PM: Dip buyers come to the rescue

By Jani Ziedins | Intraday Analysis

Apr 19
S&P500 daily at 1:26 EDT

S&P500 daily at 1:26 EDT

AM Update

MARKET BEHAVIOR
Stocks bounced and recovered the 50dma by midday.

MARKET SENTIMENT
Bulls and longs are breathing a sigh of relief.  The rebound they knew was coming is finally here.  Meanwhile bears and shorts are left scratching their head because they thought for sure the market was breaking down.

Today’s bounce doesn’t mean the rally is back on just yet.  Head-and-shoulder patterns form a right shoulder with one last bounce at support before finally breaking down.  Trade up to 1570 would remain consistent with a head-and-shoulders reversal and it is premature at this point to confidently say the rally is continuing.  Habits are hard to break and many trades made a lot of money buying dips.  Today’s support is an example of this reflex, but are there enough buyers driving this move to reclaim recent highs?

It is easy to find both bulls and bears actively promoting their point of view, showing the sides are equally matched.  And this shows up in the sideways chop we’ve seen.  But this is a change from the previously negatively skewed commentary early in the rally.  Bulls are finally finding their voice and becoming more vocal and confident, a warning sign for any contrarian trader.  Markets rally in the face of fear and without a doubt participants are far less fearful than a couple of months ago.

MARKET BEHAVIOR
Expected Outcome:

Today’s bounce at support is fairly typical in a topping market as buyers keep going back to what worked so well for them.  But eventually dip buyers run out of money and the expected rebound fails to rebound.  Another violation of 1540 shows bulls no longer have the money necessary to prop up this market and the next move is lower.

This bounce could last for a couple more days, but it is a selling opportunity not a buying one.  Dip buying is well beyond obvious and bulls are better off sitting on their hands than chasing one last rebound.

Alternate Outcome:
The head-and-shoulders pattern theory loses credibility if we trade above 1570 and is dead if we make a new high.  Right shoulders are also typically short in duration, so holding support for an extended period invalidates the H&S patter.  If this market won’t breakdown, the we must assume the next move is higher.  My bias is for a pullback, but we must always look for clues to invalidate our current thesis so we don’t get stuck on the wrong side of the market.  It is okay to be wrong, it is suicidal to stay wrong.

GLD daily at 1:26 EDT

GLD daily at 1:26 EDT

INDIVIDUAL STOCKS
AAPL tried to reclaim $400 but bumped its head and is back in the $390s.  It’s been a long time since AAPL traded in the $300s and shows buyers are not interested in this stock no matter how cheap it gets.  The biggest problem for AAPL is they don’t have a “moat” protecting their core products from competition.  Every technology company is tinkering in the smart phone and tablet space.  While most don’t have the cool factor, the thing to remember is anything that is cool eventually becomes uncool.  Just ask anyone who bought bell bottom pants, avocado colored appliances, and red shag carpeting.  The more stylish something is, the more out of style it becomes when the crowd moves on to the next cool thing.  Without a doubt AAPL remains popular with upper-middle class suburban soccer moms, but is that user group large enough to justify a half-trillion dollar market cap?

GLD is up for the fourth day in a row, but this is a better selling opportunity than buying one.  The recent plunge eliminated gold from consideration as a safe place to park wealth and now it is simply a playground for speculators.  If you must trade this, sell strength and buy weakness.  Look for a retest of $130 in coming weeks as dip buyers are flushed out when the price pulls back.  This will be a volatile trade for a while and value investors should wait a bit longer.  Remember, buy after the blood in the street has dried, not while it is still flowing.

Plan your trade; trade your plan

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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.

fleischut April 19, 2013

Don’t overlook possible double top. That’s my expected scenario. There’s plenty of liquidity to push this to around 1605 before it rolls over — just to really mess with traders’ heads.

    Jani Ziedins April 19, 2013

    That’s another good possibility. Without a doubt this thing will end at some point, the harder thing is figuring out how and when. After the fact it will be obvious, but to make money we need to see it before everyone else.

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