AM: The chase continues

By Jani Ziedins | Intraday Analysis

May 20
S&P500 daily at 1:46 EDT

S&P500 daily at 1:46 EDT

AM Update

MARKET BEHAVIOR
What cannot go any higher keeps going higher as we broke through 1670 in early trade.  The market finished in the red just four times in the last 21-trading sessions.

MARKET SENTIMENT
These things go longer and further than anyone thinks possible and is exactly what happened here.  Everyone is afraid to touch this market, yet it keeps going higher.  It defies all conventional logic, but it is a mistake applying common sense to this, or any, market.  If intuition worked, anyone could make a million dollars doing this and we already know that’s not the case.

The problem with commons sense and conventional wisdom is it is already priced in.  When everyone expects one thing, most often the opposite happens.  This isn’t because the market is irrational or vindictive, but because how everyone is already positioned.  If everyone is afraid of this market, they are already out, meaning all the selling is behind us.  When the selling dries up, supply becomes tight and there is nowhere to go but higher, often on light volume.

Do not mistake price for sentiment.  Never assume high prices mean overly-bullish and low prices mean overly-bearish.  This market keeps going higher because it is overly-bearish and AAPL keeps falling because it is overly-bullish.  Price doesn’t matter, only what other people think.  Common sentiment is this market is dangerous and AAPL is a generational buy, but both have been the exact wrong call.  At some point this market will stall out and some day AAPL will stop falling, but they go further and longer than anyone thinks possible first.

TRADING OPPORTUNITIES
Expected Outcome:

Hard to argue with the market here.  It clearly wants to go higher in spite of everyone’s reservations and the most foolish thing is to get in its way.  Given the recent run from 1530 we need to be increasingly defensive.  Locking in gains after such a strong run is a perfectly legitimate decision.  We are in this game to make money and we can only do that by selling our winners.  Another strategy is moving up our trailing-stop and seeing how far this goes.  Clearly the chase is on and this strength could continue for days or weeks.

Alternate Outcome:
The rate of gains has accelerated and we broke the upper trend line, behaviors often seen prior to a top.  This rally will end like everyone that came before it, the only question is when.  Thinking about what the market should do is costing people a lot of money.  It doesn’t matter how far or how fast we came or what the economics or fundamentals are, this market wants to rally and anyone using these conventional measures has been dead wrong.  There is no reason we need to believe in this market, but we must wait for real signs of breaking down before we trade against the trend.

Trading Plan:
Start harvesting profits or move trailing-stops up to 1650.  It’s been a great ride, but we need to be ready for the inevitable counteraction to this strong move higher.  While these gains are nice, they cannot last forever.  The next move will either  consolidate recent gains, pullback to the lower trend line, or start a real correction.  We need to be ready for it, harvest our profits, and prepare for the next move.

GLD daily at 1:22 EDT

GLD daily at 1:22 EDT

INDIVIDUAL STOCKS
AAPL recovered the 50dma, leaving us wondering what is real, the breakdown or the rebound.  Buyers supporting the stock around $420 is encouraging, but we still have not seen a higher-high our of this stock since it peaked back in September.  Until then assume the down-trend is still intact.

GLD bounced off recent lows and much like AAPL we are left wondering which trend to trade, the long-established downtrend, or the weeks old rebound.  When in doubt stick with the larger trend.  Even if GLD is finding a bottom here, it sustained a lot of damage in the recent selloff and lost its halo of safety.  It will take a while before large groups of investors learn to trust this shiny metal again.

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.