Category Archives for "Intraday Analysis"

AM: News, what news?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:14 EST

AM Update

Teflon rally shakes off economic contraction.  AAPL struggles with $460 and chances of a quick rebound are fading fast.

MARKET BEHAVIOR

Stocks traded modestly weaker on unexpected news of economic contraction in the 4th quarter, but given the magnitude of the headline, the market’s reaction is surprisingly subdued.

MARKET SENTIMENT

People can trade technicals, fundamentals, or the market.  Technicals say we are overbought.  Fundamentals say we are two-months away from a new recession.  Yet the market could care less and is holding near 5-year highs.  Markets are a collection of traders buying and selling their opinions and expectations.  Fundamentals and technicals are secondary because they only influence trader’s opinions and expectations, they don’t actually move markets.  More importantly, we only care about changing opinions and expectations.

Buying and selling is what makes markets move.  Traders with existing opinions have already placed those trades and are waiting.  It is traders who are changing their minds that provide the buying and selling that moves prices.

Today’s economic contraction report did little to change anyone’s mind, so prices stayed the same.  Bears remained bearish and bulls stayed bullish.  The bad news for bears is that headline was about as spooky as it gets and if any bulls were hanging on by their fingertips, that would have pushed them over the edge.  This proves bulls are confident and holding on for higher prices regardless of what the fundamentals or technicals show.

Journalists will point out the half-full parts of the report to explain this resilience,  but their job is to find reasons to explain the market’s move, or in this case the lack of a move.  The truth is bulls are getting greedy and bears are impotent (already out of the market).  When a headline like this cannot change a bull’s mind, the only one left to change is bears buying into the market and that is why we should expect higher prices over the near-term.

TRADING OPPORTUNITIES

Expected Outcome:
If headlines of economic contraction can’t spook bulls out of their positions, not much else will.  If this market cannot be brought down by negative news, then the only other thing is running out of buyers.  As long as cynics remain, the market will have fuel to continue rallying.  Eventually bears will develop a “if you can’t beat them, join them” attitude and buy this market   Those that jump on the bandwagon sooner will profit more than those that wait until the very end and buy the top.  It is okay to be wrong, it is fatal to stay wrong.  The sooner we recognize and fix our mistakes, the more successful we will be.

Alternate Outcome:
Markets can go down for any number of reasons, but this market is demonstrating an immunity to negative news and that greatly mitigates unexpected downside risks.  This rally will eventually turn over, but only after everyone has jumped on the bandwagon.  With today’s resilience, and if it holds through the close, we should expect the pace of bears turning into bulls to accelerate, but this is the last push toward the end of this rally and those that get in too late will be left holding the bag.

AAPL daily at 1:14 EST

INDIVIDUAL STOCKS

AAPL finally broke above $460 this morning, but is struggling to hold this level midday.  Moving into last week’s gap will be a significant technical milestone.  There are a lot of new buyers and regretful holders at the $460 level, but once we get through their selling pressure, the clear air of the gap will give less resistance up to $490 because there will be fewer people trying to get their money back.  But we have to break above $465 first.

We are in the fifth-day of the post-earnings selloff and the longer we trade at these levels, the less likely a V-bottom becomes.  If we fail to break into the gap this afternoon, chances of a quick rebound are practically nil.  The two remaining options are a grind higher and more selling.  Since so many people are still bullish on AAPL at this valuation, I see a much larger pool of available sellers (current holders) than new buyers.  If someone does not already own APPL at these levels, they probably are not going to buy it no matter how cheap it gets.  That lack of demand from new investors will be a real headwind turning this stock around.

Stay safe

PM: Moving past 1500

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

The S&P500 set another new high and is poised to continue.  AAPL flirted with $460, but was unable to break above.  Another couple of days of sideways trade will make a sharp rebound unlikely.

MARKET BEHAVIOR

The S&P500 set another new high in above average volume.  The more people wait for the pullback, the higher this thing goes.  Every market tops, but they usually go further and longer than most expect and that is clearly the case here.

MARKET SENTIMENT

Virtually everyone holding a diversified basket of stocks is showing a profit with the market at 5-year highs.  When things are going this well, there is very little selling pressure as holders keep holding on for more.  Eventually this ride will come to an end, but we are not there yet.  As long as there are regretful investors watching this market rally without them, there will be fuel to keep pushing us higher.

The market held 1500 for a couple of days and today’s break above 1504 confirmed the continuation.  The breakout was a modest 0.5% and relatively contained.  We need to watch for an unsustainable surge higher, but that will be a move well in excess of 1% and far higher volume than today’s 17% above average.

TRADING OPPORTUNITIES

Expected Outcome:
Yesterday’s dip was all the market needed to refresh itself and while we are getting further and further extended, this market still has legs.  We might only see another 20 or 40 points of upside, so jumping in here is clearly late to the party, but there is enough upside left that shorting this market is not advisable.

Alternate Outcome:
Today’s pop could be the false breakout that dragged in the last of the buyers, but it sure didn’t have a capitulation feel.  As always, the market can get spooked by its own shadow and nose over without warning, but the market is in a rallying mood and ignoring negative headlines.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL rallied modestly on light volume.  It tried to recover $460, but it could not break thought this level.  The encouraging thing for AAPL is the light volume shows sellers are taking a break for the time being.  Maybe hopeful holders are holding a little longer as the expected rebound is about to take place.  V-bottoms happen over a couple of days and if AAPL continues trading sideways at these levels, that greatly diminishes the probability of a sharp rebound.  If AAPL doesn’t trade sharply higher tomorrow, look for either a rounded base or more selling.

Apple released an upgraded iPad without much fanfare.  The one takeaway is they would not have done this if a completely redesigned iPad release was imminent, so one potential catalyst can be eliminated.  The interesting thing about Apple dropping the numbering convention on the iPad means future upgrades will most likely revolve around memory and processor upgrades.  Design-wise it is really hard to do much with a thin, rectangular piece of glass.  The headwind AAPL will continue facing is the existing iPad and iPhone products are so good that few people see the value in upgrading for fairly incremental improvements in newer models.

