AM: Another bad day for shorts

S&P500 daily at 2:46 EDT

AM Update

MARKET BEHAVIOR
Stocks gapped higher at the open following Bernanke’s accommodative comments Wednesday evening.  We broke into territory not seen since early May and sit 1% shy of all-time highs.

MARKET SENTIMENT
Hope, fear, and opportunity.  That was the title of my evening post on June 20th.  That was one extreme, and today is approaching the other as we rally 100-points from those lows a few weeks ago.

Some come to the markets to express their opinions, others are here to make money.  During choppy periods like this, those are mutually exclusive groups.  Anyone trading with an agenda and bias is getting slaughtered by this volatility.  Bulls who bought all-time highs were forced out in the recent pullback. Enthusiastic bears who jumped on the Tapering selloff  had their world turned upside down by this rebound.  It is always critical to identify the market’s phase (up, down, or sideways) because that determines our response to strength and weakness.  In directional markets we buy strength and sell weakness.  For sideways markets we switch gears to buying weakness and selling strength.

Bears are providing much of the lift as they run for cover, but not all shorts covered as some desperately cling to hope this gap will fizzle and close.  If we talk about the pain trade, ten-points higher will hurt bears far more than ten-points lower will zing bulls.  One group is at wit’s end and barely hanging on, the other is energized by recent strength.  While we can top at any moment, the pain trade favors a continuation higher.

Many assume the gap higher was driven by a surge of Johnny-come-latelys buying the QE trade, but I have my doubts.  This market came a long way and traders are notoriously fearful of heights and shy away from breakouts.  More likely the gap was driven by holders renewed confidence and resulting reluctance to sell.  Shorts under pressure to cover had to offer a premium prices to free up those shares they desperately need.  While these two scenarios produce the same result, the motivations behind the scenes tell us a lot about the sustainability of the move.  This morning StockTwits traders were suspicious of the gap.  Ironically enough, bears were the cocky ones, doubling their shorts on this obviously unsustainable surge higher. Bulls were far more quiet, wondering if they should lock-in profits before the gap fills.  The impressive thing is the market digested all this early profit-taking and averaging-up by shorts with hardly more than a 0.1% decline from the opening highs.  Holding strong in the face of this early selling bodes well for more near-term upside.

TRADING OPPORTUNITIES
Expected Outcome:
Clearly the selloff is dead as we blew past last month’s Tapering collapse and avoided making a new bearish lower-high.  While I think the Summer trading range continues, holding the gap’s gains through the day indicates there is more upside left in this move before it stalls.  I believe in the pain trade and look for the market to turn up the heat on bears desperately hanging on.

Alternate Outcome:
While this rebound is not working as planned for bears, continued strength and new all-time highs could actually set up a bearish double-top.  Markets cannot go up forever and this one will top just like everyone before it.  The key to counter-trend trading is patience and waiting for the perfect entry.  Impulsively shorting this gap is nothing more than picking a top and is never a high probability trade.

Trading Plan:
Proactive traders can sell strength take profits anytime over the next couple days.  Any bulls betting on a continuation should at least move up their stops to 1655 to protect recent gains.  Shorts should not throw good money after bad and stay out of this market until this upward momentum stalls.  Anyone on the sidelines should stay there and wait for the next trade, the best way to lose money is chase stocks in a choppy market.

TSLA daily at 2:46 EDT

INDIVIDUAL STOCKS
AAPL’s bounce continues but it is approaching the 50dma, which will likely provide overhead resistance.  At this point it is too late to buy the bounce and early to short the strength.  Wait to see how the stock responds to the 50dma and buy the break above or short bumping its head on it.

TSLA keeps making new highs in spite of all the calls of it being overpriced.  While the bears might eventually be proven right, they are clearly early and in the markets early is the same thing as wrong.  While I see more upside before this momentum trade fizzles, anyone calling $300 has been drinking too much of Musk’s kool-aid.

BBRY continues struggling as the value investors don’t see anything that interests them.  When a stock is propped up on nothing more than hope from the desperate, what is cheap usually keeps getting cheaper.

Plan your trade; trade your plan