WR: Stuck on 1550

S&P500 weekly at end of week

Weekly Review

Stocks are holding near recent highs, but how much buying is left in this rally?  AAPL’s selloff turned 6-months old this week.  Is it finally a buy again?

MARKET BEHAVIOR

Stocks dipped a modest quarter percent this week, but fell as far as 1538 following a three-day losing streak before recovering.  Volume was a tad below average and we closed the week 31-points above the 10wma, while the 40wma is 118-points behind. Both moving averages are headed higher and closing the gap as we consolidate recent gains.

MARKET SENTIMENT

The market is attracted to 1550 and recovered this level three-different times after dipping under it.  The big dip under 1540 triggered all the technical stop-losses in the area, relieving potential selling pressure on a subsequent dip.  Think of it like avalanche control.  This week’s dip set off a slide, making conditions less risky next week.  But this only protects us from selling and there is more than one way for a market to top.

Tops also occur from lack of buying.  No matter how confident holders are, they can do nothing to defend against an absence of demand. Traders most often fear a catastrophic headline that takes the legs out from under the market, but they also need to fear an overly bullish one too because that is the stealth top that sneaks up on us.  At least with horrible news, it is obvious and we are only left guessing how low will it go.  Bullish tops creep up on us because the outlook is great and everyone is confidently buying the dip.

Bullish tops are harder to trade because sentiment and demand are such squishy things.  Rallies typically go further than anyone expects, so holding longer than we are comfortable is usually the right trade.  But there also comes a point where holding is easy and we don’t want to sell because everyone knows the market is headed higher.  To me it feels like we are in the fuzzy area between these two.  I cannot say with any conviction the market already put in its top, but I can say its gone far enough for me and I’m ready for the next trade.

The thing about dip buyers is there is a fixed number of them and they will run out at some point.  We had a couple dips under 1550 this week and buyers came in and propped up the market, but how much new money is still out there if we dip under a 3rd time?  There is a reason double-bottoms are a popular reversal pattern, but tripple-bottoms not so much.  The third test of support is far less likely to bounce because dip buyers already spent most of their money on the first two dips.  Without dip buyers, who is left to prop up the market?  Value buyers eventually step in but they usually wait until prices are so attractive they cannot resist any longer.

Again, this is all just speculation on my part, but in spite of what all the gurus say about predicting the market, we are in the business of prediction.  Trading by its very nature is making predictions about future prices because lets be honest, there is no reason to buy most stocks unless we confidently predict they will be higher in the future.  At this juncture, I cannot predict the market going higher with any confidence, so I’ll wait this one out.  And more than wait it out, I’m looking to short this market because it just looks like its time.

TRADING OPPORTUNITIES

Expected Outcome:
We came a long way and there are only so many consolidations and dips that can occur before we come to the one that doesn’t bounce.  Holding on for more bounces here is getting a tad greedy.  I’m happy to sit on the sidelines, watching the market rally higher without me here because I know the odds are not in my favor.  One of the most difficult things for me to learn as a trader was being okay with leaving profits on the table.  It is never easy, but over the long-term it works out better this way.

Alternate Outcome:
Most of the time I get out too early.  I don’t mind missing another 20-ponts of upside, but I don’t want to miss the next 50 or 100-points, so I will continue watching for signs of sustainable strength.  Minor dips that find support and consolidate for 4+ days shows buying at those levels and signals a likely resumption of the rally.   We will keep looking for signs of strength and are always ready to jump back in.  The greatest advantage of the individual trader is the ease with which we can move around the market.  Of course this is a double-edged sword and many fall into the trap of over-trading every bump in the market.

INDIVIDUAL STOCKS

AAPL weekly at end of week

AAPL finally did it, it closed above the 50dma for the first time in over 5-months.  I actually find it surprising the selloff just celebrated its 6-month birthday this week.  AAPL’s weakness feels like a new thing, no doubt due to the fact no one realized it was a material selloff until several months into it.

The stock is almost 10% higher than the recent lows.  Is this enough to conclusively say the bottom is in?    Many bulls are hoping so, but the pervasive bullishness in AAPL gives the natural cynic in me something argue with.  No one is saying the stock is going to zero.  No is saying the company is failing.  No one says the products cannot compete.  Everyone believes it is a great company whose stock simply fell on tough times.  If it was a good buy at $700, then it is a steal at $450.

But what’s the other side of the argument?  What would the contrarian point out?  Some people say AAPL is a software company.  Well if that’t the case, it’s a pretty lousy software company.  The current user interface is identical to the iPhone1 that debuted five years ago.  When compared to the dynamic app icons and lock screen widgets on Android, iOS looks prehistoric.  As someone who checks my iPhone5 for stock quotes every 30 minutes, it sure would be nice if it wasn’t a six-step process.  (wake, swipe, lock-code, home button to exit last app, swipe to second icon page, click on stock app)  But since Steve Jobs didn’t check the stock market from his phone on a regular basis, AAPL sees no reason to make it easy for those of us that do.  That is the typical AAPL hubris.

Without a doubt AAPL has some of the sexiest and most desirable hardware out there, but they are miles behind the competition on the software side.  As an iPhone user, I only hope firing the head of iOS and promoting the guy in charge of hardware design means new things are coming down the pipe and we will finally have a modern OS to match our sleek hardware.

Stay safe