WR: We finally did it

S&P500 weekly at end of week

Weekly Review

All-time highs, but what comes next?  AAPL finished weak and inability to find follow-on buyers after breaking above the 50dma is a concern.

MARKET BEHAVIOR

Stocks gained 0.8% in a week where we finally set the all-time closing high.  While volume was extremely light due to the holiday shortened week, it still fell 8% below average when prorated to account for the missing day.  The 10wma is closing the gap with our sideways market and is just 37-points behind.  The 40wma is also making gains, trailing by 125-points.

Market Cycle:
This rally is 19-weeks old and covered 16.8% since the November low.  This already exceeded the 15-week, 16.4%, June-September 2012 gains, but is short of the 25-week, 32.2%, rally between October 2011 – April 2012.

The most notable difference between these previous rallies was the prior decline.  The 2011 market corrected 20%, the 2012 Spring selloff was 11%, and the most recent pullback leading to our current rally leg was 9%.  The bigger the selloff, the larger the rebound.  The last decline was the smallest and likely means we are living on borrowed time.

If there are any Elliot Wave fans out there, we are in the 5-wave across three-different time-frames.   See the accompanying chart.  Combine this with the potential head-and-shoulder formation, technically this is a good time to tread lightly.

This late in the rally we would expect the rate of gains to slow.  The best profit opportunities follow the reversal and we are four-months removed from those easy buy-and-hold gains.  The later stages of a rally are typified by volatility and limited progress; exactly what we’ve seen over the last three-week, 15-points gain.  Technicals and history say this market is running on fumes and we closer to the end of this run.

MARKET SENTIMENT

All-time highs typically bring cynics out of the woodwork as they cry unsustainable and point to the secular-bear tripple-top.  While I count myself as a long-term bull, there are enough warning signs to make me cautious here.  It is not uncommon for rally legs to last longer than 4-months, but so far everything is lining up for a near-term top.  Indifference to negative news, lack of short-squeezes, and widespread enthusiasm show market sentiment has changed dramatically from the fear and pessimism that dominated December and January.

TRADING OPPORTUNITIES

Expected Outcome:
This is a place to take profits, not establish new positions.  We are in this to make money and can only do that by selling our winners.  I started growing more cautious three-weeks ago when we first broke 1560.  Anyone selling into that strength missed all the recent volatility and gave up less than 10-points of upside.  Without a doubt there is a break-even between profits and nerves.  In my book a fraction of a percent is not worth being jerked around.  Amateur traders hate selling early, but it is one of the easiest ways to keep our sanity and avoid making dumb mistakes.

Alternate Outcome:
Continued strength shows the market is not ready to breakdown.  Markets typically selloff shortly after making news highs.  If we don’t encounter weakness next week, we will likely see higher prices before topping.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL had a disappointing finish to the week after showing such promise closing above the 50dma for the first time since September.  The stock lost 4% for the week and gave back virtually all the previous week’s gains.  Bulls claim this is just a temporary setback on the way higher, but failing to find new buyers after such a significant technical breakthrough should give anyone pause.  The down-trend was not broken by recent strength and any buying here is catching a falling knife.  There is nothing wrong with playing a game of bottom picking, but make sure to use tight stops and appropriately sized positions.  Until the stock starts making higher-highs and higher lows, expect the trend of lower-highs and lower-lows to continue.  That means we likely have a date with $400 in the near future.  Reclaiming the 50dma this week is bullish and look for a retest of $485.

Stay safe