Rebound continues

By Jani Ziedins | Intraday Analysis

Sep 09
S&P500 daily at 3:09 EDT

S&P500 daily at 3:09 EDT

MARKET BEHAVIOR
Stocks are on track for their fifth consecutive up day and seven out of the last eight.  The market is sitting on the 50dma and within points of 1670, where the previous rally attempt stalled out.  The market is prone to headline volatility and we are still well within the summer’s trading range so the coast is anything but clear.

MARKET SENTIMENT
The market goes back and forth over military strikes in Syria.  Some days it is “on”, other days it is “off”.  Today it seems to be “off”, at least that is one reason the media is giving for today’s strength.  But here is the thing, anyone afraid of these events is already out of the market.  They sold at a discount over the last two weeks to more bold traders willing to take the risk.  This churn in ownership brings more stability to the market.  Anyone holding here acknowledged the risk of military action and chose to buy or continue holding.  If bombs start falling, these people are less likely to hit the sell button because they already demonstrate a willingness to hold in the face of these uncertain risks.  This ownership churn is how markets price in events long before they even happen.

Between Taper, Syria, and weaker than expected employment, the market has every reason to sell off, yet here we are, reclaiming lost ground and only 2.5% from all-time highs.  That’s how this game is played, we rally when everyone is scared and slide when everyone feels safe.  The more nervous people are, the more upside there is and vice-versa.  It is hard to find people excited about this market and makes it easy to find a bottom.  After all the nervous and paranoid sellout, there is no one left to sell.  The best trade is usually buying what you don’t want to buy and selling what you don’t want to sell.

MARKET BEHAVIOR
Expected Outcome:
The market is challenging last month’s rebound highs.  Either this is resistance and sets the trend of lower highs, or it is the middle of a double bottom that propels us to new highs.  Given the lack of complacency and fear surrounding recent headlines, my money is on new highs.  No doubt I could be wrong because nothing is certain in the markets; that is why all savvy traders have a good defense.  While headline volatility will persist, the market already digested the biggest chunks of uncertainty surrounding Taper and Syria and is holding up relatively well.  This market will rollover at some point, but this doesn’t look like it.

Alternate Outcome:
Every dip is buyable until they are not.  The hard part is sucker’s rally looks seductively buyable and is why so many people fall for them.  If this game were easy, everyone would be rich.  If we run out of dip buyers, look for the market to rollover on a lack of demand.  5% dips are routine and happen multiple times a year so we cannot read too much into recent weakness, but every 15% selloff starts with that first point lower.  While I am reluctant to short this market, failing to make new highs is a concern and creates an interesting short entry.  We don’t pick tops, but we do short weakness where we expect to see strength.

Trading Plan:
Hopefully shorts didn’t get greedy and locked in profits days ago.  We remain in a bull market and counter-trend trades need to be nimble and quick.  We broke the 50dma and 1670 in late trade.  If we hold these levels, look for new highs in coming weeks.  If we fail to hold, look for a test of the 200dma.  We can own the market with tight stops under these key technical levels and short a violation of the same levels.

AAPL daily at 3:09 EDT

AAPL daily at 3:09 EDT

INDIVIDUAL STOCKS
AAPL has its big product launch tomorrow.  It seems like most of the big announcements leaked out already and are already priced in.  While many are looking forward to the iPhone5c, hopefully AAPL does a good job differentiating it from the higher priced model.  A low resolution screen, slower data antenna, and smaller battery would both make the phone cheaper and keep demand strong for the high-end phone.  If there is no meaningful differentiation, expect most buyers to opt for the new, fun, and cheaper iPhone5c.  That will kill revenue and margins.   I am in favor of the iPhone5c, but it must be a clearly inferior phone to its bigger brother to both open lower end markets yet not cannibalize flagship sales.  If the c has retna, 4G, decent battery, and is sold in the developed world, expect to see massive cannibalization.

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.