Stay safe

AM: New highs….again

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:22 EST

AM Update

The S&P500 bounces back after early selling and makes a new high.  AAPL challenges $460, but runs into resistance

MARKET BEHAVIOR

The market had an open invitation to selloff after yesterday’s dip and this morning’s early weakness, but it bounced back and made new highs instead.  This price-action is supportive of 1500 and if we hold through the close, the market is not ready for a pullback.

MARKET SENTIMENT

How far can this thing go?  That is what most traders are asking themselves right now.  They are interested in buying this market because last fall’s worries are ancient history, but they are hesitant to chase a market that ran this far and is poised for a pullback.  They are stuck in this indecision, but each point higher pushes them closer to buying.  The thing about chasing is it is not like a breakout or breakdown where everyone is watching the same levels and a flood of orders his the market at once.  Chasing is a gradual phenomena where traders change their minds over time.  It is this steady stream of new buyers that allows the market to drift higher in spite of all the calls for a pullback.  No doubt this cannot go on forever, but it usually last longer than most people expect and that is exactly what is happening here.

One way these things end is when a larger wave of regret hits traders in unison after the market continues marching higher without them.  Buying picks up and the pace of gains accelerates until most traders can no longer stand sitting out and jump in headfirst, but this surge marks the end of the rally as buying finally exhausts itself.  So far this pause at 1500 shows buying isn’t getting out of hand just yet.

TRADING OPPORTUNITIES

Expected Outcome:
I’ve been wary of a pullback for a few days, but the market’s resilience around 1500 is indicating support, not exhaustion.  No one has a crystal ball and our understanding of the market evolves with each new piece of information.  Barring a weak close today, the market is supported by new buyers and still has more room to run.

My initial hesitation was due to stop-loss and breakout buying that pushed us through 1500.  These buyers have limited resources and their support usually fades within a couple of days.  Since we held these levels for a third day, it shows real support from follow up-buying and this is more than a short-squeeze.

Alternate Outcome:
Markets don’t always exhaust themselves in a single push higher and we could see a rolling top here at 1500.  Watch for a material violation of new support at 1500, but until then stick with the trend.

AAPL daily at 1:23 EST

INDIVIDUAL STOCKS

AAPL rebounded from recent lows and is challenging $460 in late morning trade.  A lot of buy-the-dip traders bought AAPL at $460 after earnings, only to watch it plunge under $440 within 24-hours.  No doubt a lot of these buyers are filled with regret and looking to exit their impulsive AAPL trade at break-even.  We also had people hold AAPL through earnings who failed to sell the initial dip to $460 and they promised themselves they would finally sell if the stock regained $460.  Attitudes like this make technical levels behave like support and resistance.  When regretful owners jump at the chance to sell at $460, that will hinder further advancement.

While $460 will provide some resistance,  the major roadblock up ahead is $500 where a huge swath of regretful investors would love to get their money back.  We will probably bump up against $460 for a couple of days, maybe even turn back from it, but the real level to watch is $500.  Any swing-traders should wait to buy the break above $460 and look to sell around $490.  On the lower side  a break under $450 signals a lack of support and we will see new lows.

Stay safe

AM: Embrace the pause

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:07 EST

AM Update

The market is trading sideways at 1500 and AAPL’s early rebound is filling owners with new hope.

MARKET BEHAVIOR

The S&P500 dipped under 1500 in early trade, but recovered that psychologically significant level by midday.  A bit of sideways trade is constructive for a continuation.  The market has seen few down-days this year and a little distribution and profit taking should be expected, even welcomed.

MARKET SENTIMENT

The market isn’t worried about much here.  The only negative story making headlines is AAPL’s collapse, but that damage is contained and largely a single stock event.  Complacency is always something to be wary of, but it isn’t enough to bring the market down by itself.  It isn’t complacency that tops out the market, but investors being fully invested when they feel comfortable.  Running out of new buyers is the underlying structural event that causes complacent markets to peak.  So while complacency is creeping in here, many investors who sold toward the end of last year are not fully reinvested yet and it is their buying that is holding up this market.   It takes time for these sideline watchers to be won over and buy back in and we are still in the middle of this process.

TRADING OPPORTUNITIES

Expected Outcome:
The market probably needs a couple down-days as part of the two-steps forward, one-back.  This is the process of moving forward and don’t let modest weakness spook anyone.  For those that are holding, they can keep holding.  For those looking for a place to get in, wait for some weakness, but don’t wait too long because the dip will be shallow and quick.

Alternate Outcome:
A move above 1505 says the market is ready to keep going.  Of course a sharp advance on gigantic volume would likely be capitulation and signal a near-term top, but a more casual move above 1505 is putting the squeeze on shorts and pressuring those watching from the sidelines.  This is a chasing rally and as long as traders are watching from the sidelines there will be fuel to propel this market higher when they start buying back in.  We also need to be wary of a confidence rattling headline, but so far the market is pretty happy with the world and not too worried about last year’s headlines.

AAPL daily at 1:08 EST

INDIVIDUAL STOCKS

AAPL bounced back from early weakness and recovered $450.   We might even see the stock come up even more, but don’t be fooled, this is just a dead cat bounce to squeeze late shorts and keep hopefully owners holding on.  Anyone looking for a V-bottom is going to be disappointed.  Sharp bottoms form in over-sold stocks like we have in AAPL, but they also require an unexpected catalyst that decisively reverses the trend.  With the next earnings report three-months away, it will be a long time before we get another actionable catalyst   Further, at this juncture the market is no longer impressed with earnings out of AAPL and it needs to see something new to bring the stock back to life.  The market has clearly decided AAPL is a mobile phone company with increasing competition from Samsung on the high-end and low cost-rivals on the other end of the scale.  The market already expects strong phone sales, new phone models, and some kind of dividend/buy-back.  None of these events will reinvent the company or stock.  If anyone thinks AAPL will come back just because it is a great company will be waiting a long, long time.

I know many people are reluctant to sell AAPL here, but at least put a plan in place.  Pick levels above and below where you will sell the stock and stick to these.

Stay safe

AM: AAPL keeps sliding

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:12 EST

AM Update

Markets break above 1500 in early trade, will they be able to hold it through the close?  AAPL cannot catch a bid and is under $440.  What will it take to finally get the stock to bounce?

