PM: Three days in a row

S&P500 daily at 1:12 EST

PM Update

Stocks weakness continues.  Is this the end of the run?  AAPL is trading well for a change, what should we expect?

MARKET BEHAVIOR

Stocks closed under 1550 for the first time in nearly two-weeks and extended the losing streak to three-days.  The market finished down a modest quarter-percent, but that overlooks the wide intraday range that briefly dipped to 1538.  It will be interesting to watch 1550 in coming days to see if previous support turns into overhead resistance. Today’s selling finally registered above average volume, only the second day in over a week to trade elevated levels, but 5% above average is hardly panic levels.

MARKET SENTIMENT

This is the first time the market traded down three-days in a row this year and signals a potential shift in personality.  Previous dips rebounded with an exclamation point, yet it seems this selloff is picking up speed.  While the rally is not dead, a change in behavior is noteworthy.

We’ve been watching a potential head-and-shoulder top develop over the last few weeks.  A retreat under 1500 could bounce and form the right shoulder before continuing lower.  If, and this is a big if, we are in a H&S top, expect the market to slide as far as the 200dma and a return to 1400 would be a fairly typical 10% pullback.  I have no idea if the market will reach these levels, but it is certainly worth knowing what the downside risks are.

Recent volume is telling as both rallies and dips have been on unusually light volume.  The restrained trade shows holders continue holding no matter what direction we go.  This scarce supply is driving prices higher instead of the more typical strong demand.  Selloffs have also been limited because few holders are dumping shares in market weakness.  Holding through every dip this year has been rewarded with new highs and traders have been conditioned to wait for inevitable rebound.

TRADING OPPORTUNITIES

Expected Outcome:
1550 is the key level to watch.  Closing above this levels likely means we will finally takeout all time highs at 1565, but that is not a sign of strength, simply delaying the inevitable.  A lot of traders are comfortable with this rally, as seen by the lack of elevated selling into recent weakness.  Many have been lulled into complacency because every other dip bounced back, but there is always that final dip that doesn’t bounce and we are closer than ever to it.

The conservative trade remains sitting in cash. It’s been a great few months and the only way to win this game is locking in worth-while profits.  The aggressive trader is looking for a short entry.  A short here with a stop around 1555 sets up an attractive risk/reward.  Seven points of risk to at least 50-points of profit.  This trade has both high-probability and favorable risk/reward on its side.   Nothing is guaranteed in the markets, but it is hard to beat this setup.  If we are early, take our 7-point loss and keep looking for the next opportunity.

Alternate Outcome:
Without a doubt this market will top at some point.  There are many indications this is the top, but often markets continue longer than anyone expects.  Clearly that happened as we already far exceeded calls for a pullback going all the way back to January 3rd.  There is no reason this cannot be another head fake designed to fool bears and shakeout weak traders before resuming the uptrend.

The easiest way to identify an uptrend is by obviously watching it climb higher.  Rallying to and holding 1565 shows support for this market and continued strength into the 2nd quarter will invalidate many of my justifications for selling here.  The single greatest strength we have as individual investor is our ability to jump in and out of the market as conditions warrant.   If we sit through dips we give up the only advantage we have in this game.

INDIVIDUAL STOCKS

AAPL daily at 1:13 EST

AAPL hit its head on the 50dma, but managed to contain losses to just a quarter-percent.  Not a bad day given the size of losses we’ve seen in recent history.  Greg pointed out an interesting observation in the comments from this morning’s post that all of AAPL’s weekly closes have been at the extremes of the market’s range.  The “pain trade” as he insightfully pointed out.  We have to go back two-months before finding a week where we closed in the middle of the range.  There is no telling how far this pattern will continue, but it could provide interesting insight into trading weekly moves.  This week is shaping up as another rally week and a break above the 50dma make for an interesting swing-trade, but if we see a breakdown, look for the stock to test and even exceed the weekly low.

AMZN is trading poorly.  There are only so many times a stock can test the 50dma before breaking it.   The next stop is the 200dma.    The last time the stock broke under the 200dma, it took 5-months to recover it on stronger than expected earnings.  But even in the face of this weakness, I still don’t think the stock is breaking down because there are still far too many cynics and shorts.  I don’t think it makes a good trade but it is interesting to watch and talk about.

Stay safe