Dec 19
S&P500 daily at 1:43 EDT

S&P500 daily at 1:43 EDT

Intraday Analysis

MARKET BEHAVIOR
Stocks took a breather this morning following yesterday’s rebound to new highs.  Previous buying stalled at 1,810 and breaking through this barrier will show this rally is ready to continue.  Failing to add to recent gains likely means we will remain within the recent 1,780 to 1,810 trading range into year-end as neither bulls nor bears have the strength to move the market.

MARKET SENTIMENT
Yesterday was fueled in part by a large wave of short-covering as bears were forced to buy the unexpected bounce to new highs.  This strong move also won over many standing on the sidelines because they feared a Taper driven selloff.  With a budget deal in the works and Taper uncertainty behind us, there is no reason left to not own stocks and why the crowd feels so good right now.  But the more comfortable the crowd is, the more nervous we should be.

Quirks arising from supply and demand lead to “irrational” market behavior.  Yesterday saw a huge surge on Taper because no one wanted to sell and buyers were forced to pay a premium to coax owners to sell.  We can say this or that about a fundamental justifications for yesterday’s move, but the simple fact is owners didn’t want to sell and that scarcity drove prices higher.

The initial surge was fueled by short covering and late to the rally buyers, but to keep going the market needs new money to continue buying.  As long as we find a next greater fool willing to buy at even higher prices, all is well.  And that is the big debate.  When fears and uncertainties are few and far between, who does not already own stocks?

We have the chronic worrywarts hiding in bonds.  If they are still reluctant to trust stocks after the market ran up nearly 300% over the last four years, I seriously doubt a two-page policy statement from the Fed will cause them rush into the market with reckless abandon.

Swing traders buy weakness and sell strength.  They are more likely to sell yesterday’s bounce than buy at all time highs.

Value investors are notoriously thrifty and largely avoid buying near all time highs, preferring to wait for more attractive discounts.  These buyers have tons of money, but even more patience.  They are more likely to buy the dip than chase a breakout.

With so few buyers left willing to chase all-time highs, we need to be concerned about demand.  Confident owners and tight supply can mask demand problems for extended periods of time, but there comes a point when even tight supply cannot prop up the market.

TRADING OPPORTUNITIES
Expected Outcome:
The market bounced when it should have sold off.  That is always noteworthy.  But we also need to be cautious of recent volatility since that is a common component of topping patterns.  Obviously there are plenty of people who keep buying this market near all time highs, but with so few excuses to avoid stocks, we are getting close to the point of running out of new buyers.  While we are not there yet, we are getting closer to the dip that won’t bounce.  Until then keep holding, but stand close to the exit.

Alternate Outcome:
The last time the Fed really surprised us was September 18th when it didn’t taper.  The market surged 1.2% to all-time highs on the news, yet that marked the top as we slid into the Shutdown/Debt Ceiling lows.  While we don’t have a clearly identified hurdle in front of us, the market is vulnerable to any negative headline.  With the Taper officially started, bad news is bad again.

TSLA daily at 1:40 EDT

TSLA daily at 1:40 EDT

Trading Plan:
Barring an imminent collapse, the market will likely trade flat or modestly higher through the holidays and into the end of the year.  Traders can move to cash and take much deserved time off while others can continue hold through the holidays.  January is the next time the market will fall under the microscope.  Until then its flaws will remain hidden.

INDIVIDUAL STOCKS
While the market is acting strong, AAPL and TSLA are not having the same success.  TSLA is being rejected by the 50dma and AAPL is failing to hold $550.  Stocks go up and stocks go down.  While both of these stocks might be consolidating recent gains and setting the stage for a continuation higher, owners need to have a plan on when they will take profits.

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.

CoolHobieCat December 19, 2013

Greatly enjoy reading your daily summaries. Bought AAPL heavily at $409-420. Sold 2 positions a few weeks ago. 1,000 shares sold at $563. 1,000 shares sold at $572. Still hold 485 shares in anticipation of CHL deal. Rotating into nat gas tankers. Having fun…..

    Jani Ziedins December 19, 2013

    Nice trade! The only way to make money in this game is selling our winners.

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