MARKET BEHAVIOR

Stocks opened strong, breaking through the 1500 barrier in early trade, but couldn’t hold those gains and dipped under this key level by mid-morning.  The market found a floor at 1495 and is attempting another assault on 1500.  It will be interesting to see how the market closes and if the pattern of early weakness followed by closing strength is changing.

MARKET SENTIMENT

The S&P500 continues defying weakness in AAPL and broad market investors are unfazed by AAPL’s troubles.  AAPL posted great earnings and is not indicating signs economic weakness; it is simply an isolated story of an over-owned stock.  That is why selling has not spread beyond AAPL.

But how does this unexpected strength affect broad market sentiment?  Some people theorize hedge funds were long AAPL and short the index as a hedge.  They thought AAPL was going to outperform the indexes, but were afraid of economic and political risks taking all stocks, including AAPL down.  In situations like this, they buy AAPL and short the S&P500.  This limits their exposure to the difference between AAPL and the S&P500, allowing them to make money even if AAPL declines, as long as the broad market declines even more.  This is a great way to isolate a single stock’s story from wider economic concerns.

A quick example will better illustrate this concept.  Lets say a major European bank becomes insolvent overnight and requires a high-profile bailout.  All stocks tank on this news, but some more than others.  If AAPL falls 5%, but the S&P500 with its heavy exposure to financials falls 7%, then the hedge fund actually made 2% that day because AAPL outperformed the S&P500.  (-5%) – (-7%) = +2%   This simple idea is the entire reasons hedge funds exist.  They reduce risk by hedging out broad market risk, allowing them to focus exclusively on individual stock stories.  But obviously this only works when they are right about the individual stock story.

Why this matters to the broad market is many of these hedge funds were short the S&P500 as part of their AAPL trade and when they sell out of AAPL, they are also buying back their S&P500 short.  If this really is the case, this is a temporary  lift because short covering is not driven by expectations of higher prices. We need to see other buyers step in to keep this rally going.

TRADING OPPORTUNITIES

Expected Outcome:
The market is taking it’s time at 1500, which is supportive of these levels as long as people are buying for the right reason.  Momentum chasers and short covering represents a small sliver of available money in the market.  While it is large enough to move the markets when they work together, they don’t have staying power to keep prices up by themselves.  This is why we want to see three or four days of support at a level before feeling confident other buyers are also buying these levels.  Today is the second day of trade around 1500 and if we keep this level through Monday and into Tuesday, it proves there is more to this new high than just short covering and we can stay long or add new positions.

Alternate Outcome:
With too many people waiting for the expected pullback, the market continues marching higher, crushing bears and filling traders watching from the sidelines with regret.  These two groups are the ones that keep buying the market and pushing it higher.  With as much selling as we saw between September and November, there are still lost traders holding cash and ready to chase this thing higher.  Breaking through 1505 and closing strong would show this market is still ready to move.

AAPL daily at 1:12 EST

INDIVIDUAL STOCKS

Another bad day for AAPL as it dropped under $440.  If AAPL was a great buy at $550, then it is a screaming deal at $450, but the question any AAPL bull must ask is where are all the buyers?  With continued weakness, new buyers are clearly not interested in this stock at $450 even though a lot of people who swear by the huge intrinsic value.  What this tells us is everyone who believes in AAPL is already fully invested, leaving no one else buy.

I was one of those people until yesterday, but the 10% decline on record earnings invalidated my thesis and in these situations there is nothing left to do but get out and reassess.  AAPL could easily find a floor around $450, but the same thing was said about $550.  The truth is these things go longer and further than anyone expects and clearly that is happening here.

There are two groups of traders watching this stock.  One is value investors attracted to the low P/E and dividend.  The other are holders desperate for a rebound.  The question becomes who will move first.  Value investors, especially those that resisted the temptation to buy AAPL at $500 are an obviously a patient bunch and waiting to see how low this will go.  On the other side are the hopeful owners insisting there is real value in AAPL and it is only a matter of time before it recovers.  At this point it seems far more likely the hopeful crowd will be demoralized by the steady march lower and eventually sell when they just can’t take it anymore.  Once everyone completely hates the stock, it will finally find a bottom and start rallying.  Both FB and NFLX had to go through this cleanse of maximum pessimism before they bottomed.  We should expect the same from AAPL, meaning we need to get rid of all these hopeful owners before this stock can bounce back, and that means lower prices in the near-term.  Apple Inc is a great company, but it will take time for the AAPL stock to work through its supply and demand imbalance.

The best way to trade situations like this is to sell and reassess with a clear head.  If you still believe in the story, buy back in when the price action supports your thesis.  No one is right about every trade and we all lose money, the difference is successful traders admit defeat and move on.

Stay safe

PM: S&P500 breaks 1500

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

The S&P500 market another new high, but it wasn’t able to hold those gains into the close.  Is this the start of a pullback to support or just another bear-trap?  AAPL was pummeled and never caught a bid, finishing at the day’s lows.  What does that mean for the near-term trade?

MARKET BEHAVIOR

The market showed impressive strength in the face of AAPL’s collapse.  The S&P500 broke above the psychologically important 1500 level while AAPL plunged 10%.  In a break from recent character, the market started strong and finished weak, failing to hold 1500.  One day does not make a new trend, but it is noteworthy enough to watch more closely.  Much like the rest of the month, volume was above average and most traders are actively participating in this market.

The last time the market printed 1500 was long before the financial meltdown and this is a significant milestone. It took a few years, but the market is finally getting its mojo back and encroaching on the all-time high, just 75-points away.  All the people who bailed on the market years ago because it was broken can’t be all that happy with their emotion-driven decision to shun equities and stick their money in 1% bonds.

MARKET SENTIMENT

It is noteworthy the market couldn’t hold 1500 and retreated back to the 1490s.  We have seen a lot of buying over the last two-and-a-half months and it would be perfectly reasonable for the market pullback to support before resuming the uptrend.  The market needs periodic rests to maintain quality ownership.  If prices rise too quickly, conservative investors get nervous and sell to emotional momentum traders.  Momentum buyers are notoriously weak-kneed and bail in droves when the trend turns against them.  While volatility is good for swing-traders, it is bad for investor confidence and everyone benefits from a stable market.

