AM: New highs

By Jani Ziedins | Intraday Analysis

Apr 02
S&P500 daily at 1:31 EDT

S&P500 daily at 1:31 EDT

AM Update

MARKET BEHAVIOR

Stock’s indecision continues as we rebound from yesterday’s weakness and are making new highs, just a few points shy of the all-time record at 1576.

MARKET SENTIMENT

This back-and-forth has both bears and bulls more vocal as they cheer for their side, but this equality is new and a big reason the market’s behavior has changed in recent weeks.  Bulls are still winning the tug-of-war with each new high, but the rate of gains has tapered from the nearly straight-up market in the first two-months of the year.  This is typical behavior as the best gains occur early in a move and become harder to come by the older a rally gets.  At 4.5 months old, it shouldn’t surprise anyone we are seeing more sideways trade.

The Q1 rally proves traders were overly bearish at the start of the year, and converting former bears into buyers is what propelled us higher.  If this rally fueled itself on pessimism, how much gas is left in the tank?

It is easy to predict the future, the harder part is getting the timing right.  Both bulls and bears could be right if we continue another 30-points higher before falling into a 10% correction, but they could both lose money if the bear shorts too early and the bull holds too long.  That is what makes this game so maddeningly difficult.  I have no doubt this market will top because every rally eventually ends, the harder part is figuring out when.

TRADING OPPORTUNITIES

Expected Outcome:
There are three ways this market will top.  It might simply run out of buyers and rollover.  It can surge higher and exhaust itself before reversing.  Or an unexpected negative headline can send holders rushing for the exits.  Holding 1560 through Wednesday makes the rollover top unlikely because we don’t get that long to sell the top.  We still haven’t seen a powerful exhaustion surge, so the market needs to go higher before it can turn lower under that scenario   And the news driven top requires an external and unpredictable catalyst to move the market.

In the absence of bad news, the market is setting up for higher prices if we hold 1560 through Wednesday.  Just because the market is headed higher over the next few days doesn’t automatically make buying and owning the market a good idea.  We always need to consider the risk/reward of every position and given the age of this rally and the slowing gains, it seems like there is more downside risk than upside potential here.  And of course a material selloff under 1560 today or tomorrow means this market is struggling to find buyers and we need to watch for further weakness.

Alternate Outcome:
A lot of profit taking occurred over the last 4-weeks of sideways trade.  We need buyers to continue higher and these recent sellers could buy back in and keep pushing this market higher.  The longer we hold these levels, the more likely this outcome becomes, especially if we consolidation stretches out and gives the 50 and 200dma time to catch up.

AAPL daily at 1:31 EDT

AAPL daily at 1:31 EDT

INDIVIDUAL STOCKS

AAPL recovered a large chunk of yesterday’s selloff.  This could simply be a dead-cat bounce as shorts cover for a tidy profits after the recent selloff.  Buying at $430 is less convincing when the stock couldn’t attract support above the 50dma.  Anyone who wanted to buy the dip already bought it, meaning there are few buyers waiting in the wings to prop this name up.  Look for more weakness as hopeful bulls sour on this name.  I don’t see a rebound in this name until everyone has given up on it and stops defending it.

Stay safe

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.

Greg from Japan April 2, 2013

Hi Jani,

Would you give any significance to IWM trending down (especially last 2 days), while SPY and DIA are still soldiering on. IWM actual best was an intraday high over two weeks ago (last March 15th @ $94.96). I personally believe, the small caps index is an indicator of the trend to come for other indexes. Am I giving it too much importance? What is your take?

    Jani Ziedins April 2, 2013

    Interesting find. Divergences are noteworthy and just one more piece of the puzzle. It could be the canary in the coal mine, but the SPX could also benefit from small cap selling if that money is reallocated to “safer” bluechips. But even in the latter case, it is simply delaying the inevitable.

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