PM: One point selloff

By Jani Ziedins | End of Day Analysis

May 20
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks failed to hold early gains and slipped a single point.  Volume was lower than recent days and this looks more like rest after a strong run than anything we should be concerned about.  We cannot go up every day and given the hot streak,  a one-point giveback is not a big deal.

MARKET SENTIMENT
The bounce that should have died in January continues setting all kinds of records.  It is hard to avoid commentary on how rare this rally’s performance is in historical context.  But that shows people are still looking for excuses to distrust this rally.  As long as suspicion remains high, look for the rally to continue.

The “sell in May” folks are running out of time and are 70-points in the hole.  Without a doubt we could give all that back in the next 10-days, but so far 2013’s “buy in May” is one for the record books.  But there is always next month.  Maybe it will be “Sell in June and go to the Moon”.  That sounds catchy.  Of course I better not joke about it lest people start repeating and believing in it.  Never forget we trade people, not calendars, rhymes, or Wall Street folklore.

TRADING OPPORTUNITIES
Expected Outcome:
Stay on the winning side of this market, but transition from offense to defense.  We are in this to make money and that is best done by locking in profits when everyone else is dreaming of bigger gains.  Either sell proactively or tighten up our trailing-stop to ensure we protect our hard-earned profits.  Too often I hear traders talk about profits like they are less valuable than initial investment.  The only reason we put ourselves through this brain damage is to capture profits, don’t let them slip away.

Alternate Outcome:
Every correction begins with one down-day.  While this might not be that day, we need to keep a lookout because that day is coming.  The eventual top will likely sneak up on us when everyone writes it off as another normal rest day following a hot streak.

Trading Plan:
Look for opportunities to lock-in profits, either by selling proactively, or using a trailing-stop.  We have major support back at 1600, but waiting that long would give back a big chunk of our profits.  Instead defend minor support under 1650.  We stand a greater chance at getting shaken out in a routine pullback by using a closer stop, but our main focus is shifting to defense after such a strong move.  We will shift back to profits when this move ends and we come across the next attractive setup.

TSLA daily at end of day

TSLA daily at end of day

INDIVIDUAL STOCKS
AAPL had a good day and recovered the 50dma.  Holding this level shows big money is potentially supporting this stock after many months of selling it as fast as they could.  But if we fail to hold the 50dma, it indicates this rebound is built on nothing more than the hope and prayers of stubborn bulls.  These diehards have not been able to defend the stock over the last $300 and will continue losing this battle if they don’t get help from deeper pocketed investors.

GLD had a huge rebound as this boring, safe, commodity is keeping conservative investors up at night.  The obvious short ended in a massive short-squeeze today.  The time to short was earlier in the move and the retest of $130 was the time to take profits.  Look for volatility to continue and the best trade remains buying weakness and selling strength.  For the time being the down-trend remains intact and look for dip-buyers to sell in droves when the stock breaks $130.

TSLA is hanging in there after the secondary offering.  Climax tops often end in a spike higher.  Holding these levels for a few days means the top might not be in and this is remains a dangerous, even suicidal short.  This thing will breakdown at some point, but as long a buyers keep buying the $80s, stay away.

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.