PM: Taking a break

By Jani Ziedins | End of Day Analysis

May 09
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks gave up a little ground, but are still above Tuesday’s close.  We cannot go up every day and after covering 100-points in three weeks, the market is entitled to some well-earned rest.  Volume was average, but less than yesterday, showing the selling was rational and orderly.

MARKET SENTIMENT
Nothing like a few point selloff to get bears excited again.  Just like a broken clock, they will be right at some point.  As nimble traders we have to decide if this is finally their moment.  Predictions of this market’s demise are clearly premature since we are only half a percent from all-time highs.

TRADING OPPORTUNITIES
Expected Outcome:
While this might not be the top, we could see a modest dip after the impressive streak of up days.  The new level of support is 1600 and any bounce off this level is buyable, although eager buyers might not allow the market to fall to 1600 before stepping in.

Alternate Outcome:
At some point bears will be right and we get closer with each passing day.  We are just shy of all-time highs and it is clearly premature to call for a top, but we must stay vigilant and stick to our profit targets, trailing-stops, and stop-losses.   This market will top when everyone expects it to continue higher and our rules will prevent us from being seduced into giving back all of our hard-earned profits.

Trading Plan:
1600 is the level to watch.  As long as we remain above that, the rally is alive and kicking.  A dip to 1600 that finds support is buyable.  Breaking 1600 means we need to be more cautious and locking in gains is good defense.  The 50dma is racing higher with each passing day and it will reach at least 1580 by the time the market dips to it.  Failing to hold the 50dma is another concern and expect stop-loss selling and shorting to pressure the market back down to 1540.  At that point the viability of the rally is finally in jeopardy.  Until then the wind is at our back and stick with the rally.

LNKD daily at end of day

LNKD daily at end of day

INDIVIDUAL STOCKS
AAPL finished at the lows of the day, but held $450.  Much like the broad market, AAPL earned a break and today’s selling was on light volume.  The stock is acting well and this is the longest streak above the 50dma in well over half a year.  But don’t lose sight of the fact this stock is in the middle of a brutal correction and half a dozen similar bounces fizzle and collapsed lower.  The question any bull needs to answer is who will buy this stock here?  This was the most widely held stock and many were overweight AAPL near the highs.  The selloff humiliated and humbled many investors and they are far less likely to embrace it with such reckless abandon any time soon.  The dividend boost and share buyback make it attractive to income investors, but these are highly price sensitive investors and will not bid the stock back up to old highs.

NFLX bounced near the $200 level on strong volume.  There are no signs this stock is ready to breakdown and bears are in store for another round of humiliation.

LNKD slipped under a rapidly rising 50dma.  While it would be nice to see the stock bounce off this moving average, holding up here is not bad.  Selling has been contained and buyers are willing to step in at these levels.  If the stock breaks above the 50dma on volume, it is buyable, but expect a wild ride and take profits when it feel like the stock is invincible.

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.