TRADING OPPORTUNITIES

Expected Outcome:
The preferred outcome is a modest pullback and consolidation of recent gains.  A nice and steady rally is preferable to a dramatic sawtooth ride for most investors.  Without a near-term pause, I will grow increasingly suspicious of the sustainability of this rally.  The market doesn’t need to pullback, but it should at least digest gains.  We saw nice sideways trade following the Fiscal Cliff  spike and that allowed the market to continue higher.  We need to see something similar to confirm the durability of this rally to 1500 and beyond.

Alternate Outcome:
Seeing the S&P500 bump its head on 1500 might be a tad too obvious because the market hates being predictable and this could be yet another bear trap before surging higher.  The market will pullback at some point, but trends are far more likely to continue than reverse because they continue countless times, yet reverse only once.  While the market can continue higher, it gets harder and harder for the rational trader to keep holding.  It is foolish to holdout for top-dollar and most often it is preferable to get out on the way up.

The market is one big head game and most people do better selling into strength because selling weakness leaves them filled with regret over not selling earlier.  The temptation is to wait for the market to go back up to the previous high, but more often than not the market steps lower, leaving the trader with even more regret at not selling the first dip.  And beyond this, the early seller has a huge psychological edge because he is watching the pullback with cash in hand and hungry to buy.  Compare this to the guy riding the elevator down, nervously trying to decide if he should get off or not.  By the time the market finally chases him out, the early seller is buying back in and ready to ride the trade back up.

I’ve read countless interviews with successful traders and I have yet to find one who claims his key to success is selling on the way down.  Every single one claims they sell too early, many going even further and saying that is the number one key to their success.  Maybe they are on to something.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL’s massive plunge caught a lot of people, including myself, off guard and that is why it happened.  The most noteworthy thing is the stock never caught a bid and finished at the lows of the day.  This is the most owned stock by big money and they failed to prop up their most important investment.  Big money knows the market is a game of perception and often they will defend their positions by buying shares to prevent a major selloff.  I was surprised we didn’t see that with AAPL, especially in after-hours trade when it would have been a lot easier to manipulate the market.  Based on this completely absent defense, it seems everyone already has as much AAPL as they can handle and no one is able or willing to put new money at risk.  That is a scary prospect for the stock.  No matter how solid the fundamentals, if there are no new buyers, the stock will continue languishing.

The problem for people hoping for a rebound is the biggest catalyst came and went and there really isn’t anything over the next few months to trigger a strong move.  The iPhone5S will be met with a yawn.  Management was hostile to questions over their cash hoard, so don’t expect much movement on that anytime soon.  Apple TV is still a R&D project.  And virtually all the other good news concerning global sales is already baked into the stock.  Without a reason new for investors to buy, it seems we are stuck at these levels for a while.  The stock could rally or slide another $20 or $40, but any expectations of recovering $600 in the next few months are a pipe-dream.  Apple Inc remains a great company, but it’s stock is out of favor and everyone who believes in the story already has all the stock they can handle.

Stay safe

AM: Markets surge while AAPL tanks

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:00 EST

AM Update

AAPL tanks and the market breaks 1500, what’s going on here?

MARKET BEHAVIOR

The market ignored all the noise over AAPL’s plunge and broke above 1500 in early trade.  Clearly the AAPL story is a single-stock event and the rest of the market is doing fine without its leadership.

MARKET SENTIMENT

I am surprised at the market’s resilience when the index’s biggest member stumbles in a bad way, but this is just another example of the market doing the least expected thing.  The market clearly wants to go higher and it is winning over reluctant traders with each passing day.  The only question is how many reluctant traders are left to win over before we run out of new buyers?

Today is the first day in a while that started strong and it will be interesting to see what happens in the second half of the day. Often these things go further and longer than most expect and that is clearly the case here.  Earnings have been fairly decent, even AAPL put up good numbers, so it seems the economic recovery is still intact and things are turning out better than feared.

It appears the Debt Ceiling showdown is being postponed and the market has yet to find a new fatalistic obsession.  Right now the only thing bothering traders seems to be too-far, too-fast and that is easily overcome by the market’s continued strength.  The thing we need to keep an eye on is the level of cynicism remaining in the market, if this market wins over too many fans, then we are approaching saturation and will run out of new buyers.

TRADING OPPORTUNITIES

Expected Outcome:
The market clearly wants to go higher and it would be foolish to try to short such a strong market, but that widespread attitude could be the thing that finally lets a short work.  Those that are still in the market can move up their stops and hold for a little longer, but there is nothing wrong with locking-in profits and waiting for the next trade.  The difficult trade is for those on the outside looking in.  It is tough to watch other people make money, but never force a trade just because you feel like you are being left behind.  There will be countless profit opportunities over the next 11-1/2 months.  If you missed this trade, just wait for the next one.

Alternate Outcome:
Last year’s Q1 rally continued for 3-months and we could easily see something similar here, but we need to look at what made last year’s Q1 rally possible.  The summer of 2011 saw a massive selloff between the downgrade of US debt and financial instability in Europe.  The markets sold off nearly 20% in a matter of days followed by moths of volatile sideways trade prior to the record-setting 2012 Q1 rally.  Compare that to this summer’s 8% dip and concern over spending another four years with the same Democrat in the White House.  These are two radically different setups and they will most likely produce different results as well.

The fear of a global depression in 2011 gave traders flashbacks to 2008 and they sold in droves.  It was the pervasive pessimism and huge pool of sellers that provided the fuel for the 2012 Q1 rebound.  We also had a wave of selling last summer, but it was far smaller, meaning the fuel for this Q1 rally is more limited.  No doubt we can keep going higher, but it needs to be part of a sustainable grind higher, not a race to 1600 that will inevitably run out of gas and come back down.

