PM: What will kill this rally

PM Update

The market is consolidating gains ahead of employment, AAPL is still struggling for direction, and NFLX is building a base.

MARKET BEHAVIOR

Stocks traded flat on average volume, a nice support day for recent gains.

MARKET SENTIMENT

Neither buyers nor sellers were out in force.  Holders prefer holding for further gains and are not cashing in recent profits.  The under-invested are still sitting on their hands, hoping more than ever the expected pullback is just around the corner.

The Dow made new highs and many headlines doubt the sustainability of these gains, but so far there hasn’t been anything unsustainable about this rally.  Volume has been restrained and we checked back to the 50dma last week.  The rally has covered a lot of ground since the November lows, but that is what markets do.  The duration and size of gains are less than other rally legs over the last few years, so by that metric this bull is only  middle-aged.

Friday’s employment report is a major mile-marker and has the potential to wreck this rally.  Most would assume I’m referring to a horrible number that takes us down, but so far this market has proven immune to bad news,  even swallowing a negative GDP report without skipping a beat.  What is more likely to kill this rally is blow-out numbers sending the last of the holdouts scrambling for stock and finally exhausting supply of available buyers. Hitting 1575 over the next few days is more likely to kill this market than another dip to support. Markets often top on good news and a great employment report could be that news.

TRADING OPPORTUNITIES

Expected Outcome:
Expect volatility around employment, but there is greater upside potential than downside.  Last week flushed out most weak holders and buyers that bought in the face of weakness are far harder to rattle.  Current holders proved they will not impulsively rush for the exits and that confidence puts a floor under the market.  On the other side, a strong report will sent shorts scurrying for cover and convince holdouts to chase this market with both hands.  This will finally be our signal to get out.

Alternate Outcome:
Just because previous episodes of bad news didn’t crash this market doesn’t mean it is completely immune from shocking and unexpected news.  The key to breaking this market will be sending it sharply through previous support, triggering a massive wave of panic selling.  This is not a likely outcome given the market’s resilience to swift selling last week, but the higher we go, the more real this risk becomes.  As always, stick with our trailing-stops and don’t fight the tape if it is going against us.  Another dip under 1500 likely kills this rally leg.

INDIVIDUAL STOCKS

AAPL gave up half of Tuesday’s gains when new buyers failed to show up and support the rebound.  The stock is still in free-fall and one day doesn’t make a bottom.  The most bullish scenario is a continued rebound to $455, a dip back to new lows creating a double-bottom, and then a slow and steady grind higher.  The less optimistic bottom is a sharper and deeper selloff leading to a ‘V’ bottom.  Either way expect new lows before this thing is done.  Whether that new low will undercut by $5 or $50 is still up in the air.

NFLX is bouncing along support at $175, but the more followed this level becomes, the greater the risk is if the stock breaks it.  A dip under $175 will likely set off a wave of stop-loss selling and send the stock back down to $160.  But this is actually bullish because it will flush out the late chasers and set the stock up for a rebound on the backs of short sellers.

Stay safe