AM: How we got here

S&P500 daily at 2:50 EDT

AM Update

MARKET BEHAVIOR
Stocks finally broke the 1700 barrier and continue trading between 1700 and 1705 through midday.

MARKET SENTIMENT
The media attributes today’s strength to data of some sort, but we know the truth, the market rallied because holders are not selling and supply remains extremely tight.  No matter how traders feel about these levels, it doesn’t take much demand to prop up prices when there is so little available to buy.  Some will ask how long this can last, well it’s been this way since the November lows three-quarters of a year ago.  People often discount the potency of low-volume moves, but as we’ve seen, low-volume rallies often go further and longer than anyone expects.  The whole “candle burns twice as bright” thing is what allows low-volume rallies to outlast the more coveted high-volume moves.

After crossing the psychological barrier at 1700, we need to see how the market responds.  Between the gap at the open and sideways trade since, many shorts are holding on and not covering.  They are hoping prices will retreat and their wishful thinking is blunting a more powerful short-squeeze. Real short squeezes are relentless climbs higher that punish bears and fill them with regret as they kick themselves for not selling earlier in the day.  A gap and sideways trade lets them take a wait and see approach.  Many with 1700 stop-losses bumped that up to 1705 this morning.  This means we still have fuel available to continue the move past 1700 as the market turns up the heat on these stubborn doubters.

TRADING OPPORTUNITY
Expected Outcome:
We are holding 1700 and there is no reason to fight what is working.  The market never makes things easy and technical levels are best drawn with dull crayons.  Dipping to 1695 and bouncing back qualifies as holding 1700, but makes placing stops more challenging.  We want to give the market enough breathing room so we don’t get shaken out, yet don’t leave too much profit at risk.

Alternate Outcome:
The lack of a strong short squeeze either means shorts are falling to a hope and pray strategy, or it means there is no one left to buy the breakout.  While we always give the benefit of doubt to the trend, we need to watch for a rollover.  The bullish thesis is nice gains on breakout buying and short-squeeze.  If we don’t get what we expect, we need to reevaluate our entire outlook.

Trading Plan:
Move our trailing stops to 1695, but be willing to buy back in if the market shakes us out with a swift dip and rebound.  One of the most important aspects of successful trading is recognizing quickly and decisively when we make a mistake.  Acting early is the best way to make ensure we don’t get stuck on the wrong side of a trade.  That goes for both holding positions and buying back in after selling.

We finally have the setup for a double-top, but bears shouldn’t pick a top here.  Wait for a swift break under 1700 that shows demand evaporated before challenging this Energizer rally.  Further, when we do short, take short profits early and often because the market will bounce without a fundamental catalyst that sends formerly resolute holders rushing for the exits.

Source: StockTwits 8/1/2013

INDIVIDUAL STOCKS
AAPL is trading sideways for a third day at the $455 level.  While this behavior was constructive for the broad market, sentiment between these two is 180 degrees.  The market is too-high while AAPL is a “generational buy”.  Will this lead to a different outcome following a tight consolidation?  We will soon have the answer.  No doubt much of the hope for a quick AAPL rebound evaporated months ago, but there are still more AAPL bulls than bears.  StockTwits reports 88% bulls to just 12% bears.  Compare this to early June where bears were in the majority, at what proved to be the move’s low.  The crowd got it wrong there and is likely getting it wrong here too.

Plan your trade; trade your plan