AAPL daily at 1:00 EST

INDIVIDUAL STOCKS

What can we say about AAPL?  AAPL reported one of the most profitable quarters in the history of the world and investors blasted the stock for being too predictable, stable, and profitable.  The ironic thing is if Cook came out and said we are changing our strategy and sacrificing margins for market-share, the stock would have shot up like a rocket.  For whatever reason, investors are punishing AAPL for its high-dollar, high-margin product lineup and predicting it is the next Blockbuster Video and on the verge of going out of business.  But the truth is smartphones have barely penetrated the global market and there is so much upside that both AAPL and Samsung will hardly be able to keep up with demand.  But everyone assumes because AAPL isn’t selling a $15 smart phone that they are headed out of business.  Someone better tell BMW and Nordstroms that they don’t have a viable business model because they don’t sell scooters or have dollar bins for poor people.

But no matter what, we trade the market and the market doesn’t like AAPL.  What we are watching is the cleansing process; AAPL was the most loved stock on Wall Street and now it has to become the most hated before it can recover.  NFLX and FB went through the same thing and provide a roadmap for AAPL’s eventual recovery.  My mistake was thinking sentiment had bottomed, but where I went wrong was not recognizing that a stock as loved as AAPL was needs to become even more hated than what is normally required to bottom.  This plunge to $450 certainly goes a long way to achieving that goal.  It might not be the final bottom, but we are getting close.

Hopefully most people closed out their trades and are not willing to ride this thing down.  While Apple Inc. might be a great company, we trade the stock and stubbornness should never let us go down with the ship.  The greatest advantage individual investors have is our nimbleness.  We can get in and out of positions in seconds and if we don’t take advantage of this, we give up the only edge we have on large institutions.  I’m not promoting overtrading, just saying that we don’t have to go down with the ship.  Sell out of AAPL here, clear your head, look for the right entry and jump back on board when the time is right.  There is no reason any of us should ride AAPL from $700 to $450.  That is the way people go broke.  Take our loss and move on.

Stay safe

PM: AAPL plunges after-hours

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

The S&P50o notched another new high, but the big headline is AAPL’s poor performance in after-hours trade following its earnings release.  The company announced record earnings, but the market was unimpressed and pummeled the stock.  It is okay to be wrong in the markets, but it is fatal to stay wrong.  Anyone caught on the wrong side of this trade needs to follow their trading plan.

MARKET BEHAVIOR

The S&P500 traded fractionally higher, but it was enough to set another new high.  Today’s volume was above average, but the lowest out of the last four days.  Good earnings from blue-chip companies propped up the tech sector, at least during regular hours.  Of course everyone knows what happened after-hours, but we will get to that later.

MARKET SENTIMENT

The market keeps pushing higher, but in a tentative way.   We see early weakness followed by a rebound and modest gains.  1500 is just a few points away and the rally lacks the enthusiasm and conviction to make a strong move higher, but this is not a bad thing.  Caution is a common characteristic of sustainable rallies.  Brashness, overconfidence, and complacency are hallmarks of major tops.  Reluctance to over-commit here means many traders are still holding back and their available reserves are the fuel that can continue pushing this market higher if they are compelled to chase a move higher.

But enough about this stuff, everyone wants to hear about AAPL.  AAPL is the largest member of the S&P500 and NASDAQ indexes.  No doubt today’s after-hours selloff will be felt by the indexes tomorrow and could be a catalyst for a near-term market top.  AAPL closed lower by 10% at the end of after-hours trading and is primarily responsible for a 0.4% drop in SPY and 1.5% in loss in QQQ in after-hours.  AAPL has largely been a single-stock story recently as it traded near 52-week lows while the S&P500 was making 5-year highs, but is this story big enough to shift market sentiment and finally trigger pullback?  It will be interesting to watch.

TRADING OPPORTUNITIES

Expected Outcome:
Tomorrow will be a real test for the market.  If the pattern of strong closes continues, it is showing signs the market wants to keep going higher.  But if the market cannot shake early weakness, look for bears and nervous holders to pile on the selling and push the marked back down to 1470.

INDIVIDUAL STOCKS

Swing and a miss.  Obviously I blew my AAPL call.  Not that it was a bad trade, it just didn’t work out and that is all that matters.  AAPL had one of the most profitable quarters in the history of the word, yet the stock was pummeled 10% after-hours.  We don’t trade fundamentals, we trade stocks and when the stock goes the wrong way we lose money.  Simple as that.

For those of us in AAPL, we need to figure out how to pick up the pieces.  It is perfectly normal, even expected to be wrong in the markets, but what is fatal is staying wrong.  Successful traders take their lumps and move on and that is what we need to do here.

In Wednesday morning’s post I wrote about position size.  Using a 3% risk target and the option market’s expected move of 7%, I came up with a maximum position size of $43k for a $100k account.  Lets see how this trade did if the after-hours selloff holds into Thursday.

At the height of selling, AAPL was down 11% from Wednesday’s close, so lets use that number.  An 11% loss was larger than the option market’s prediction of 7% and 11% of $43k is a $4,730 loss, or a 4.73% hit to the $100k model portfolio.  While an ugly number, it certainly is not a catastrophic loss and easily lets the trader live to fight another day.  The original 3% loss limit was conservative to begin with because as we just saw, sometimes things can get carried away.

But from a risk management perspective, a 5% loss is not that big of a deal.  We took a calculated risk and sometimes these things don’t work out.  But this isn’t just rationalization, a 5% loss is very manageable if we don’t let it grow.  It takes 14-consecutive 5% losses to lose 50% of a portfolio’s value.  (it is not 10 because the losses get smaller as the portfolio shrinks)  But f we let this loss get away from us, it only takes six 10% losses to wipe out half of a portfolio.  This is why cutting losses early is such an important part of success in the markets.

If any of you are in AAPL, don’t feel bad, it was a calculate risk and it didn’t work out.  These things happen and if you are having a difficult time with this, trading might not be the right thing for you.  But no matter what, we need to figure out how to move on.  After-hours trading sessions are notoriously illiquid and the price action we saw this evening might not represent what happens tomorrow.  The after-hours crowd most likely got the direction right so don’t expect AAPL to rally tomorrow, but the size of the loss can be distorted by the thin trade.

