PM: Bears run for cover

By Jani Ziedins | Intraday Analysis

May 03
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks decisively broke resistance at 1600 and closed near 1615 after better than expected employment numbers.  Volume was average, but better than the lethargic levels over the last couple months.

MARKET SENTIMENT
This market continues surprising bulls and bears alike, but that is what makes it work.  Obviously bears are feeling the heat, but even bulls expecting near-term weakness are getting left behind.  Anyone thinking this market’s come a long way and is due for a rest took profits and is regretting this decision.  These are the new buyers chasing this market higher.

Fundamentals and technicals don’t matter, only supply and demand.  Understanding what people think and how they are positioned is the only way to make sense of this market.  Bears and cautious profit-takers sold during the two-months of sideways trade.  But even with all this selling weighing on the market, we held up.  That alone is bullish, but all those sellers are the next buyers, fueling this rally to new heights.  It doesn’t matter what the fundamentals are, just how other traders are positioned.  With most of the weak hands already out the market, there is nowhere to go but higher.  And that is exactly what we’ve done.  The irrational market makes a lot more sense when we understand how other traders are positioned.

TRADING OPPORTUNITIES
Expected Outcome:
While we broke out to new highs, I’m reluctant to chase the market.  Over the last couple of months, buying dried up near the highs as big money waits for the dip.  Much of today’s buying was short-squeeze driven, but expect a 15-20 point pullback in coming days where big money will buy in.  This doesn’t have to happen, but it fits the current market’s personality of notching new highs and then consolidating those gains.  Everything looks great as long as we stay above support at 1580 and stick with what is working.

Alternate Outcome:
This upside breakout caught a lot of people off guard and could trigger a flurry of chasing.  If we witness a series of accelerating gains, this could be the last of the buyers rushing in before the market exhausts demand and noses over.  Slow and steady gains are sustainable, racing ahead is not.  As for the widely expected pullback, don’t doubt this rally until we break 1580 and fail to hold the 50dma.  This market will top like everyone before it, but look for a series of lower-highs and lower-lows signaling buying is drying up.  Don’t get in front of this market simply because it’s gone too-far, too-fast.

INDIVIDUAL STOCKS
AAPL held the 50dma for the fourth consecutive day, something we haven’t seen in over seven months.  Apple is a great company with popular, high-margin products.  The viability of the company was never in question so  obviously the stock will find a bottom at some point.  Many are hoping this is the bottom and a $90 point rally over a couple of weeks is a leading contender for that bounce.  But any bull needs to be careful because we’ve seen six similar bounces that failed to stop the slide.  This could be the real one, but set a hard stop-loss to keep you from riding another leg lower.  A simple stop-loss could have saved a lot of people  a mountain of money through this slide.  What is cheap often gets cheaper.

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.