Holding the breakout

By Jani Ziedins | Intraday Analysis

Sep 19
S&P500 daily at 2:21 EDT

S&P500 daily at 2:21 EDT

Stocks are holding most of yesterday’s breakout through midday trade.  This shows a wave of selling and profit taking has not hit the market and enough buyers are willing to step up and pay these prices.  No matter what the headlines say, the market continues making higher-highs and when in doubt, stick with the trend.  Former resistance at 1700 becomes support and we will see if the gravity of this summer’s trading range is strong enough to pull this young breakout back to earth.

Obviously bulls are happy with recent gains, but even they have a fear of heights and are tentative following recent gains.  Given the headline risk, few are actively promoting 1800.  Compare this to many bears’ outlook a couple of weeks ago when they were certain we were destined for 1500.  We have cautious optimism from bulls and extreme negativity from bears.  That skew in sentiment is the fuel that keeps this rally alive.

Obviously the market moves in waves and we go up and down all the time, but the next major down move will only happen when sentiment flips and bears are cautiously pessimistic while bulls are enthusiastic.  Remember, we don’t trade fundamentals or technicals, but people and their portfolios.  As long as traders remain wary of this rally, that means we have a large pool of prospective buyers sitting on the sidelines.

Expected Outcome:

If this breakout holds 1700 over coming weeks, expect the market to finish the year strong.  Traders are notoriously afraid of heights and their reluctance to own this market for the last 10-months left many sitting out.  As these watchers warmed up to this market, or more likely were afraid of being left behind, they started chasing, creating the demand that elevated this Teflon rally to all-time highs.  The more people fear a market, the more prospective buyers we have.

Alternate Outcome:
While current headlines are already priced in, we need to watch for something the market is not prepared for.  Debt Ceiling is the next bogie on the horizon.  Politicians keep kicking this can down the road and the market is growing immune to all the political noise.  Fear of the Fiscal Cliff last fall created an outstanding buying opportunity.  Chances are this time around fewer sellers are going to show up simply because anyone who sold political uncertainty last year regretted that decision.  But this lack of selling ahead of time leaves the market more vulnerable to a worse than expected political trainwreck.  More likely than Debt Ceiling is unquantified risk from a headline that isn’t even on our radar yet.  Stay cautious and defensive.

Trading Plan:
Proactive traders can sell the pop and wait for a pullback to 1700.  Others can continue holding after moving up their trailing stop to just under recent resistance at 1700 or 1709.  Being short here is nothing more than trying to pick a top and we should wait for a material violation of support before betting against this breakout.

AAPL continues the bounce off $450 and recovered half of the recent selloff on favorable reviews of the new iPhone5s.  While no one disputes the build quality fo AAPL products, the question is if these new “innovations” are enough to reverse the market share losses to Android.  In order to compete for market share, they need a large screen phone and a cheap phone, something we still don’t have.  As a business, I respect AAPL’s decision to stick with what they know best, high quality, premium priced hardware.  They have a great brand, reputation, and company and will be a force in the industry for years to come.  But what they are not is the largest and most successful company in the world.  The recent bounce is a good chance for longs to get out and bears to short.  We could make it all the way back up to $500, but it will likely act as a ceiling and the stock will rollover once the initial buzz from the iPhone5s fades.  Longs can hold as long as we stay above the 50dma, but have and respect your stop-losses.

TSLA daily at 2:22 EDT

TSLA daily at 2:22 EDT

TSLA is the stock that just keeps on giving, breaking above a recent consolidation today.  We can split this story in two pieces, there is the car company and the feeding frenzy around the stock.  For the company, the make a well received, high-priced car.  It is a very niche brand and more like Maserati than Porsche.  Sure Tesla could expand their product line, but they will eventually face stiff competition from the major auto companies.  The drivetrain is one of the simpler pieces to making, marketing, and selling cars in large volumes.  It won’t take much effort for a F, GM, TM, or BMW to convert an assembly line to electric vehicles and pump those cars through existing distribution channels.  Tesla and Musk have done an impressive job creating a new car company, but it is foolish to think they have a sustainable competitive advantage over other auto companies.  The greatest asset Tesla has is the buzz around the brand, and as we’ve seen with Apple’s rapidly falling market share, those advantages only last so long once lower priced competition shows up.

As for TSLA the stock, it is the go-go momentum stock of the moment.  The strength is aided by the fact many shareholders are insiders and not selling.  The small number of shares available for trade make it easy for limited demand to drive the prices to insane levels.  It is a great ride, but just realize this is only a ride and have an exit in mind.  While the stock can keep going higher, fear a misstep by the company, the “Qwikster” equivalent that sent high-flyer NFLX down 75% over a couple of months.  I have no idea what that might be, it could be a PR disaster like cars catching fire or a fundamental data point like slowing sales once the initial backlog of cars is delivered.  What I wouldn’t fear is analyst downgrades.

Plan your trade; trade your plan


About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.