AM: Another short squeeze

By Jani Ziedins | Intraday Analysis

May 28
S&P500 daily at 1:17 EDT

S&P500 daily at 1:17 EDT

AM Update

MARKET BEHAVIOR
The market gapped higher at the open and continued up to 1674 before pulling back by midday.

MARKET SENTIMENT
Another obvious top ends in a short-squeeze.  When everyone says “this is it”, we know it isn’t.  The selloff stalling Thursday and Friday showed the next move was higher and a time for shorts to take profits, not initiate new shorts.  Wednesday’s frantic plunge on recycled headlines of QE ending never had a chance.  What everyone knows and is talking about is already priced in.  Once the initial knee-jerk selling ran its course, supply dried up, laying the foundation for today’s bounce.  This market will top at some point, but it won’t be for any of the reasons people are constantly talking about.

TRADING OPPORTUNITIES
Expected Outcome:

Most of the nervous jumped ship last week and shorts piled on the weakness.  All that selling took the excess supply out of the market.  Buyers stepping in front of the volatility demonstrated comfort holding here and are less likely to sell modest weakness or headline fear-mongering.  Their confidence and resolve will return stability to the market.  The selloff stalling on Thursday and Friday was the sign we could buy the dip and was a poor place to add shorts.

Alternate Outcome:
Today’s bounce could be nothing more than short-lived dip-buying prior to the next leg lower.  While it seems less likely, we must defend against it.  It is okay to be wrong, but it is fatal to stay wrong.  We found support at 1635 and breaking this level shows the selling is not done.  Every rally ends and so will this one.  Maybe we will see it coming, or maybe it will catch us by surprise, but stops will protect us either way.

Trading Plan:
Owning the market here with a stop under the recent dip to 1635 is reasonable trade given how the market is acting, but this rally is elderly and we need to watch for stalling.  Failing to make new highs shows buying is drying up and that could finally lead to the widely expected selloff.

INDIVIDUAL STOCKS
AAPL is down on a day when the market is higher, but the silver lining is it is still holding above the 50dma.  The other notable technical development is the 50dma is heading higher for the first time since the selloff began, showing near-term prices have stabilized around the $430 level.  Technical traders have stop-losses under the 50dma and $420.  Selling could pick up if we break either of these levels, but so far the stock remains a cautious buy.

LNKD and NFLX are struggling amid the market uncertainty.  Speculative stocks react to volatility and weakness far more than the market averages.  The rewards are huge, but so are the risks.  Everyone wants to hit home runs and hold the next monster stock for a 5x gains, but realistically we are better off taking profits after strong runs.

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.