AM: Bounce continues

AM Update

MARKET BEHAVIOR
The bounce continues for a second day as the market pushes back into the middle of the 1600/1700 range.

MARKET SENTIMENT
The headline event was the monthly employment report.  175k new jobs appears just right, not too hot to threaten QE and not too cool to signal economic weakness, or at least that is how the talking heads are spinning it.  Truth is we are up again because we ran out of sellers yesterday.  The market moves on nothing more than supply and demand.  Tight supply equals higher prices.

It is another painful day for aggressive and greedy shorts who failed to lock-in profits.  Many of the late shorts are forced to cover at a loss and their buying is a big part of today’s lift.  The flashing neon warning sign for bears was bouncing after breaking 1600 yesterday.  When the violation of support failed to trigger an avalanche of stop-loss selling, that was our signal we were running out of sellers.  If a bear’s investment thesis predicted a swift drop after breaking support, not seeing that move was a sign something was wrong and it was time to lock-in profits.

But that was then and this is now.  Where are the markets headed?  Is today’s bounce a bull-trap or a buying opportunity?  All the anxiety surrounding recent weakness flushed nervous holders out, replacing them with confident traders willing to buy the fear.  As anxious and paranoid as traders feel in the aftermath, a 5% pullback is very therapeutic and often all the market needs to refresh itself.

The crowd remains bearish here, meaning the contrarian trade is still believing in this market.  This morning there was a Yahoo Finance poll prior to the jobs numbers showing only 24% believe the economy is getting better.  It shouldn’t surprise anyone the market bounced again.  When everyone is constantly talking about how “overly bullish” the market is, the crowd is bearish, not bullish, and the contrarian trade is sticking with the trend.

TRADING OPPORTUNITIES
Expected Outcome:
The market can do one of three things; up, down, or sideways.  The pervasive bearishness and recent flush exhausted the supply of sellers and the bounce killed any downside momentum, meaning a crash is unlikely.  The market had a huge run in the first five months of this year and continuing that rate of gains seems unlikely.  The only thing left is trading sideways.  Recent trade likely set boundaries for the range between 1600 and 1700.  Sell strength and buy weakness.  Let profits grow to a worthwhile amount but don’t wait too long because they will likely disappear a few days later.

Alternate Outcome:
If we expect a trading range, the alternate is a directional move.  The outside limits of this range appear to be 1598 and 1687, but for simplicity’s sake lets call it 1600 to 1700.  The biggest threat is a near-term pullback to 1600 and likely means the rally is in trouble.  Breaking out to the upside means the rally is not done, but up-legs are slower and more deliberate than selloffs so we have plenty of time to jump on the rally bandwagon if that is the direction it goes.

Trading Plan:
Stay long until we get to the upper half of the trading range and then follow with a trailing stop.  Shorts should lock in any profits if they have some left.  Buy weakness and sell strength until we break out of the 1600/1700 range.  Swing trading a range is hard because we don’t know exactly what strength and weakness is.  Rather than get greedy trying to capture all of a move, build up some profits over a couple of days, lock them in, and look for the next trade.  More experienced investors can short or sell options.

INDIVIDUAL STOCKS
In addition to the exciting new square icons for iOS7, we can look forward to iRadio.  Lets hope it will drive new phone sales like Ping, iCloud, and Apple Maps.  No doubt iRadio will add some incremental revenue from existing users, but AAPL doesn’t have a revenue problem, they have a market share problem.   Without some new, must have feature, they will continue losing market share to Android.  People already have a Pandora account and all their friends are on Spotify, so I don’t see where iRadio fits in and it is nothing more than a late, platform dependent, me-too product.  I’m sure most don’t even remember Ping, but that was Apple’s attempt at a social network built into iTunes.  It was a gigantic flop because it was late and didn’t provide anything new for users.  Unless iRado offers something that blows away Pandora and Spotify users, expect another iFizzle.

GLD is down again as the volatility continues.  There is no reason to hold gold here until it breaks and holds $140.  It no longer provides safety and stability for a portfolio and the widely expected hyper-inflation just isn’t happening.

TSLA is sending shorts running for cover…again.  Shorting this stock is a suicidal game, but if someone can’t help themselves, at least take profits quickly because invariably it will bounce.   This is a nice swing-trading stock for nimble, fast, and courageous day-traders, but everyone else should watch with fascination from the sidelines.

Plan your trade; trade your plan