Testing support at 1800

By Jani Ziedins | End of Day Analysis

Dec 02
S&P500 daily at end of day

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks dipped for a second day, but managed to hang on to 1800.  This level was resistance in early November and is now providing support here.

MARKET SENTIMENT
Much of the recent chatter and articles revolve around defending why we are not in a bubble, or talking about the Santa Claus Rally.  While there is cynicism around the edges, far more people are making excuses to hold than claiming this is a golden shorting opportunity.   That is a remarkable shift from a few months ago when the consensus was calling for a pullback.

Sir John Templeton famously said  “Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”  We are clearly past pessimism and skepticism, the only question is if this is optimism or euphoria.  This morning the Stocktwits’ SPY sentiment gage was well over 70% bullish, far and away the highest reading of the year.  While not a scientific sample and valid way to extrapolate broad market sentiment, it does give us insight into which side is confidently bragging about their positions.  As the saying goes, hubris precedes the fall.

While sentiment measures make poor timing signals because we never know how far is too far, they do give us a good sense of which direction the market is poised to move.  Since there are few worries holding this market back, it is hard to imagine a single piece of good news that will launch us higher.  On the other hand, one piece of bad news could easily send us into a tailspin.

TRADING OPPORTUNITIES
Expected Outcome:
While a trend is more likely to continue than reverse, we also need to account for the risk/reward for each trade.  While the market could easily continue inching higher, the potential for a big move is to the downside.  While it rarely makes sense to take big risks for small returns, buying calls is one way to squeeze every last drop out of this up-move while also managing downside risk.

Alternate Outcome:
The problem with sentiment is we never know how far is too far until after the fact.  This market could continue grinding higher through next year as the wider population embraces stocks for the first time in five years.  While this outcome relies heavily on the next greater fool theory, it does happen and we need to watch for it.

Trading Plan:
1800 is the line in the sand.  If dip buyers fail to defend this level, it signals further downside.  The 50dma is back at 1750 and retesting this level is not unreasonable and actually constructive for continuing this rally into next year.  If the market holds 1800, expect a slow grind higher for the rest of the month.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS
AAPL stock had a strong Thanksgiving week as it rallied in anticipation of a good holiday shopping season. It made new high ground today, but stumbled and finished weak along with the broad market.  If we experience further weakness in the indexes, expect AAPL to give up most of these recent gains.  There is no reason for a bull to chase the stock up here and we will have the opportunity to get in closer to the 50dma.

TSLA is trading sideways in the $120s.  It failed to put in a V-bottom and is instead consolidating.  Chances are we have not seen the real capitulation selling yet.  A dip back under $100 would go a long way to stamping out the previously unbridled enthusiasms for this small car company with a huge market cap.  At this point it is hands off and is more gambling than investing.  It could continue sliding to $100 or rally $40.  It is just a coin-flip.  Anyone tempted to buy this dip should continue waiting and let the stock prove itself first.  Better to be a little late than a lot early.

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.