AM: More of the same

By Jani Ziedins | Intraday Analysis

Aug 14
S&P500 daily at 3:33 EDT

S&P500 daily at 3:33 EDT

AM Update

More of the same as the market remains stuck between 1680 and 1700.  Aside from a couple short excursions, the market traded between these levels for the last month.  Traditionally the longer a market consolidates, the bigger the resulting move.  Every sideways consolidation this year ended in an upside breakout and when it doubt, stick with the trend.

We are in the final weeks of summer and shouldn’t expect much.  The big decision makers are returning from summer vacation and just getting settled.  Look for larger moves in September and October as big money takes their portfolios off autopilot and starts buying and selling in larger quantities.

Consolidations typically favor a continuation and most reversals end in an exhaustion surge.  Traders are notoriously afraid of heights and more comfortable buying dips than breakouts.  That’s why many distrusts the market at all-time highs, yet love AAPL under $500.  The thing we need to remember is people already traded what they talk about.  If someone loves AAPL, they are fully invested.  If they claim this market’s gone too far, they already moved to cash.  The ideas people talk about and promote tells us how they are positioned.  If the chorus claims the market is ready to top, it means the crowd already sold.  If everyone says AAPL is going higher, they already own as much as they can hold.  The reason contrarian investing works so well is markets only respond to changes in supply and demand and people only trade when they change their mind.  If the crowd loves something, there are few left to buy and a large group of potential sellers.  If the crowd dislikes something, there are few left to sell and plenty of buyers available.  This is one of the best years in market history because no one trusted it and AAPL slumped 40% because everyone loved it.  Go against the crowd, not the trend.

Expected Outcome:
These things go longer and further than anyone expects and that is clearly the case here.  No matter how high this feels, there is still more upside left.  Markets decline faster than they rally.  Holding 1680 for a month is the opposite of a swift selloff and suggest the high probability trade remains higher.

Alternate Outcome:
Hundreds of millions of shares changed hands over the last month.  Many new buyers are using 1680 as support and will sell a dip under this level.  Once the selling starts, it has a tendency to cascade as more stops are hit and the wider pool of owners become nervous.  Selling begets selling and before we know it we find ourselves down fifty points.  While I don’t expect that, hard stops keep us out of trouble.

Trading Plan:
It is hard to make money in this lethargic, sideways market and the risk/reward is not on our side.  Waiting for the resolution of this consolidation will provide quicker and safer profits.  A sustained break of 1700 is our signal to go long and failing to hold 1680 is our chance to short the market.  Expect the real fireworks in September and October as we either continue this rally into year-end, or finally start the correction everyone’s been waiting for.

Source: Yahoo Finance 8/14/2013

Source: Yahoo Finance 8/14/2013

It really felt like the overly bullish fever in AAPL broke.  It was no longer the overwhelmingly most talked about stock on StockTwits and I largely stopped getting hate mail every time I criticized the company.  No doubt that shift in sentiment allowed for this $100 move higher, but how much upside is left?  There was a revealing, if not downright scary poll on Yahoo Finance today.  Well over 50% of the respondents are not simply bullish on AAPL, but they said they are willing to “bet the farm” it will recover old highs.  It is shocking how excited people are about a stock that is 30% off its 52-week high.  The bullish arrogance is also back in the StockTwits AAPL stream.  No doubt these people have a lot of be excited about, but I wonder what level most of these people bought?  Rather than making a lot of money, I suspect many are excited about losing less.

While there is a lot of upside momentum, for the company to truly make a comeback we need to see a return to strong growth and a decisive reversal of the nonstop market share losses.  It’s been a great trade for those that bought the breakout following earnings, but we only make money when we sell our winners.  Every AAPL bull needs to have their price that is good enough.  Many rode this down from $700 and hopefully they learned their lesson about using trailing stops.

Plan your trade; trade your plan


About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.

Tori13 August 14, 2013

Really enjoying your posts. Thanks so much. I must (embarrassingly) admit that I have not had great success with my stock entries and have frequently gotten burned in fake-outs You said in your post “A sustained break of 1700 is our signal to go long”. I would love to know how you define a “sustained breakout”. Would you look for a retest of 1700? What if it doesn’t retest but just goes up? At what point do you decide its a real move?

My experience has been that I wait for a retest but when it doesn’t come and the market has taken off with a few strong days, I feel its too late to get in (afraid of buying at the top) and am left behind…until I can’t take it anymore and of course, buy at the top. 🙁 Many thanks.

    Jani Ziedins August 14, 2013

    All good questions. Falling back under 1700 a couple weeks ago makes it more likely the next one will stick. Often we have to put our neck on the line when the stock first crosses our buy point, that is just part of the game. When we break 1700, if the market cannot hold those gains and falls under before the close, I’ll pull out and possibly even go short. I expect a wave of buying when we break this widely followed level and if we don’t get that, it means my analysis is flawed and I need to start over. At the very least that means pulling the plug. Other times it means the alternative outcome is in play and the opposite trade becomes attractive.

LT August 14, 2013

Great insight. I made a little this morining on Apple. Held over night and was sweating got out early AM. Had a feeling Apple wasnt going any higher. Option exp is Friday and there is 20k contract for 500, 15k contract for 490 call…they’re gonna push this baby down below that. MM need to make their money.

Good article Jani.

    Jani Ziedins August 14, 2013

    Glad to hear about the profits. It is hard to jump in AAPL after such a large move and I am reluctant to continue owning a stock I wouldn’t buy. At the very least I expect the Ichan pop to fade as we retest the 200dma. Maybe we go a bit higher first. I’m not good enough to pick a top, but it is unlikely this will be the last time we see $500. If someone takes profits, they can buy back in after a consolidation sets the groundwork for further gains. The other important thing to remember is all these gains are built on pure speculation and opinion. AAPL did not crush earnings the way TSLA and NFLX did. AAPL is a show me story and we might see a pop if they introduce a new $300 or $400 “low-cost” phone, but if they make the cheap phone attractive enough to compete, the cannibalization with the higher end model will be massive. We already see a large shift to older models as it is. If they offer a shiny new cheap model only the people with money to burn will opt for the iPhone5s.

[email protected] August 14, 2013

Great post as usual.

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