PM: Two-points shy

PM Update

Another new high as the market moves beyond support at 1550.  How much longer can we keep this up?

MARKET BEHAVIOR

Stocks had another strong day, closing within 2-points of the all-time closing high.  Volume was a little below average, but made a comeback from the previous three-sessions of extremely light volume.

MARKET SENTIMENT

This is getting interesting.  The after four-days of support at 1550, the market broke through 1560.  As we discussed, markets reverse fairly quickly, so four-days at this level made a continuation more likely than a selloff.  The question is where do we go from here?  Breaking 1565 is all but a given, what’s next?

It seems like everyone is expecting the rally to continue a bit further before rolling over.  Some predict 1575, others 1600, and even a few think 1625.  The one estimate I have yet to hear is imploding tomorrow.

We could hit 1575 on Friday easily with a short-squeeze and surge of breakout buying.  1600 is more of a stretch and I doubt we could keep this string of up-days going for another 40-points, thus it will take a couple of weeks and one dip to reach 1600.  1625 is even further and would take a month and a couple of convincing false selloffs along the way.  On the other side, we could drop to 1500 by next week and 1450 the week after since markets selloff far faster than they rally.

From here the market can go up, down, or sideways.  A sharp selloff likely means the rally is dead.  The market can only bounce so many times and we used more than our fair share getting to this point.  A dip under 1550 and finishing at the day’s lows is an interesting short entry with a stop above 1555.  A surge through 1565 and past 1575 tomorrow on huge volume signals the last buyers are chasing the rally.  This is a great time to lock-in profits and consider shorting when the market starts imploding.  Lastly, the only way we reach 1600 and beyond is if the market continues consolidating and grinding higher at a sustainable rate.

TRADING OPPORTUNITIES

Expected Outcome:
Anyone who missed this rally should not rush in since this is the riskiest the market’s been since the November lows.  If you waited this long, keep waiting for the next high-probability trade, most likely a short when this rally finally rolls over.  Anyone still in the market needs an exit plan.  Take profits early or use a trailing-stop to protect hard-earned gains.  From here 1545 is a decent a trailing-stop.

Given the above analysis, a decent trading plan is:
-Sell a strong move higher and look to short the subsequent breakdown
-Short a dip under 1550 with a stop above 1555
-Set a trailing-stop at 1545 and move it up as the market grinds higher
-If the above is too much, lock-in profits and wait for the next trade, likely shorting the breakdown

 

Alternate Outcome:
Many traders expect this market will rally another 25 to 50-points before rolling over.  If we want to be contrarian, we are left with two options, an imminent breakdown or marching ahead without a selloff.  Both are viable outcomes.  If everyone is looking for a top on a surge higher, it won’t happen because no one will chase it.  This could explain the modest breakouts seen the last couple weeks.  If no one chases, the market will run out of buyers without the obvious surge higher.

At the other extreme if these are too many reluctant buyers willing to buy every dip in an effort to catch this market, they will  keep pushing us higher far longer than anyone expects.  Using the above plan will help us trade anything the market throws at us.   There are no guarantees of in the market, but a sound plan moves the odds in our favor.

INDIVIDUAL STOCKS

AAPL continues trading between $425 and $435.  Churning at these levels for an extended period of time is one way to clear dead wood, potentially taking the place of another leg lower.  If we hold these levels and start rallying in the second quarter, AAPL might actually be buyable, especially if it does this in the face of a declining broad market.  Those are some big ifs, but it is possible.  Don’t rush out and buy the AAPL here because lower is still the high-probability trade, but failing to selloff would give this alternate outcome credibility.  But even if AAPL does rally, this is a trade and expect resistance at $485, especially if the rebound moves fast.

Stay safe