Obviously the market will open weak, but where it goes from there is key.  No doubt many traders saw the horrible headlines screaming 10% loss in AAPL and the market will open with a wave of sell orders.  But where the market goes from there will set the tone for the rest fo the day.  One strategy for trading gap downs is to let the market stabilize in the first five-minutes of trade.  If supply dries up after the initial wave of selling, prices can actually rebound through the day.  Take the low of the first five-minutes of trade and use that as your stop-loss.  Continue holding as long as the market stays above this level and if you are lucky you will recover a decent chunk of the early selloff.  But if the market starts selling and breaks the stop-loss, get out!  The first loss is often the best loss.  Take your 5% loss and move on to the next trade.

Tomorrow’s AM post will get more into how to trade AAPL going forward.

Stay safe

AM: Markets flat and AAPL up ahead of earnings

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:20 EST

AM Update

The S&P500 is flat and digesting recent gains.  We will watch this afternoon’s trade to see if the patter of late strength continues.  AAPL is trading higher ahead of earnings, but no matter how confident you are, always mange the risk in any given trade so you will always live to fight another day.

MARKET BEHAVIOR

Stocks are flat this morning as we digest recent gains and a pause here is healthy and supportive of current levels.  We will watch through the close to see if the trend of strong finishes continues.  We are close to 1500 and often the market is drawn to levels everyone is watching.

MARKET SENTIMENT

Tech stocks are doing well after strong earnings from bellwethers like GOOG and IBM, but the eight-hundred pound gorilla is AAPL reporting after the close.  With most of the macro-economic worries falling off the front page, earnings are getting more visibility than they have seen in a long time, but is this enough to keep the rally going?

The market is within 10-points of  1500, a major psychological milestone.  While round numbers are secondary for direct supply and demand, breaking through and holding 1500 will be a psychological boost for the market and help get sideline-watchers back in the market.  But more importantly, will these be the last buyers before demand dries up, or will this finally break the dam and flood the market with new buyers?

The dynamic between bears and bulls seems fairly balanced.  Bears are still bringing up old headlines and too-far, too-fast, but bulls are emboldened by the recent gains and everyone loves being on the winning side.  When everything is equal, you have to side with the trend, but just realize every day brings us closer to the inevitable pullback.

The expected pullback is nothing more than that, a pullback.   Retesting support will provide a reality check for the market and keep the rally fresh and sustainable.  People who claim a massive selloff is ahead are not paying attention and too hung up on dire headlines that the market already digested and discounted.  The market can crash at any time, but it won’t be because of the things everyone is already talking about.

TRADING OPPORTUNITIES

Expected Outcome:
We will most likely run into resistance at 1500, but how we trade after that will determine the market’s next move.  If the market peaks and reverses from 1500, then expect a retest of recent support.  1470 was a significant resistance level could provide support for a pullback.   We could also see sideways trade at 1500, which is supportive of a continuation.  If the market surges through 1500, that is the harder trade.  It might not be a sustainable, but often these things go further and longer than anyone expects and it is hard to watch the market race ahead without us.

Alternate Outcome:
Most people are talking about too-far, too-fast and expecting a pullback, including myself, but that alone is reason enough to wonder if we might not pullback at all.  This is what we saw in Q1 of last year and this year’s Q1 could be the sequel.  This is the reason I will watch the market for supportive price action that shows this rally has legs.  I don’t want to force a trade here because we are vulnerable to a pullback, but risk is a part of trading and I will keep waiting for the right entry point.   The best way to describe my attitude to the market is short-term cautious, long-term bullish so I need to keep looking for a place to get back in the indexes.

AAPL daily at 1:20 EST

INDIVIDUAL STOCKS

AAPL is modestly higher just hours from earnings.  The options market is still predicting a 7% move.  To calculate this, add together the at-the-money weekly call and put, approximately $17.50 each, then divide by the stock price.  ($17.50 + $17.50) / $510 = 6.9%.  For those that are familiar with sports betting, this market equivalent of the over/under.

Remember we want to limit our risk in any one trade to 3% of our account value.  3% is not a stop-loss or position size, but the size of loss we are willing to take on an individual trade relative to our account size.  If you have a $100k account size, you don’t want to lose more than $3k on any individual trade.  If 7% is the expected loss, 7% * investment = $3k.  Using a little algebra we come up with $3k/7% = $43k initial investment to achieve a 3% risk profile for an AAPL trade.

This isn’t to say 7% is the most you can lose on AAPL if earnings are downright horrible, but it is a reasonable approximation.  And more often than not, the actual result will fall within the predicted 7% range because of the concept of limited gain, unlimited risk associated with selling options.  This means the options market tends to error on the high-side when coming up with their over/under to account for this unlimited risk of an outlier event.

Stay safe

PM: Eying 1500

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Stocks are within striking distance of 1500, but the bigger question is what it will do once we get there.   Wednesday after the close is when we finally figure out what is going on with AAPL and if recent selling is justified.

MARKET BEHAVIOR

Stocks had a good day as the S&P500 notched another new high in higher than average volume.  The market is in clean air, meaning virtually everyone who owns stocks is making money and we no longer have overhead resistance from the “just let me get out at break-even” crowd.  It certainly looks like the market is attracted to 1500 and while not of technical significance, no doubt the nice round number will have a psychological impact on traders.  We are still a ways from 1576, the all-time high, but that could be in play if this rally continues over the next few weeks.

MARKET SENTIMENT

The market is riding an elevator higher after breaking resistance at 1473.   Will we bust on through 1500, or hit our head?  The interesting thing from a sentiment analysis is many traders have a nuanced view of the market here; many think it will head higher in the short-term, but a pullback is just around the corner.  This complicates things because it is vastly easier to contrarian trade when people have a single view of the market.

The challenge with this split view figuring out how people are positioned.  Are they riding the market higher and plan on selling at the top?  Or are they just sitting on their hands, waiting for the expected pullback?  When people have a single view of the make it is pretty obvious if they are long or short the market depending of if they think the market is going up or down.

With the market at 1492, 1500 is just a stone throw away and I expect we will challenge that level soon, maybe even tomorrow.  The question is if we should buy this level, take profits, or go short.  It would be crazy to buy this level after such a strong run, but it might be just crazy enough to work if too many people are waiting for the pullback.  But we could also hit our head if too many traders are getting greedy and dreaming of 1525 or even 1575.

