The rebound is taking a break as we trade sideways just shy of 1580.
Bears need the market to breakdown to validate their thesis we are over-bought and running out of buyers. Bulls on the other hand need to prove buying won’t stall out again at the upper end of the trading range. Finally swing-traders expect us to stay in the trading range and are preparing to take profits. Right now that puts the swing-traders on the bear’s side, making it two-on-one. If the rally can continue to new highs against bear shorting and swing-trader profit taking, it shows there is still a healthy supply of buyers willing to step in at these levels. Many expected last week’s selloff to be the end of the rally and sold in anticipation. Many of these sellers are buying back in after the market held up and are the ones pushing us higher.
Holding the bounce for a fourth day shows buyers are still willing to own this market and the recent rebound was more than just a flurry of dip buying. If we see a material selloff over the next day or two all bets are off, but so far the market acts like it wants to go higher. How much higher is up for debate. Maybe we rally and bump our head on 1600 again before falling back into the trading range. Maybe there has been enough consolidation to sustain an upside breakout.
While I still don’t feel comfortable with this market, it looks like it wants to go higher and we have to respect that even if we chose not to buy it. The thing bulls have to be wary of is the higher we go, the harder we fall. Every rally pulls back at some point and the longer we put off taking our medicine, the worse it will taste.
I’m still waiting for a market breakdown. A weak close would breath life back into the bear thesis, but I have to admit continued strength is not what I expected and thus invalidates a large part of my bearish analysis. This market will top at some point and we simply need to wait for it. These things go further and longer than most expect so resist the temptation to jump in front of this rally.
Trading Plan: Closing above 1580 today shows bulls are still in control. Failing to hold 1570 shows bears and swing-traders are weighing on this market, but the real selloff won’t begin in earnest until we set a material lower-low under 1540.
AAPL is down modestly after earnings in an anticlimax ending to a widely anticipated event. We heard a little for bulls with increased cash distributions, but bears can point to declining margins and earnings. A clear lack of a win for bulls keeps bears in control and expect lower prices as one more catalyst came and went without bring the stock back to life. Bulls finally got their cash hoard event and the stock is unmoved. The only thing left is a radical new product and everything points to incremental updates to the iPhone5 and other existing products this year. I expect the stock will print $350 over the next eight weeks as formerly hopeful holders become demoralized and abandon their once cherished AAPL.
NFLX is holding yesterday’s breakaway following blowout earnings. Few believe in this company, yet it keeps beating expectations and continues rallying on the backs of shorts. We could see the stock retreat to $200 but this is a buyable dip and the direction remains higher.
Plan your trade; trade your plan
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.