AM: Support continues

AM Update

MARKET BEHAVIOR
Stocks are up, recovering all of Friday’s losses and then some.  Support at the 50dma continues holding as the market put in a floor following May’s selloff.

MARKET SENTIMENT
A tough day for shorts as the obvious selloff fails to arrive on schedule.  The market bumped its head on 1649 last week and no doubt many shorts are using that prior peak as a stop-loss.  If we break above it, look for another wave of short-covering to fuel the next leg higher.

Trading against the trend is always a tough game and unfortunately many bears failed to lock-in profits when we pulled back to 1600.  The best trade of 2013 is assuming every dip will bounce and for anyone betting on the breakdown, its been a rough year.  When trading with the trend, we can let our bets ride, but we must be far more nimble when trading against it.

One of the most fascinating aspects of the market is both bull and bear can be right at the exact same moment as long as they both sell right.  In a volatile market like this, that means locking-in profits when we get them.  Of course the other edge to that sword is both can be wrong if they time their sales poorly by holding too long.  The best trade remains taking profits when we are most confident and initiating trades when we are most fearful.  It doesn’t always work, but it does well enough that the profits easily offset the losses.

The financial press claims this bounce is due to hope the Fed will reassure markets following recent uncertainty about the future of QE.  It is not a bad way to spin things, but the truth is those that feared QE ending abandoned ship over the last few weeks, selling to buyers far less concerned about it.  That self-selection left us with an ownership base less concerned with QE and is the real reason behind recent strength.  The market is not a unified entity, but a crowd that is constantly turning over.  If we flush out the fearful, then all we are left with is the confident.  Confident owners equal tight supply and tight supply equals higher prices.

TRADING OPPORTUNITIES
Expected Outcome:
There is little downside momentum left in the market as the recent tests of support failed to trigger wider selling.  Clearly holders are not afraid of a little weakness and their confidence keeps supply tight.  The pressure is on bears and look for the market to rally in the face of their pessimism.

Alternate Outcome:
This market will rollover when we least expect it and is why we must continue discussing the risks and not become complacent just because the market is moving our way.  Recent bounces off the 50dma and 1600 add weight to these levels.  If everyone is following these obvious levels, expect the crowd to rush for the exits on the same technical signals.

Trading Plan:
Continue betting on the bounce with a stop under the 50dma, but expect volatility to continue and take profits in the upper half of the 1600s.

INDIVIDUAL STOCKS
Yet another short-squeeze in NFLX as the stock gaps higher on content related news.  Finding support at the 50dma and bouncing in high volume creates a valid entry point with a stop under recent lows.  What cannot go any higher keeps going higher.

Not to be left out, AMZN is also challenging the upper end of a six-month consolidation.  A high-volume breakout is buyable, stalling makes an interesting swing trade back into the consolidation.

On the other side, the buy of the decade remains dead money as AAPL cannot breakaway from the 50dma, but following the massive selloff, we cannot complain about sideways.  Anyone betting on the stock’s recovery better be patient.

Plan your trade; trade your plan