AM: Still holding gains

AM Update

MARKET BEHAVIOR
Stocks opened lower, testing support near 1700 before finding a floor and bouncing.

MARKET SENTIMENT
If we hold these levels, it will be the third day where buyers and sellers support Thursday’s breakout to all-time highs.  Nervous holders and opportunistic bears sold preemptively during July’s consolidation under 1700.  The exhaustion of that selling pressure cleared the way for these recent gains.

The lack of a strong upside move shows cynics are sticking with their positions, whether that is underweight or outright short.    Traders changing their minds is the only thing that moves prices and this modest climb shows participants’ reactions are fairly muted.  As with everything in the markets, there are two valid sides to every story.  The bull says steady price moves are sustainable and support a continuation of the uptrend.  The bear counters by pointing out the apathetic trade shows a lack of engagement and diminishing enthusiasm for chasing new highs.  They both have a good arguments, but this is how it must be because the market price is always the exact balance point between bulls and bears.

If we assume both sides are intelligent and thoughtful, where do we find our trading edge?  We look for clustering of opinions.  This groupthink is the crack in the Efficient Market Hypothesis we exploit on this blog.  No matter how bullish people claim this market is, the consensus remains cautious and reluctant to buy new highs.  Yahoo Finance had another poll showing people still don’t trust the economic recovery with only 23% saying employment is getting better.  This pretty much mirrors a similar GDP poll from last week.  No matter how bullish people claim the market is, most people are afraid of this market and that is fuel propels this extraordinary rally.

TRADING OPPORTUNITIES
Expected Outcome:
While the breakout appears stalled as we trade near support for the third day, this is constructive behavior suggesting a continuation, not a topping.  New highs invite a wave of profit-taking by holders and shorting by cynics.  This selling is short-lived and if the market holds support with this weight on its shoulders, the uptrend will resume as soon as the selling dries up.  This is what pushed us above 1700 and it will continue the move through 1710 and beyond.

Alternate Outcome:
There are always two valid views on every market and at some point the bears will get this right.  Maybe we’ve come too-far, too-fast.  Maybe this lethargic breakout signals exhaustion.  Maybe economic numbers and Fed Tapering will finally catch up with the market.  Maybe there will be an unexpected shock to the system.  Maybe selling will beget more selling as we fall down the rabbit hole of panic selling.  Maybe, maybe, maybe.  Something will happen because it always does, our job is to get out of the way before the market takes us down with it.

Trading Plan:
Keep holding with a stop under 1695.  Wait for a swift break of this level before laying out a short.

INDIVIDUAL STOCKS
Another strong performance by AAPL as it challenges the 200dma for the first time in nearly a year.  Is this the start of AAPL’s resurgence or just more strength to sell?  If the stock breaks $470, this will be the highest mark since early February.  If we believe the stock is stuck in a $400 trading range, this is a great time to lock in recent gains.  If we think AAPL is making a comeback, we should be buying stock on margin, not selling it.

Most stocks rally on fundamental outperformance, even if it seems unrealistic.  NFLX, TSLA, and LNKD are all superstars with outrageous valuations.  The one thing they have in common is uncommon growth and a habit of far exceeding expectations.  For many years AAPL fit this category and that propelled the stock from $200 to $700 over a few years, but is this recent bounce supported by strong growth or beating already high expectations?  Or was this simply being less bad than already lowered expectations?

Today’s buyers will point to the recent veto by the White House on a patent injunction, but the stock barely reacted when this injunction originally came out and it only affects nearly obsolete models like the iPad2 that are on the verge of being discontinued anyway.  Plus this is a double-edged sword for AAPL since it is seeking injunctions against Samsung for similar patent infringement.  While this veto is a win for consumers, it is largely a wash for AAPL.

Earlier we discussed holding the break of the 50dma and taking profits near the 200dma.  It’s been a nice run since earnings, but the only way to make money in this game is selling our winners.  Either we sell into strength or we raise our trailing stops to protect recent gains.  The previous high at $450 is a decent level to expect support.  A more conservative trader could use recent highs at $457 or $465.  The key is keeping our profits and not give them back in the next gyration lower.  The thing that scares me about AAPL’s new highs is the 92% bullish sentiment on StockTwits.  While momentum can carry us higher, that kind of sentiment skew is not sustainable over the medium-term and there will be a shock to the stock price to better balance sentiment.

BBRY surged higher without any clear catalyst, but it still remains under $10.  This is a clear lesson for both sides that stubbornly sticking to entrenched positions rarely works.  Bulls should have cut their losses after earnings and bears should have locked in profits after recent weakness.  Most likely this suge is fueled by short covering and will  fade quickly.  Some speculate there is an impending buyout offer, but it really seems like the BlackBerry franchise is yesterday’s news and between iOS, Android, and the Window’s phone, what does BBRY really have to offer anyone besides a rapidly shrinking user base and a portfolio of patents that recent White House moves diminishes the value of.  But that is over analyzing the situation.  This is a trading stock plain and simply; buy weakness, sell strength, and repeat.

Plan your trade; trade your plan