Back to 1700

S&P500 daily at 1:53 EDT

MARKET BEHAVIOR
Stocks surged above 1700 on news Larry Summers withdrew from consideration as the next Fed Chairman.  This opening gap leaves us a few points from all-time highs at 1709 and erased most of the late summer selloff.  So far the best trade has been buying weakness and selling strength.  Will that continue, or is the market finally ready to breakout of the 1600/1700 trading range?

MARKET SENTIMENT
While the news might be random, the market’s reaction is not.  It is easy to attribute today’s move to Summer’s decision, but the only reason the market moved this strongly is because the spring was already coiled.  If it wasn’t this headline, it would have been something else.  There was no guarantee we would break 1700, there are no such things in the market, but the market was poised for this move and that made it the high probability trade.  Luck is always a big component in any individual move, but over time a sound process is what leads to consistent, long-term success.

Obviously the market was oversold at 1630 and it snapped back as soon as traders realized things were not as bad as feared.  Once those afraid of the headlines sold, supply dried up and we rebounded to the upper end of the trading range.  Prices move on nothing more than supply and demand.  No matter what the fundamentals, technicals, or crowd says, markets bounce when we run out of sellers and is exactly what happened here.

TRADING OPPORTUNITIES
Expected Outcome:
We came a long way from the recent 1630 lows, but we only make money trading what is in front of us.  The question is should we sell this strength, or hang on for a breakout?  Right now either decision is a sound call.  The sideways summer trade allowed the market to consolidate first half gains, clearing the way for a potential continuation higher.  It is coming to terms with gradual  Tapering and military action in Syria seems less likely.  We have a date with the Debt Ceiling, and while the rhetoric will be ugly, past flirtations with disaster were buying opportunities and the market is less likely to get bent out of shape this time.  Of course that complacency increases the downside risks if complications do arise and is something we need to watch, but so far the year’s bullish theme of “less bad than feared” is continuing into the Fall.

Alternate Outcome:
More and more traders are becoming comfortable holding modest volatility.  While in the near-term that provides stability and is bullish, it adds water behind the dam and increases to the risk for when things finally breakdown.  Five percent pullbacks are a healthy part of moving ahead, but so are ten, fifteen, and twenty percent pullbacks.  We always have a date with more selling and every buyable dip brings us a step closer to the one that doesn’t bounce.

Trading Plan:
Lock in recent gains, or see if there is more in the tank by moving up your trailing stop.  Either trade works here.  Obviously being short any time over the last two weeks was a painful trade and adding new shorts is only trying to pick a top.  We are moving into the fall and that catalyst improves the odds of seeing the next directional move.  Right now bulls have the ball and it is their turn to show us what they have.

AAPL daily at 1:53 EDT

INDIVIDUAL STOCKS
AAPL continues struggling following the disappointing product announcement.   More of the same from the most innovative company is never bullish.  The stock is down nearly 10% from the $500 level and is yet another example of why we need to take profits after big moves.  Some people love owning AAPL, but I’m in this to make money and the only way to do that is selling our winners.  While many AAPL bulls see this weakness as a buying opportunity, the company clearly lost its mojo and has yet to stem the market share losses.  They are a healthy and profitable company with a loyal following, but the market is less willing to make it the most valuable company in the world and expect more air to be let out of the stock price.  For buy-and-hold investors, that likely means a date with the mid to lower $300s over the next twelve to eighteen months.  Hold this at your own peril.

Plan your trade; trade your plan