PM: Buy the dip or short the bounce

By Jani Ziedins | End of Day Analysis

May 28
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks bounced after three-days of selling.  Volume was average, but respectable following a three-day weekend.

MARKET SENTIMENT
A large chunk of Tuesday’s buying was driven by short covering as aggressive bears were forced to buy stock when the market bounced.    Short covering climaxed mid-morning and we retreated from the daily highs when follow-on buying failed to materialize.  The rally is sustainable if buyers remain nervous and hesitant, but is in trouble if we can’t find buyers because everyone is already in.

I posted Yahoo Finance surveys before and for the most part they were overwhelmingly bearish.  Today’s survey is the first cautiously bullish one I’ve seen in a while.  It shows 42% are buying stocks, but the majority, 58%, remain wary of this market.  If we are concerned about overly bullish markets, we are not there yet, but the recent rally continues eroding doubt and fear.

Source: Yahoo Finance 5/28/2013

Source: Yahoo Finance 5/28/2013

Success doesn’t come from always being right, but recognizing and fixing mistakes early.  We can recover and even make money if we change sides soon after our original thesis proves invalid.  We lose a little initially, but after recognizing our mistake and updating our outlook, we start profiting from new information.  I grew cautious as we pushed to new highs in March and was bearish in April.  On April 18th when the market failed to break wide-open as expected, I was forced to throw my original thesis out the window because the bounce invalidated everything I believed.  It took a couple of days to work up the courage to buy the market in the 1570s, but that was the right call given the way the market was behaving.   It is okay to be wrong, but it is fatal to stay wrong.

TRADING OPPORTUNITIES
Expected Outcome:
Bears will use the retreat from the day’s highs to justify holding their shorts, but one thing is clear, downside momentum stalled and selling dried up.  We cannot sustain the rate of gains seen over the last few weeks indefinitely and a pause here is expected and healthy, not bearish.  Resist the seduction of  “too far, too fast” and learn to trust embrace an easy and highly profitable rally.

Alternate Outcome:
While the market looks good here, it is getting old and we need to prepare for the inevitable correction.  The higher these things go the harder they fall.  Signs we are running out of buyers is stalling short of recent highs and breaking support.  Until then stick with the rally.

Trading Plan:
As long as this market holds recent support at 1635 it remains buyable/holdable.  Shorter-term traders should use this as a trailing-stop.  More material support is back at 1600 and the 50dma.  Fail to hold either of these levels and the rally’s viability is in doubt.

TSLA at end of day

TSLA at end of day

INDIVIDUAL STOCKS
AAPL lost ground, but is still above $440 and the 50dma.  It struggles finding buyers willing to push the stock higher, but these same buyers are willing to step in and prevent a further slide.  Support here is half-full/half-empty for bulls.  On one hand the stock is attracting value buyers willing to put a floor under $440, on the other it is attracting value buyers unwilling to buy above $440.  The increased dividend opens the stock up to a wider pool of income investors, but these buyers are notoriously price sensitive and will not push the price up the way growth investors do.  There is room to swing-trade this name, but the days of easy buy-and-hold gains are behind us.

GLD is stuck in the lower $130s as the supply of dip-buyers is drying up and new lows seem likely.  Everyone who wants Gold already has some and it will be a challenge to attract new buyers at current levels.

TSLA  annihilated shorts yet again.  The market can stay irrational longer than we can remain solvent and that is clearly the case here.  Climax tops reverse quickly and the sideways trade over the last couple weeks showed the top was not in yet.  At this point there is no trade because the only thing crazier than buying it at these levels is shorting it.

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.