AM: We did it, the sequel

By Jani Ziedins | Intraday Analysis

Apr 10
S&P500 daily at 1:06 EDT

S&P500 daily at 1:06 EDT

AM Update
Who thought we could use all-time highs and weak hiring in the same sentence.  Right or wrong, trader’s faith in the Fed is unflappable.

MARKET BEHAVIOR
The markets cleared all-time highs by a wide margin as they pushed through 1585 in early trade.  This was the last major record for the SPX and now we can move past the hype and focus on what comes next.  Over four-days the market rallied 45-points from the post-employment low and finally broke above the recent consolidation.

MARKET SENTIMENT
When in doubt, stick with the trend and that is clearly the case here.  While calls for a top will eventually be right, they were obviously premature.  The question is where do we go from these new highs?

The all-time high is purely symbolic because few traders actually sat for five-years waiting to get their money back.  Support and resistance levels work because these are where large groups of traders bought or sold.  Moving above or below these areas changes losses into wins and wins into losses.  Support and resistance less than a year old are the strongest because traders are still in these positions.  Levels older than two years are far less meaningful because most traders have long since moved on.  Anyone who bought the October 2007 highs sold a long, long time ago and no one is selling today to get out break-even.

The strong move off of 1540 is largely fueled by lack of supply from confident holders and demand due to short covering.  We have not seen a fundamental catalyst over the last few days justifying this move.  The most recent major headline was unexpectedly weak hiring and the best bulls can come up with is weak employment keeps the printing pressing running at full speed.  Technically the market checked back to the 50dma, held support, and then broke above the trading range.  No matter what anything else indicates, we win and lose exclusively on price and the price keeps going higher.

TRADING OPPORTUNITIES

Expected Outcome:
Either this is the start of the next leg higher, or the last exhaustion surge before rolling over.  I remain skeptical of this market, but it is proving far more resilient than I expected.  At this stage most of the demand is artificially driven by short-covering and tight supply from confident holders.  To sustain the move we need to see constructive consolidation where a wider pool of investors are willing to step in and support these levels.  If this is an exhaustion surge, the market will roll over quickly in the vacuum of follow-on buying.  Anything short of a collapse over the next couple days shows this rally is sticking around, but just because prices are headed higher doesn’t mean we need to be long.  Sometimes the best trade is simply sitting on our hands and waiting for the next trade.

Alternate Outcome:
Where will the next buyer come from?  Shorts are scrambling for cover and their buying will dry up soon.  The next buyer is the recent profit-taker looking to get back in.  After that is the international trader looking for safety and security of the US markets given the instability in the rest of the world.  And finally the crowded treasury market will eventually rotate back into equities.  There is ample supply of buyers waiting to push this market higher, the only question is over what time frame?  Can new demand come in fast enough to overcome the market’s natural tendency to pullback?  We will soon find out.

The one thing we do have to watch for is the longer this market goes without a material pullback, the larger the pullback will be when it eventually happens.  We could soar for another quarter or two, but that will be on Icarus wings.

INDIVIDUAL STOCKS
On a day like today, virtually everything is higher, even lagging stocks and indexes are popping.  IWM, GOOG, AAPL, LNKD, and AMZN are all strongly higher.  The broad market is often credited with 50% of an individual stock’s move and today it is lifting all boats.  The notable exception is NFLX struggling to get into the green.

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.