TRADING OPPORTUNITIES

Expected Outcome:
Everyone knows a pullback is coming, the question is when.  Do we selloff tomorrow, or rally until summer?  Then there is the size of the pullback; are we headed to 1470 or 1350?  All good questions that every trader must come to terms with before trading this market.

Long-term traders can just sit through all this noise because they know over time they will come out ahead.  The downside is they could trade sideways for months or even years before their investment thesis works out.  Short-term traders can avoid those sideways trades, but timing becomes everything.

Nothing has chanted materially for the long-term trader and they should keep doing what is working.  As I’ve shared elsewhere in this blog, I believe we are in a secular bull and a person that holds a diversified portfolio over the next decade and be handsomely rewarded for their patience and discipline   (some might argue most of those gains are simply inflation catching up with us, but I’ll save that discussion for another time)

Over the near-term, it would be difficult to recommend buying this market here.   Further, I subscribe to the line of thought that if you wouldn’t buy something today, then you probably shouldn’t own it here either.  Trades often view purchase price and profits as two different things.  One is sacred while the other can be thrown around with reckless abandon because it is someone else’s money.   No, that is your money, you earned it by putting capital at risk, don’t be reckless and let is slip away just because it is profit.  The only reason we are in the market is to make profits, so don’t be so flippant with them.

If now is not a good time to buy and a decent time to take profits, what about shorting the market?  The trend is still higher and shorting is a counter-trend trade.  It is hard enough to make money trading with the trend, so only the most bold should even consider going against the trend.  If you can’t help it and must short, don’t do it here.  Wait for the market to surge higher and short that top.  If we break 1500 tomorrow, that could be an interesting place to consider a short, but you have to recognize a short here is a low-probablity trade and a great way to give away money.  Just ask any of the bears who have shorted since 1350.

Alternative Outcome:
Last year’s first quarter rally didn’t quit until April.  We could see something similar if traders keep waiting for the pullback that never comes and are eventually  forced to chase.  Quarters often develop a personality and this could be a chasing quarter just like Q1 last year.  Many traders took tax gains into the end of the year and companies paid special large dividends.  This pile of cash needs to be put to work and buying equities is a great place to do this.  It also looks like the Debt Ceiling debate is getting kicked down the road, so we might see clear sailing for a while.  But sustainable rallies have a moderate pace with two-steps forward, one-step back.  When we see the step-back, we can jump in when the market finds support and is ready to resume the uptrend.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL had another yo-yo day.  It opened higher, sold off midday and rallied into the close.  The stock is mostly biding time until earnings after Wednesday’s close.  The stock isn’t making a strong move either way as both bears and bulls seem content with the stock where it is.  We are at the lower end of the range, meaning bears’ opinions are more represented in the current price.

As I said above, the indexes are harder to read because of the more nuanced view traders are taking toward the market, but in AAPL things are very black and white.  Either people think AAPL is a steal here, or they think it is grossly overvalued.  This makes reading sentiment a lot easier.  The question any AAPL trader needs to answer is if they think the wheels are coming off, or if all this doom and gloom is overblown?  I’m not a long-term AAPL bull and am more impressed with what MSFT is coming up with, but this is a multi-year story and in the near-term there is still a lot of upside for AAPL, especially when the name is as punished as it has been.  But this is just one person’s opinion.

There are no guarantees in the market and it can always make fools of us no matter how sound our research and analysis.  Always practice prudent risk management and have a plan for what you will do if a stock goes up, down, or sideways so you don’t have to think about it when emotions are running high in the moment.  If AAPL traders higher, hold for additional gains.  If it gaps lower at the open, wait a few minutes to see if value investors step in and support the name.  If the stock trades flat, get out of the name and look for something more interesting since an uninspired AAPL is a stock that is probably headed lower over the near-term.

Stay safe

AM: Market up, AAPL down

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:36 EST

AM Update

Stocks are trading modestly higher after early weakness, but AAPL isn’t finding the love as it dips under $500 ahead of tomorrow’s earnings.

MARKET BEHAVIOR

Stocks traded modestly lower at the open, but in typical fashion found a floor mid-morning and bounced back near break-even. How much longer can this pattern of early weakness followed by afternoon strength last?  The more obvious something becomes, the closer it is to changing and this pattern is getting fairly obvious.  One of these days a lot of traders are going to buy the mid-morning dip and be dumbfounded when the market continues lower instead of bouncing like it is supposed to.

If we hold 1480 into the close, this will be the 3rd day in a row we closed above this level and if we can hold above this level by Thursday’s close, the market is showing support and will more likely continue higher before pulling back.

MARKET SENTIMENT

We are stuck in a place where is it no longer valid to make a blanket statement claiming the market is overly bullish or bearish.  To figure out what is going on we need to split the market into segments based on timeframe.  This is often the case when the market is on the verge of counter-trend trade.  I have no idea when the market will pullback, but pullbacks are fundamental to the markets so we know one is coming.  Maybe it will come this week or maybe it will be like last year were we went three-months without a meaningful pullback.  We don’t make money calling for a pullback, we make money getting the timing of that pullback right and that is the hard part.

Near-term sentiment is becoming fairly optimistic as headlines are taking more of a positive tone and pessimists are keeping most of that negative attitude to themselves.  But the other side of this argument is the market saw a massive level of selling in the October and November correction and those buyers are on the sidelines wondering if they need to chase this market or risk being left behind.

TRADING OPPORTUNITIES

Expected Outcome:
The market is pausing above 1480 and if we can hold these gains into Thursday’s trade that is supportive of a continuation.  But if we see weakness develop over the next couple days due to AAPL or Debt Ceiling developments, look for a modest dip back down to 1470, 1460, or 1450, all levels of technical significance as recent support or resistance.

Alternate Outcome:
The market can continue marching higher without pausing because of all the recent sellers sitting on the sidelines   Moves in the direction of the market often go longer and further than most expect and there is no reason we can’t keep going higher here.  How a person trades this is all about risk management.  We’re in this game to make money and to make money we need to lock in profits at some point.  Some people like to let those profits ride and others have smaller goals and prefer to turnover their portfolio with smaller gains.  I’m straddling the fence in this regard.  I have a large portfolio of buy-and-hold investments and that lets me be far more active with my personal trading account.  But this is what works for me, what works for you could look a lot different.

