AM: Obvious top isn’t so obvious

By Jani Ziedins | Intraday Analysis

May 02
S&P500 daily at 1:52 EDT

S&P500 daily at 1:52 EDT

AM Update

MARKET BEHAVIOR
Stockes recovered all of yesterday’s selloff.

MARKET SENTIMENT
We were down yesterday on news and up today on news.  What gives with this bi-polar behavior?  The market has a reputation for being irrational, but stocks always move for a reason and it only appears irrational when we don’t understand the underlying drivers.  The most important concept to grasp is prices only move on supply and demand.  Nothing more, nothing less.  People are confused when the market reacts the ‘wrong’ way to a headline and complain the market is being irrational.  The reason the market didn’t react ‘logically’ is the headline didn’t change anyone’s mind.  Either the news was already expected, or it simply reinforced what people already thought.  When people don’t change their mind, there is no new buying and selling, thus no reaction in the markets.  When we look at what people think and how they are already positioned, the lack of a move makes perfect sense.

Applying this to the current market, big money managers are reluctant to buy new highs, but they want to get in this market and are buying every dip.  When the market makes new highs buying stalls.  After pulling back a few points buyers rush in and support the market.  This has absolutely nothing to do with recent headlines and is simply the accumulation strategies employed by large money managers.  Anyone trading the news is having a bad time because the market is not responding to the news.

TRADING OPPORTUNITIES
Expected Outcome:

The yesterday’s obvious selloff is less obvious today as buyers continue supporting this market.  Buying typically dries up quickly around tops and the way we are holding up demonstrates buyers are alive and well.

There is nothing wrong with feeling uncomfortable with and sitting this one out, but it is extremely risky to short this market.  Either stick with the trend or sit out until we have more concrete evidence the rally is stalling.

Alternate Outcome:
Every rally ends and so will this one.  While the trend is higher, we need to remain vigilant and watch for cracks in the foundation.  Pullbacks like yesterday are normal and expected.  Resist the temptation to jump on the short bandwagon prematurely, wait for real signs of slacking demand.  Most likely this will show up as lower-lows and lower- highs.  With all the bearish headlines this market’s brushed off, don’t expect a bad headline to take it down. We are looking for stalling demand.

Trading Plan:
Keep doing what is working and this market is buyable until we break 1570.  A stop-loss/trailing-stop at 1570 is a decent level that sits a little under previous support in the mid-1570s.  Even if our stop gets taken out, we need to watch for another rebound and buy back in.  Just because we sell doesn’t mean we have to stay out.  The 50dma is climbing higher and near 1560 and is another key level of support to watch.  The last line of support for the rally is 1540, after that the expected correction is taking hold.

AAPL daily at 1:24 EDT

AAPL daily at 1:24 EDT

INDIVIDUAL STOCKS
AAPL recovered all of yesterday’s dip and is just shy of $450.  To maintain these levels bulls need a wider group of buyers to come in and support the stock.  This is the seventh bounce in this extended downtrend.  Every previous time the dip buying fizzled and the selling resumed.  The stock will eventually find a bottom, the question is if this is the real one or just another head fake?    AAPL cheerleaders are out of hibernation, showing there is still a lot of hope left in this stock.  Buyers can hold it here, but keep it on a short leash and don’t keep holing if it breaks under the 50dma.

Yesterday everyone was talking about the bond offering and it was a great business decision on their part, but I am dumbfounded by the people willing to lend AAPL billions of dollars for 30-years at near Treasury rates.  Boy do people have short memories.  How many tech companies lasted this long?  Back in the 80’s Apple was one of the hottest and most innovative tech companies between its Apple ][ and Macintosh computers.    Yet the company was on the verge of bankruptcy ten years later and needed Bill Gates and MSFT to throw it a lifeline.  Like I said, good for AAPL for taking the easy money, but these debt buyers need to have their head examined.

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.