PM: Have we come too far?

By Jani Ziedins | Intraday Analysis

Aug 21
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Dramatic swing of emotions as the market digested the Fed minutes.  We opened lower and fell immediately following the minutes release, but the market rebounded and reclaimed all the day’s losses, but just when everything seemed normal, we collapsed to close near the day’s lows.

The market retreated from the 50dma on surprisingly light volume given the hype around the Fed minutes and dramatic trade that ensued.  In spite of all the excitement, few traders seemed to care and sat on their hands.  The market closed at a new relative low and the next meaningful technical level is 1600.

MARKET SENTIMENT
The Fed statement came out and was as wishy-washy as ever.  I have yet to find a single person whose mind was changed as bulls and bears remain married to their positions.  The market is forward-looking and the Taper trade is ancient history, but it makes for good TV and is why the media keeps talking about it.  Honestly, what is the impact to the stock market 6-months from now if the Taper starts in September or January?  This is all manufactured hype and the market is already focused on what comes next.

This rally will end at some point, but a 15% annual gain is fairly typical and anything but too-far, too-fast.  A 27% annual return barely breaks into the top quartile, meaning we could easily see another 10% of upside from here and still fall within normal market behavior.  Source  That doesn’t mean we won’t see near-term volatility, but the crowd loves to hate this rally and is the fuel that keeps it going.  Markets climb a wall of worry because by the time the world finally feels safe, everyone is fully invested and there is no one left to buy.

TRADING OPPORTUNITIES
Expected Outcome:
I bought yesterday and was stopped out today.  That is just the way it goes.  I took a calculated risk, speculating we ran out of sellers under the 50dma and it didn’t work out.  That doesn’t make it a bad trade and if I had to do it all over again I would.  The key to success in the markets is not the individual outcome, but the process.  Stick with a sound trading strategy and over time we come out ahead.  There are always trolls who criticize other’s mistakes and brag about their successes, but those traders are often washed out within a year because they focus on the outcome, not the process.

I was disappointed by today’s close and it suggest more downside is possible.  While I still believe this is a temporary pullback, sellers remain in control and we need to wait for that next entry point.  Reclaiming 1655 in coming days would get me back in, but for the time being I’m just a spectator.

Alternate Outcome:
Every rally ends and this one is no different.  The high a few weeks ago could be a double top that is too much for this aging bull to overcome.  Shorts can continue riding the downward momentum, but keep that trade on a short leash and cover if we reclaim the 50dma.  The bull market is still intact and any counter-trend trade needs to be nimble and capture profits early and often.

Trading Plan:
For the nimble swing-trader, cash or short is the only trade to have here.  The bull should buy 1655 and the bear covers at this level.

TSLA daily at end of day

TSLA daily at end of day

INDIVIDUAL STOCKS
AAPL is resting above $500 after sprinting to this level on a combination of less bad than expected earnings, imminent product launch, and Icahn buying a “large” stake.  According to Apple rumor blogs, the iPhone5s and a cheaper iPhone5c are pretty much done deals.  Some expect a fingerprint reader on the more expensive model and there are differing reports on how much the new “c” model will cost, but most fall between $300 and $400.  If that is all we get, expect the stock to fall as traders sell the news.  I’m quite confident this is not the last time we will see $500, so there is little risk to locking in profits and waiting for the stock to consolidate recent gains.  If we continue higher, there is plenty of time to get back in.

TSLA struggles with $150 as the recent earnings release failed to ignite another upside rampage.  The stock is already up 325% for the year and most of the good news and expectations have already been priced in.  I’ll leave it to others to decide how much a car company that in its entire existence only sold two-days of GM sales volume is worth, but from a trading perspective this hot stock needs some cooling off.  Look for a retest of the 50dma in coming weeks.  Two-steps forward, one-step back.

Plan your trade; trade your plan

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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.