Sliding to support

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks are lower for a second day following Wednesday’s breakout to all-time highs.  The market remains above the summer’s 1600/1700 trading range leaving us to decide if the market is entering a new phase of directional trade or if the sideways trade sucks us back in.  Buy the breakout, or sell the strength, that is the million dollar question.  Friday was options expiration, so the extremely high volume is not comparable to typical trading days.

MARKET SENTIMENT
Traders are notoriously afraid of heights and reluctant to chase breakouts, especially when they are nervous about impending headlines.  Watching buying pause here is normal and expected, but what we are most interested in is how owners react to these new highs.  Are they locking-in profits and selling too-far, too-fast, or are they holding on for more gains?  The modest pullback over the last couple days suggests most are still holding.  Obviously in a group as large as the market we will have some traders sell the breakout and this is contributing to modest weakness over the last two days, but current selling is more stream than tidal wave.

Even when most buyers remain reluctant, we can still move higher if existing owners continue holding and keep supply tight.  That is the stuff low-volume rallies are made of.  While conventional wisdom says we cannot trust low-volume moves, that is a myth.  We are 10-months into a low-volume rally that keeps making higher-highs.  Demand is only half of the picture, tight supply is just as powerful.

Source: Yahoo Finance 9/20/2013

There were a couple more Yahoo Finance polls the last couple days showing just how “overly bullish” the market is at all-time highs.  Twenty percent are not worried about a bigger selloff and in a different poll, another twenty percent think stocks are a bargain.  I would hardly call one out of five “overly” bullish, especially since in both polls the bullish response was the least popular choice.  Remember, don’t confuse price with sentiment, they are two very different things.  A true contrarian trades against the crowd, not the price.  Right here the contrarian trade remains believing in this market.  All the doubters are already out of the market, meaning there is little selling pressure left.

TRADING OPPORTUNITIES
Expected Outcome:
Stick with what is working.  No matter what the headlines say, this market continues making higher-highs.  Expect some near-term weakness as profit-takers pressure the market, but once this wave passes and selling dries up, look for the market to add to recent gains.  Markets grind higher, especially in later stages of a rally so we need to be patient.  The most nimble traders locked in recent gains and will buy a bounce off support, but at this stage there is no reason to doubt this breakout.

Alternate Outcome:
Triple-tops, double-bottoms, a person can see whatever they want in the charts.  What we are looking for is strength where there should be weakness and weakness where there should be strength.  While this rebound to new highs caught many off guard, we need to tread lightly if this breakout fizzles and rolls over too quickly.  The expected outcome is support near 1700, anything less and we need to reevaluate our bullish thesis.

Source: Yahoo Finance 9/19/2013

Trading Plan:
A bounce off support is buyable.  Don’t short until we break through support.  Locking in recent gains is not a bad trade given how far we’ve come in a few weeks, but be ready to get back in when the market firms up.

INDIVIDUAL STOCKS
As an iPhone5 owner, I’m  impressed with iOS7 and am glad AAPL finally moved its user interface out of 2007.  As big of a leap as this update is, it is only playing catch up with Android and not a compelling reason to buy an iPhone, just less of a reason to go with Android.  The problem AAPL continues having is it is Jony Ive vs the entire Android community when it comes to finding the next great software innovation.  Because Android is an open operating system, they have thousands of developers tinkering and will likely continue beating Apple to the punch on most software features.  While the Apple faithful waited in long lines to buy the iPhone5s, that was never in question.  We want to know is what the casual smartphone user thinks and we won’t know that for months.

Plan your trade; trade your plan