AM: Still going

By Jani Ziedins | Intraday Analysis

May 08
S&P500 daily at 3:26 EDT

S&P500 daily at 3:26 EDT

AM Update

MARKET BEHAVIOR
The streak of up-days continues into its sixth session, making it twelve out of the last fourteen.

MARKET SENTIMENT
Three-weeks ago the market was on the verge of collapsing into the widely expected correction,  yet here we stand nearly 100-points higher.  Many of the smartest minds said we were due for a pullback after such a strong first quarter.  That is a perfect example of how far brains will get us in the market.  This is a game where the smartest people in the world are trying to take money from each other.  We cannot beat the market by out-thinking it, but we can succeed by changing our perception.

Everyone looks at fundamentals, headlines, and technical levels.  There is money to be made with these tools, but is it enough to be worthwhile?  Lets imagine there is a $20 bill lying on the street and I am the only one who sees it.  That’s twenty dollars for me.  If we are together and both see it, we split it in half.  If there are four of us, we each get five dollars.  Taking it to the extreme,  if there are 2,000 of us, then we each get one cent.  At that point our windfall is hardly worth the effort.  This is exactly what happens in the markets when too many people trade-off the same information.  These profit opportunities quickly evaporate as it is divided among so many like-minded traders it is hardly worth the effort.

We are not smarter than the brainiacs on Wall Street, we don’t have an army of analysts, CEOs of major companies won’t return our phone calls, and we are not part of the good old boy network.  There is no way we can compete with the big boys at their game, so we need to come up with our own.  “Think Different” is a famous Apple ad campaign, but it fits perfectly what we are trying to do.  To succeed in the markets we need to see the things everyone else misses.

Sustainable success for the average investor does not come from predicting the news, but understanding what everyone else thinks, how they are positioned, and what moves the crowd can make.  As complex as people want to make this with fundamental and technical analysis, it is really simple.  When people are excited to buy prices, go up; when they are excited to sell, they go down.  To win at this game all we need to figure out when people will buy and when they will sell.

When everyone expected the market to collapse back in mid-April, they sold ahead of time.  Who is going to keep holding stocks if they are convinced the market is headed lower?  If all the pessimists were out, it means little selling pressure remained in the market.  And more than just that, when everyone is bearish and already out of the market, there is just one option left to them, buy stocks.  When everyone is bearish, we have this huge pool of potential buyers ready to bid prices up when they change their mind buy back in.  And this is why we jumped 100-points instead of crashing 100.  It is not because the world is a better place, but because everyone sold in April and there was nowhere left to go but higher.

TRADING OPPORTUNITIES
Expected Outcome:
Stick with what is working.  Recent breakouts stalled shortly after making new highs, but this one keeps marching higher.  I’m sure we will see a modest dip, but don’t let 20-points of selling spook us.  This is a decent place to move our stop-loss up to protect recent gains.  What was resistance at 1600 should act as support.  We should leave ourselves a little buffer so we don’t get shaken out in a temporary dip under support.  Something between 1595 and 1575 is a decent place to put a stop depending on our risk tolerance and belief in this rally.

Alternate Outcome:
The higher they climb, the harder they fall.  Almost all the pessimists are right, just a little early, but in a game where timing is everything, early is the same thing as wrong.  While we stick with the trend, we need to watch for signs buying is drying up.  Every rally comes to an end and so will this one.  Stay vigilant when everyone else becomes complacent.

Trading Plan:
Move our stops up and stick with is rally as long as we keep making higher-highs, higher lows, and hold above the 50dma.

INDIVIDUAL STOCKS
AAPL is still hanging in there and just a few dollars shy of its first higher-high in over half a year.  Stick with what is working, but expect a pullback to the 50dma over the next couple weeks when dip-buying slows down.  As long as big money steps in and accumulates shares near $440, the stock will find support.  But if big money is no longer interested in being overweight AAPL, the stocks will break this widely followed level and likely trigger a wave of stop-loss selling and shorting.

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.