Holding support

By Jani Ziedins | Intraday Analysis

Sep 24
S&P500 daily at 3:40 EDT

S&P500 daily at 3:40 EDT

MARKET BEHAVIOR
Stocks bounced back from early weakness and reclaimed support at 1700.  This is the second day we’ve tested and held this level.

MARKET SENTIMENT
The euphoria following Summer’s withdrawal evaporated as quickly as it came.  We gave back all those gains and any late buyers are sitting on losses.  This is why savvy traders buy when everyone is fearful and sells when everyone is getting comfortable.

The market got a little ahead of itself, rallying 100-point in three-weeks and this pullback is normal and expected.  While it rained on the bulls’ parade and brought life back to demoralized bears, that is exactly what it needs to do before we can continue higher.  As we discussed earlier, big money hates buying breakouts and all-time highs.  They wait for the euphoria to pass and buy the pullback.  So far they are buying 1700 and is why we are finding support.  Of course two-days doesn’t make a bottom and we need to hold this level for two more days before we can feel more confident big money supports these levels.  Without their endorsement, this brief pause at support will continue lower as soon as the dip-buyers run out of money.

Source: Stocktwits 9/24/2013

Source: Stocktwits 9/24/2013

Bullish sentiment on Stocktwit’s SPY stream went from 26% to 60% over a couple of weeks as the market bounced off 1630 and notched new all-time highs.  The last few days brought that back to a more palatable 46% percent.  Recent sellers and shorts will be buyers of the next leg higher.  Of course we might need to see a little more selling or sideways trade before we are ready for the next move.  A dip to the 50dma creates an even more irresistible entry point for big money.

TRADING OPPORTUNITIES
Expected Outcome:

While the medium-term outlook is positive, near-term we might see a little more selling.  Buying here is picking a bottom and we typically wait at least four days before buying support.  A dip to 1680 is attractive because it creates an even better entry point for the swing trader.

Alternate Outcome:
Discussion of the debt ceiling is heating up and while most are aware of it, we have short memories and often forget just how ugly these things get before a compromise is finally reached.  Last time the threat of a default lead S&P to downgrade the nation’s credit rating.  Obviously that was a joke because bonds rallied on the news, but it shows just how contentious these things can get.  Expect the rhetoric to heat up and spook investors as we approach the deadline.

Trading Plan:
Buy the market if we firm up around 1700 over coming days and short crashing through the 50dma.

The recent dip to 1630 shows us how we make even more money when we are wrong.  If we originally bounced off 1680, that is 50 fewer points we could make on the rebound.  Sure we lost a little when we got stopped out, but I appreciate the volatility because that creates bigger opportunities.  While I would be “right” if we bounced off 1700, I would make more money if we dipped to 1650.  This is just one reason why being right and making money are two very different things.

AAPL daily at 3:40 EDT

AAPL daily at 3:40 EDT

INDIVIDUAL STOCKS
AAPL is flirting with $500, but has yet to break through this key level.  The company smashed sales records with its iPhone5s/c launch, but this is also the first time the company sold phones in China on the launch day, so obviously that skews the data and makes direct comparisons meaningless.

Clearly the company sold a lot of phones to the faithful that are willing to stand in line to have the newest AAPL gadget, but this is a small sliver of the market.  While it is great PR to have the news show people lining up to buy the latest Apple phone, the only thing that matters is how attracted average people are to these upgrades.  The smartphone market is evolving in two directions, larger screens and cheaper phones.  Right now AAPL is stuck in no-man’s land with a small and expensive phone, explaining most of their market share losses over the last couple years.  While the stock market cheered the 9 million phone sales, this pop is selling opportunity, not a buying one.

TSLA is bouncing around the $180 level, but it sure would be nice to see the stock form a base and shake out some of the momentum chasers.  Even a dip under the 50dma would be a great way to clear the deck.  Locking in profits at $185 is not a bad trade since the stock will inevitably pass through this level again in a future dip or rebound.  Even if you believe this is the next GM, take some profits and look to buy it back cheaper.

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.