PM: Is the rally dead?

PM Update

MARKET BEHAVIOR
Stocks dipped nearly one percent on average volume.  Since early March the market has been range bound with each breakout and selloff stalling near the highs and lows.  Today’s selloff short of 1600 continues that pattern.

MARKET SENTIMENT
While today’s move lower spooked many traders, we are still within one percent of all-time highs and it is premature to write this rally’s obituary.  Over the last eight-weeks the market always struggled near highs, but no matter how many people piled on the short bandwagon, buyers always stepped in to support it after a modest selloff.  Is there a legitimate reason this weakness will end differently?

People blame today’s weakness on economic data, comments from the Fed, or something else, but the truth is big money doesn’t like buying new highs.  We’ve seen this play out time and time again over the last couple months as buying stalls near the highs, but these same traders gladly rush in and support the market a few points lower.  This cycle of buying dips and shunning highs is what keeps us rangebound.

Many bears are excited this is finally the selloff they’ve been waiting for, and they could be right, but is there new evidence this dip will end any differently than all the other failed selloffs since last November?  Cynics point to weak economic data, but this market rebounded from negative GDP headlines, hiring numbers that missed by six-figures, and all the noise out of Europe.  If the market ignored all of that, why is it suddenly worried about today’s headlines?

Markets move exclusively on supply and demand.  Institutional buying dries up near the highs and picks up near the lows.  Until we see a material violation of this pattern, stick with it.  This market will eventually top on lack of demand, but support over the last four months shows there is still an ample demand ta these levels.   The current crop of recent sellers will power the next move higher when they buy back in.

TRADING OPPORTUNITIES
Expected Outcome:
Today’s dip doesn’t change anything and was largely expected by anyone who’s paying attention.  We didn’t know today specifically would be the day, but we new it was coming and now that it’s here we shouldn’t be scared of it.  Look for support near 1570 and the rally is not in serious trouble until we break through 1540.

Alternate Outcome:
Every change in direction starts with one day.  Is today that day?  Probably not, but we need to watch closely just in case.  It is safest to assume this is just another swing within the trading range because trends are more likely to continue than reverse.  I will only become concerned if we close under 1570 and bearish if we break the 50dma.  Anything else is a buying opportunity.

Trading Plan:
Stick with what is working.  While scary, today’s dip is nothing new.  Watch for buyers to support this market above 1570.  Anyone looking to get in the market can use this weakness as a buying opportunity with a stop under 1570.  If we cannot hold 1570, the next level we will test is the 50dma.  Failing that means the widely expected selloff is finally here.

INDIVIDUAL STOCKS
AAPL took a breather with the rest of the market.  We are still above the 50dma and a bull can continue holding, but keep the stock on a tight leash and sell if we break the 50dma.  Look for overhead resistance near $470 and take profits before then.  There are a lot of unhappy AAPL shareholders looking to get out at break-even  so expect substantial selling pressure as the stock moves higher.  I remain wary of this rebound and think the stock needs one last flush lower to chase off the last of the hopeful, but that is just my opinion and as long as we hold the 50dma, bulls can continue ignoring me.

AMZN had a rough day and failed to hold the 200dma for the first time in over a year.  This is a big change in personality and signals a lack of support from bulls.  This is a decent short entry with a stop above the 200dma.  Expect volatility in a move lower and take profits after strong moves and reshort the inevitable bounce.

I’ll write about UA tomorrow.  Leave comments with other stocks you want me to look at.

Plan your trade; trade your plan