Short squeeze continues

Intraday Analysis

MARKET BEHAVIOR
Stocks smashed through the 50dma and came a long way from last week’s 1,740 lows.

MARKET SENTIMENT
Emerging Market fears evaporated as quickly as the came.  What threatened the developed world last week doesn’t even warrant a footnote this week.  Such is the ways of the market.

While everyone knows the market has periodic 5 and 10% pullbacks, they lose sight of that every time we are in the middle of one.  If everyone calmly held through a routine dip, we wouldn’t have one because the market doesn’t pullback without selling.  While in hindsight every 5% dip seems like a great buying opportunity, reality is they are terrifying events to live through.  The only reason a trader sells a 5% pullback is because they are convinced it will turn into a 10 or 20% correction.  Pullbacks work because they convince so many traders this is no ordinary dip.  That was clearly the case last week when many were dumping stocks over fears of Emerging Markets and a US economic slowdown.  But one person’s fear is another’s profit.

TRADING OPPORTUNITIES
Expected Outcome: Inside trading range, headed to upper bound
While we still have a way to go before this weakness proves it is nothing more than a vanilla pullback, it is shaping up that way.  Recent fears over EM and the US economy are fading as quickly as them came.  Nothing calms nerves like a rebound in prices.  But don’t expect the non-stop rally to continue.  Markets trade sideways 60% of the time and we are likely entering a 3 or 6 month consolidation as we digest last year’s big gains.  Buy weakness, sell strength.

Alternate Outcome:
While most owners are feeling better about their positions, few selloffs go in a straight line and they bounce on their way lower.  We could easily be in the process of forming a head-and-shoulders or double top.

Trading Plan:
Trading range or topping pattern?  For practical purposes it doesn’t really matter since we sell strength in both cases.  The bigger question is how high do we let this run before locking in gains.  Sell before the highs, wait for new highs, follow with a trailing stop, or the easiest, buy-and-hold.  It all depends on a traders risk tolerance and time frame.

INDIVIDUAL STOCKS
AAPL is close to closing the earnings gap, but that might not be so bullish.  Recent strength follows comments from Tim Cook that he spent a big chunk of his US based cash hoard buying stock over the last couple weeks and hinted at new products.  I saw one enthusiastic analyst suggest a $300 iWatch will sell in similar numbers as iPads.  I don’t know what he is smoking, but I want some.  There are few gadgets as geeky as a computer watch and there is nothing that screams enginerd like a calculator watch.  Countless people I know have iPads, yet I don’t know anyone with a geeky watch.  A more realistic sales projection would expect iWatchs to sell as well as Steve Job’s self-proclaimed Apple TV “hobby”.  The iWatch would be an interesting gadget for the Apple fanatic, but nothing more than a rounding error on the financials.  Since few people would throw out their current $2k flat screen TV for the rumored iTV, it would likely have an even smaller contribution to the bottom line.  And if this new thing is a payment processing solution, expect it to contribute generate as much profit as Google Wallet.

Plan your trade; trade your plan