AM: Sideways is good

S&P500 daily at 2:38 EDT

AM Update

MARKET BEHAVIOR
Stocks are down in early trade, continuing last week’s pattern of tight consolidation under 1700.

MARKET SENTIMENT
Traders are notoriously afraid of heights and hesitant to buy after a strong run.  Ten-percent in a month certainly qualifies as a strong run, but often what appears too-high keeps going.

There is a lot of crowd psychology behind the scenes that gives us insight into what comes next.  Stocks came a long way by steamrolling shorts and seducing momentum chasers.  This surge provided the powerful lift off of June’s lows, but the rebound stalled shy of 1700 a couple of weeks ago.  While short covering and momentum chasing are powerful forces, they don’t have staying power and quickly run out of gas.  This is exactly where we find ourselves and we must look for clues from other groups of holders and buyers for hints of what comes next.

Unsustainable buying often peaks and reverses quickly, but we have not seen that behavior in the recent consolidation.  This means while buying slowed down, we maintained current levels because existing holders are not interested in selling, keeping supply tight.  Traders often think of demand, but supply is equally important in determining price moves.  When the market hit recent highs, many short-sellers and profit takers sold shares, but this is a temporary weight on prices.  Once that selling abates, in combination with confident holders, the most likely outcome is a continuation higher.

TRADING OPPORTUNITIES
Expected Outcome:
The longer we hold these levels, the higher the probability this rally will continue.  Proactive sellers had their chance to sell and the market swallowed that supply without flinching.  I have no idea how much further this can go, but recent sideways trade indicates the next move is higher.

Alternate Outcome:
While every dip bounced, there comes a point when we run out of dip buyers and there is nothing to stop the next move lower.  Every selloff starts when traders are most confident and without a doubt recent strength is calming nerves, proving the doubters wrong, and encouraging buyers.  While the next move is likely higher, there are no guarantees in this game.  Even something with an 80% probability  of success should fail one out of five times.  No matter how sound and confident our analysis, we always need to look at the other side, and when all else fails, let our stops pull us out.

Trading Opportunities:
Recent stability suggests the next move is higher.  Shorts should reconsider, or at the very least use tight stops.  Aggressive swing-traders can hold with a stop under 1675.  Everyone else sitting on recent profits should wait for a better risk/reward, likely coming once the summer doldrums pass.  Expect volatility to continue and take profits early and often, especially on the short side.

AAPL daily at 2:38 EDT

INDIVIDUAL STOCKS
Deja Vu all over again.  AAPL retook the 50dma on better than expected iPhone sales and continues holding those gains.  Less-bad is rarely cause for exuberant celebration, but it was enough to give the stock some breathing room.  Recent speculation swirls around the iPhone5c, the colorful and cheap alternative to the more expensive flagship model.  Given the success of outdated iPhone 4 and 4s sales, any investor needs to come to terms with a material percentage of 5s cannibalization by the 5c.  Most people don’t need the power of  the latest and greatest and will be happily settle for the stylish younger sibling.  The bigger question for investors is if the hit to the flagship lineup will be offset by reclaiming market share losses to Android.  Technically speaking, all of AAPL’s previous bounces failed to make new highs and we need to trade above $460 to break the bearish trend of lower highs.

TSLA is burning the cynics yet again.  The stock was pounded a couple of weeks ago on an analyst downgrade, but those sellers are suffering regret as we make new all-time highs merely days later.  Stocks like this are not for the faint of heart a violent ride is par for the course.  Ignore the talking-head chatter, but fear signs the company is not living up to wildly optimistic expectations.  Maybe it is a PR snafu like NFLX’s bone-headed attempt to spit the DVD and streaming business, or tapering growth that took down the mighty AAPL.  Enjoy the ride up, but don’t get greedy and stay vigilant.

Sorry for missing a couple posts last week, but something came up that kept me away from my computer. Things are back to normal and look for the daily analysis to resume this week.

Plan your trade; trade your plan