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The range bound market continues the recent bounce and is challenging 1580 by midday. (addendum: we just had a wild mini-flash crash as the market plunged nearly a percent and then right back up over a matter of minutes. It seems AP’s twitter account was hacked and the hacker tweeted the White House was attacked and Obama was hurt. All untrue.)
Either this is the last gasp of a dying market, or there are far more buyers at these levels than even the bulls expected. Paradoxically everyone’s expectation of a brief pullback after such a long run is what keeps the rally alive. Prospective buyers eager to get in this market buy any weakness and this type of dip-buying is sustainable because these are investors with longer time horizons. The dip buying we are wary of is late followers jumping on an over-crowded bandwagon.
Sustainable buying is sustainable and unsustainable buying is unsustainable. As silly and obvious as that sounds, it is extremely insightful. The longer we hold these levels, the more likely the rally will continue. Unsustainable buying dries up quickly and the market crumbles on the lack of demand. Holding 1550 for a month and a half demonstrates ample supply of investors willing to buy at these levels and easily overcomes all the pessimism and profit taking thrown at it.
Unsustainable bounces only last a few days before collapsing under their own weight. Holding these levels through Wednesday is more than a few days and demonstrates ample demand and willingness of investors to buy these levels. I’m still wary of this market and a breakdown over the next twenty-four hours is most likely the end of this run.
No one can predict the future and we must trade the market we are given. There are plenty of reasons for this market to top here, but there are just as many for it to continue. I’ve been bearish on this market for a month and the market keeps holding up. I have to respect that. It is okay to be wrong, it is fatal to stay wrong.
Retesting 1540 over the next few days is likely the end of this rally, but holding strong through Wednesday means new highs are likely. But none of this changes the fact the spring is coiled to the downside and holders need to be disciplined in their use of stops to get them out ahead of trouble.
Markets refresh one of two ways, the most common and efficient is through a sharp pullback. This shakes out weak holders and clears the way a move higher. But the second way is a long sideways grind that bores traders out of their positions. They achieve the same result, but in different ways and over different time frames. The longer the sideways trade, the greater the upside potential.
We are just a few hours away from AAPL’s earnings. Will this finally be the fundamental catalyst that turns the stock around? Will we get the buybacks and dividend increases everyone is hoping for? Or will we finally see disappointing iPhone5 numbers that justify the selloff from September’s highs? The market is better at predicting the news than the news is at predicting the market. We will soon find out if the market was ahead of the news on this one.
One last selloff will make an interesting buying opportunity, but remember this is now a trading stock, not a long-term hold. AAPL no longer has a monopoly on the personal device market, exploding sales, and eye-popping margins. AAPL is competing in a completely different market than two years ago and no matter what anyone else says, AAPL’s entire fortune is tied to iPhone sales. Without hardware sales, there is no iTines, App Store, or any other residual income. These additional services are not diversification, but further reliance on hardware sales.
NFLX exploded this morning and continues humiliating bears. These things go further and longer than anyone expects. We trade stocks, not valuations so don’t get in the way of this freight train.
Plan your trade; trade your plan
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.