Holding recent gains

MARKET BEHAVIOR
Stocks recovered half of Wednesday’s sell off as buyers were willing to step in at these levels.  This is the fifth close above 1740 and we are slowly consolidating recent gains and building support.

MARKET SENTIMENT
We moved past the fiscal and political driven volatility and the market is quietly digesting third-quarter earnings.  It almost feels serene following the all the shouting and political theater a couple of weeks ago.  This calm is constructive and lets traders rationally evaluate and trade their outlook without worrying if they are standing on a trapdoor.

Trading above 1740 for a fifth-day gave profit-takers plenty of time to harvest recent gains and thus far buyers have been willing to step in and defend these levels.  Once this wave of profit-taking and cynical new-high-shorting passes, look for prices to continue rallying on tight supply.  No matter what people think the market should do, we continue making higher-highs and higher-lows and we cannot fight the trend.

Given all the fear and uncertainty over Taper, Shutdown, and Default, the fact the market held up so well signals we are not standing on a trapdoor.  The market had every invitation to breakdown, but it bounced instead.  That alone tells us the market is not “over-owned” because few owners were interested in selling the endless stream of headline fear mongering.  If anything, the market is under-owned since all the nervous sellers over the last few months are looking for a way to get back in.  Expect their demand to prop up prices as they rush to buy every dip.

TRADING OPPORTUNITIES
Expected Outcome:
Keep doing what is working.  While there is nothing wrong with locking-in recent profits, the longer we hold support, the safer it is to buy back in.  The rebound chased out most of the bears in a powerful short-squeeze, but it will take time to win over the rest of the skeptical traders standing on the sidelines.  But with year-end only two months away, expect big money to feel pressure to chase performance into the end of the year.

Alternate Outcome:
It’s been a fearful year between Fiscal Cliff, Sequester, Cyprus, Taper, Shutdown, and Default, but the market is standing as high as ever as it weathered the storm.  Right now it is hard to think of anything the collective is fretting over.  While it feels comfortable, the market is a worrywort by nature and it will quickly find, or invent, another crisis.  Depending on what it is and how worked up traders get, we could see larger selling if it catches traders off guard and causes currently confident owners to lower future expectations.

Trading Plan:
Keep a trailing stop at 1710, 1730, or 1740, depending time-frame and level of risk.  Those out of the market can look at getting in Friday if we continue holding 1740.

INDIVIDUAL STOCKS
TSLA shook off a dip under the 50dma as it recovered this widely followed level.  This is encouraging behavior since it shook out all the stop-losses under the 50dma, but selling stalled and did not cascade out of control.  If the bounce continues on high volume, it is a valid entry, but keep a tight stop since we are late in this move and the chances of failure are elevated.

AAPL continued higher as Icahn pushed for a $150b buyback.  While that would be very shareholder friendly, AAPL management typically ignores shareholder pressure.  $513 is support and the stock is holdable as long as we stay above this level.  Volatility creates great buying and shorting opportunities for the nimble swing-trader, but its been a tough ride for the buy-and-hold investor.  Expect the sideways trade to continue as momentum investors have since moved on to TSLA, NFLX, and FB.  AAPL is a great company with fantastic products, but eroding market share and declining prices will prevent it from reclaiming prior highs.

NFLX is struggling with an identity crisis following Tuesday’s massive reversal and revelations Icahn cashed in half his stake because the valuation was getting a little rich.  Expect this to put a damper on festivities for a while, but if the stock holds current levels in the face of the defensive selling and aggressive shorting, that is bullish because it is building the launching pad for the next leg higher.  For shorts, the stock doesn’t break lower soon, cover the short before you are forced to in yet another short-squeeze.

Plan your trade; trade your plan