, others it signals a continuation.  After repeated low-volume rebounds to new highs, I don’t need to tell you which one applies here.  Right now the savvy trader is embracing the low-volume rally and fearing the high-volume surge.  When the crowd finally rushes to buy, we will take our cue to exit.

TRADING OPPORTUNITIES

Expected Outcome:
The market can do two things here, surge higher or pullback and consolidate gains.  The surge will be the last gasps of this rally before it collapses in exhaustion.  A dip tomorrow and sideways trade through the remainder of the week signals a more sustainable continuation.  We will see more chasing going into quarter end, meaning there are still a few weeks left in this rally, but we could see a couple of days of weakness first.

Alternate Outcome:
We came a long way and a lot of people are long this market.  Last week’s pullback likely put in the left shoulder of a head-and-shoulder pattern, meaning we are getting close to the top of this move.  While I don’t think today set the top of the head, we still need to honor out trailing stops to keep us from riding a winner back into the dirt. Selling  last week took some downside volatility out of the market and while a dip to 1525 is reasonable, falling under 1515 is more worrisome and a good place to set a trailing stop.

INDIVIDUAL STOCKS

AAPL daily at end of day

AAPL daily at end of day

AAPL bounced nicely and recovered a couple percent of the recent selloff.  While the bounce is interesting, buying it is still catching a falling knife.  12 of the last 15-days were negative and the stock shed over 10% in three-weeks.  The stock continues making lower-lows and lower-highs and is not a worthy buy candidate until it breaks this trend and finally makes a higher-high.  There is a minor high at $455 and a more meaningful high at $485.

Today’s bounce could continue higher on broad market strength, but the trend remains lower.  The market often moves in a direction that will humiliate the greatest number of traders.  It seems today’s bounce brought relief, meaning the pain trade remains lower.  The selloff will likely continue until AAPL is the most hated stock and everyone is embarased to admit they still own it.  We are not there yet.  It is a great company, the problem is no one is interested in buying the stock.

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.

spearchew March 6, 2013

http://s10.postimage.org/643mk1d7t/ES_STATS.png

Whether there is any value at all in monitoring quarterly ES price moves, I cannot say, but nevertheless I like to put things in perspective.

Anyway, taking the charts at face value I submit that it would not be extraordinary for this market to rally another 40 points this month.

    spearchew March 6, 2013

    http://s11.postimage.org/7kd0znzhf/ES_STATS_2.png

    Would also suggest that, again taking these stats at face value, the bears are going to be in charge in Q2 – and that’s ignoring the fundamentals which are not particularly good.

      Jani Ziedins March 6, 2013

      I agree and we should expect a different personality out of the market next quarter. I’m looking for a place to lock in profits, either a surge higher, or the end of the quarter, whichever comes first.

scott March 6, 2013

Jani,

You’re going to have to change that column header from “Individual Stocks” to Individual Stock. Outside of aapl (lowercase due to mkt cap shrinkage) I think NFLX for one has been very interesting of late, bouncing several (5 at least) times off of 178.

Great blog,
Scott
VolatilityAnalytics.com

    Jani Ziedins March 6, 2013

    You’re right, it’s mostly just AAPL. I covered NFLX, LNKD, and AMZN last week, but AAPL is the only mainstay I always include. It’s the stock everyone is most interested in and I’ll get 10x as many views from an AAPL tweet as any of the others. If that’s what the people want to hear about, who is to argue? Plus AAPL is working amazingly well for my style of analysis and I have a better feel it than any of the other stocks.

    A couple years ago I chased winning stocks, but I never enjoyed looking at all those charts. I love the idea of the markets, but I don’t want to be chained to my computer, so over time my style has shifted to focusing on fewer and fewer things. Betting on individual horses is exciting, but it is easier to make money betting on the race. Right now I swing-trade the indexes using leverage and do pretty well. My goal is 5% per months and I’m already well past that mark in March and we are only one week in.

    NFLX is interesting, but I have a feeling support at $175 will fail and setoff a wave of stop-loss selling, but this is longer-term bullish. After dipping to $160 and flushing out a lot of the late chasers, the stock will resume the uptrend on the back of all the shorts gunning for the stock.

      scott March 6, 2013

      So what leverage do you use? SDS, QLD, FAS, TNA?

        Jani Ziedins March 6, 2013

        Usually 150% SSO/SDS for 300% total.

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