What collapse?

By Jani Ziedins | Intraday Analysis

Sep 10
S&P500 daily at 1:14 EDT

S&P500 daily at 1:14 EDT

MARKET BEHAVIOR
Stocks are crushing it as they continue the surge higher.  Today we blew past resistance at the 50dma and 1670 as strength makes it a painful day for shorts.  The market is up 50-points in less than two-weeks as many fears are quickly fading in the rearview mirror.  We remain inside the Summer’s trading range and this bounce is more  a reaction to oversold levels than strong demand for stocks.

MARKET SENTIMENT
Traders often try to get ahead of the market by out thinking it.  They use fundamentals and technicals in an attempt to predict its next move, but what they miss is market prices are nothing more than a function of supply and demand.  It makes no difference what the fundamentals or technicals show, if we are running out of sellers, markets find a bottom and bounce.  Far and away the hardest part of contrarian investing is ignoring what everyone else is obsessing over.  Taper?  Forget about it.  Syria?  Already priced in.  If people are talking about it, they already traded it, and it is no longer relevant.  You can take that to the bank.

TRADING OPPORTUNITIES
Expected Outcome:
Hard to argue with what is working.  The market decisively recovered the 50dma and blew through last month’s stalled rebound to 1670.  While new highs seem a done deal, don’t expect the market to race straight there.  There will be some zigs and zags along the way.  Fear and uncertainty over Syria is quickly fading and everyone is expecting the Taper, so it will take new headlines to reignite the move lower, but expect headline driven volatility to persist.  As long as we respect recent lows, this weakness is just another entry point.

Alternate Outcome:
While the near-term collapse is temporarily off the table, we need to acknowledge bears are not wrong, just early.  This market will come down at some point and we need to be ready for it. I have no idea if it will be next week, next month, or next year, all that matters is we are prepared.  While I am constructive on this market, as soon as it stops acting as expected, it is time to pull the ripcord.  Most still don’t trust this market, but we are getting closer to the day when people stop fearing every red day and that will finally be our time to stick with a short.  The market has a nasty habit of convincing us we are wrong just before proving us right.  Stay flexible and open-minded.

AAPL daily at 1:14 EDT

AAPL daily at 1:14 EDT

Trading Plan:
Hopefully shorts took profits days ago because they are getting dangerously close turning into losses.  The goal of this game is making money and the only way to do that is selling our winners.  We reclaimed the 50dma and avoided starting a trend of lower-highs, so bulls are back in control.  We can own this market with stops under recent resistance, plus a safety margin to keep us from getting shaken out.  How big that margin is depends on the individual trader’s conviction and appetite for risk.

INDIVIDUAL STOCKS
AAPL is minutes away from unveiling its “cheap” phone.  While a great looking iPhone5c will cause the stock pop, anyone looking two steps ahead will see that means massive cannibalization for the far more profitable flagship model.  The less capable the “c”, the better it is for AAPL’s bottom line, so don’t hit the sell button if it isn’t something you want to buy.  That’s the point because it will keep demand up for the top end phones.

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.