AM: Should we care about the Fed?

AM Update

MARKET BEHAVIOR
Stocks are higher, but retreated from an early assault on 1700.

MARKET SENTIMENT
Stocks stalled short of 1700 as buyers were unwilling to chase prices to new highs.  Some might claim this is a double top, but to be a real double top we need to exceed the previous high of 1699.  This triggers the last wave of breakout buying and short covering before demand dries up and we roll over.  Anyone waiting for a double-top should expect higher prices in coming days and reversing soon after the breakout makes an excellent shorting opportunity, but that is then and this is now.  Currently the market is holding up nicely and higher prices are in our future.  Where we go after breaking 1700 is still up for debate, but the market is certainly acting like new highs are on the to-do list.

As overly-bullish as everyone claims the market is, ironically enough, that is the majority opinion.  The masses remain pessimistic and fearful of a pullback in spite of, or because of the all-time highs.  In a Yahoo Finance poll, only 27% think the economy is improving.  That hardly qualifies as widespread optimism and bullishness.  Traders are notoriously afraid of heights and new highs frequently make traders nervous.

When it comes to contrarian investing, the mistake most people make is confusing price-action with sentiment.  When we are at all-time highs, most assume the market must be wildly overly-bullish, but unfortunately for these confused ‘contrarians’, the market’s been overly-bullish for the last 250-points.  What is high often keeps going higher because the crowd remains skeptical and those doubters provide fuel for higher prices.

Some claim one headline or another is responsible for a particular price move, but the reality is only buying and selling can do that.  Today we had a Fed statement promoting ‘modest growth’, a softening of their previous outlook.  These pieces of information only move markets if it causes people to change their mind, and as a result buy or sell stocks.  If it simply reinforces what people already believe, everyone keeps holding and the market continues doing what it was doing previously.  Today’s Fed statement isn’t going to change anyone’s mind and its impact will disappear as soon as news-driven traders take their lumps and move on.

TRADING OPPORTUNITIES
Expected Outcome:
Stick with what is working.  Most expect a pullback following the breathtaking rebound off June’s lows, but that expectation is what keeps us near all-time highs.  Those with a fear of heights locked-in profits weeks ago and most of that defensive selling is already behind us.  The current crop of holders are waiting for higher prices and their patience is keeping supply tight, making the path of least resistance higher.

The one head-fake to watch for is a quick whip under 1675, triggering a wave of stop-losses and sucking in short-sellers before bouncing back.  We must always sell when prices cross our stops, but that doesn’t prevent us from buying back in if the market rebounds.  Stay open-minded and trade the market without consideration to what we did or thought last week, yesterday, or this morning.

Alternate Outcome:
Traders remain cautious and wary, making a continuation more likely, but anything can take out the market’s legs at any time.  Many expect a pullback after too-far, too-fast, but this market clearly doesn’t care about gravity.  We will top, but it will not be because of something everyone is expecting and positioned for.  There is a hidden landmine lurking out there and it will catch us off guard.  That will finally be the catalyst that sends us lower.  Currently we are rallying as an overly bearish market warms to a gradually improving world, but inevitably we will be surprised by unexpected bad news.

Trading Plan:
Continue holding with a stop under 1675 and wait to see how the market responds to the breakout above 1700.  Quickly retreating under 1700 shows buying exhaustion and is shortable.  If previous resistance turns to support, we move up our stops and wait to see how much further this rally goes.  Obviously if we expect higher prices, this is a poor place to be short and it is best to admit defeat and take a small loss.

We remain in the summer chop.  The average trader can sit out this volatility and wait for a better risk/reward, likely coming this fall.

INDIVIDUAL STOCKS
AAPL is maintaining recent gains and is holdable as long as we stay above the 50dma.  There is not a fundamental catalyst justifying recent strength, but sentiment might have changed enough to finally put in a bottom.  If we break and hold $460, the next bogie is the 200dma and would be a nice place to take profits.

FB broke $38 and made headlines after finally regaining its IPO price.  Some consolidation here is normal and expected, but look for strength to continue as last year’s favorite became this year’s dog.  Prices move when people change their mind, with so much negative sentiment, there is still lots of upside left, but expect a bumpy ride as we struggle with resistance at $38.

TSLA is the momentum flavor of the month, yet bears continue standing in the way of this steamroller.  What goes higher often keeps going higher until everyone gives up fighting it.  I have no idea if that is $140, $160, or $180, but anyone holding out for $300 is getting greedy.  All the recent sellers and shorts following the GS downgrade need to buy and that is providing lift up to $140.

Plan your trade; trade your plan