AM: Finding support at 1700

S&P500 daily at 2:44 EDT

AM Update

MARKET BEHAVIOR
Stocks opened slightly lower on disappointing employment numbers, but reclaimed losses by midday.  The market tested 1700 early, but previous resistance provided support and we bounced nicely.

MARKET SENTIMENT
It is hard keeping track of the relationship between news and the market’s reaction.  Is bad still good?  Or is bad bad again?  Are we more worried about QE continuing or economic strength?  The headaches fundamental investors give themselves debating this is too much for me.  Rather than try to outsmart the market, I simply look at other traders to figure out where we are headed.  Markets are a collection of people, not an aggregation of data.  Understanding what they think and how they are positioned turns a previously irrational market into one that starts making sense.

What is too-high keeps going higher.  The consolidation under 1700 invited the paranoid to take profits and tempted the bearish to short.  Once this temporary wave of selling passed, the market rallied on tight supply.  As much attention as we give demand, supply is just as important.   Most sellers and shorts over the last 9-months came to regret that decision as the market relentlessly marched higher.  Get stung a few times and people change their behavior.  In this instance that means sitting through volatility.  While this cannot last forever, buying dips and holding weakness is the trade of the year.  This will change at some point, but until then resolve by holders keeps supply tight and props up prices.  No matter what the news or technicals say we should do, we continue rising on tight supply.

TRADING OPPORTUNITIES
Expected Outcome:
Keep doing what is working.  The early test of 1700 was encouraging, but even a dip into the 1690s is normal, expected, and constructive as long as the selling stalls and we bounce back.  Many shorts are still hanging on, hoping for the reversal they know in their heart is coming, but they will be forced to buy this market once the pain of losses gets too intense.  With all the doubters, profit-takers, and shorts, the pain trade remains to the upside.

Alternate Outcome:
Everyone’s been talking about this for months now, but every rally ends and so will this one.  While they are right, in the markets early is the same thing as wrong.  While we don’t want to jump in front of this market, the longer we go, the more careful we must be.  Stick with the trend, but as soon as this market stops acting like we expect, that will be our signal tides are changing.  Maybe this is the top, maybe we continue to 1750 before rolling over, maybe it is this Fall, or maybe it doesn’t happen until next year, but stay vigilant and don’t let recent profits make us complacent.

Trading Plan:
Keep holding with a stop under 1695.  Sideways consolidation clears the way for a sustainable move higher, but we could also see the market leap ahead in yet another short-squeeze.  Fifteen-points is normal, fifty over a couple of days is not.  Move our trailing stops higher as we climb and proactively lock in profits if the rate of gains accelerates unsustainably.  It is okay to doubt this rally and sit in cash, but don’t try picking tops.  Wait for an accelerating selloff through 1700 before going short.

LNKD daily at 2:44 EDT

INDIVIDUAL STOCKS
AAPL finally did it, it broke the nearly year-long streak of lower-highs as it eclipsed May’s $457 high.  Is this just the start of things to come, or strength to sell?  It won’t take long to see if momentum buying exhausts itself or if a wider pool of investors use this technical milestone to finally start buying this beaten down name.  Longs should move their stops up to recent support at $450 and expect the 200dma to act as resistance.  The smart trade since January is selling strength and buying weakness.  Bulls can use a trailing stop, but expect the sideways trade to continue until we reclaim previous support at $500.

FB is sticking around the $38 level.  The longer it holds here in the face of profit-taking and shorting, the more likely the continuation is.  While it would be perfectly reasonable to see it dip back to $32 as part of a consolidation before moving higher, holding $38 for another day or two means it wants to go higher in the near-term.  It is tough to hold a stock that came this far, but shorting it is just asking for trouble.

LNKD is crushing bears yet again as it surges 11%.  What is too high usually keeps going and that is clearly the case here.  We can debate the fundamentals up and down, but momentum is on the bull’s side and when we live and die by price alone, it is foolish to argue with the market.

Plan your trade; trade your plan