AAPL daily at 12:37 EST

INDIVIDUAL STOCKS

AAPL dipped under $500 this morning as the stock was hit by more selling ahead of tomorrow’s earnings.  Is this just nervous traders getting cold feet and bailing ahead of this event?  Or are some people trading on inside information and getting ahead of the rest of us?  Only one way to find out and that is to see what AAPL says tomorrow.

Recent weakness accounted for much of the negative supply chain rumors out there and even if they prove out accurate, the stock shouldn’t see too much selling because those sellers already sold before earnings.  This creates a potential sell-the-rumor, buy-the-news following earnings.

Stay safe

LA: A big week

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Look Ahead

This will be a key week for the markets.  We have AAPL’s earnings and the House vote on extending the debt ceiling three months.  We also want to watch how the market responds technically to the new breakouts and if we can hold the recent gains.

MARKET BEHAVIOR

As everyone knows, the markets made new 5-year highs and continues the trend of higher-highs and higher-lows over virtually every timeframe from daily charts all the way to monthlies   In fact, we are not that far from making all-time highs in the S&P500 and digging our way out of the decade-long slump of the 2000s.  The best time to buy-and-hold is when everyone says buy-and-hold is dead.

MARKET SENTIMENT

The big events coming up on Wednesday are AAPL’s earnings and the House’s vote to extend the debt limit three months.  Normally a single stock isn’t worth discussing when talking about the broad market, but AAPL is no ordinary stock since it represents almost 5% of the S&P500’s weighting.  A 10% move in AAPL could move the market 0.5% and that is before considering sympathy moves in related stocks.

How is the market lined up for these events?  It seems like many investors stopped paying attention to the Debt Ceiling after the Fiscal Cliff compromise.  Maybe that is because when our politicians reached a Fiscal Cliff deal, traders assumed they will do the same on the Debt Ceiling and it isn’t worth worrying about.  Or maybe the market has such a short attention-span that it can’t focus on something that is still weeks away.  Maybe fatigue set in and pessimists got so throughly thumped by the Fiscal Cliff rally that they just gave up.  But no matter the reasoning, given the recent market’s strength, it seems selling due to Debt Ceiling worries is very limited.  Without much pessimism to act as fuel, a Debt Ceiling deal will generate a modest pop at best.  In fact, if more people bought the expected Debt Ceiling deal, we risk seeing a sell-the-news event when buyers fail to show up after the announcement.

AAPL is a different deal.  The stock is trading at the lower end of the recent range and the latest headlines suggest a 50% reductions in iPhone5 production.  The technical and fundamental story seem broken and that chased a lot of investors out of the stock.  But all the selling into earnings creates an asymmetrical trade if most of the pessimistic selling happened ahead of time.  Bears could very well be right about AAPL, but if the recent selling already accounted for most of this negative view, that leaves little downside for when the bad news finally come out.  But what happens if the news is better than expected?  The stock pops dramatically as bears get chased out in a short-squeeze.

It will be interesting to see how much influence AAPL’s earnings have on the broad market.  Lately the stock has become disconnected from the market and  the market could have a good day even if the market plunges, or vice versa.

Outside of these two events, the market has priced in a fair amount of optimism and is less concerned over issues that plagued the market through the last year such as Euro Contagion, Obamacare, Obama’s reelection, Fiscal Cliff, raising taxes, and now the debt ceiling.  But I have little doubt the market’s next fatalistic obsession is just around the corner.

TRADING OPPORTUNITIES

Expected Outcome:
One of the more fascinating aspects of the market is you can find traders with completely different opinions on the market and they can both be right (or wrong) at the same exact time.  A bear could be shorting the market and bull buying the market, and they can both make money.  The bear could expect a pull back to support over the next couple weeks while the bull is expecting it to rally over the next three months.  Two completely different views on the market and they can both make money if they time their sales right.

And here I find myself with a split personality.  I’m bullish over the longer term, but am cautious over the short-term.      And to clarify, cautious doesn’t mean bearish, just expecting the market to retrench a little before heading higher.  Maybe that happens this week, but even if it doesn’t, we’ve come a long way and it is always smart to take worthwhile profits to keep greed at bay.

Alternate Outcome:
If too many people are taking profits here, that could keep the rally moving higher.  If the premature profit takers end up buying back in, their demand pushes prices even higher.  It will be an interesting week.  If the market pulls back modestly and quickly finds support, it could be buyable.  Same goes for a pullback to 1450, or even 1400.  The one thing I would be reluctant to do is chase a surging market higher.

AAPL weekly at end of week

INDIVIDUAL STOCKS

I’ve already discussed the AAPL trade above, but I’ll just mention the risks associated with holding through earnings.  Even if the odds were an obscene 80/20 in a person’s favor, that still means one time out of five he will get it wrong.  And the same can happen here, no matter how great the setup is, some trades just go bad no matter how sound the analysis and that is why we practice responsible risk management.  The options market is predicting a 7% move, so if a person wanted to limit their risk to just 3% of their portfolio, don’t hold any more than 50% of your account in AAPL.

Stay safe

WR: New 5-year highs

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Weekly Review

Stocks set new 5-year highs, but how much longer can this rally keep it up?  How are you going to trade AAPL’s earnings next week?  Are there other ways trade this than just buying ahead of the announcement?

MARKET BEHAVIOR

The S&P500 broke out to 5-year highs this week and printed levels we haven’t seen since 2007.  Volume for the week was average as most traders returned from the holiday break.

The market is 65-points above the 10-week moving average and 90-points above the 40-week moving average.  (similar, but slightly different from the 50dma and 200dma)  While it is not unusual to trade this high above these moving averages, it makes it less likely we will go significantly higher before the MA’s have time to catch up.  There are two ways the market closes the gap, one is dipping back to the moving averages, the other is trading sideways and letting them catch up.  The 10-week moving average is turning up quickly and the 40-week is edging higher as well so we might have to wait too long before resuming the uptrend.

MARKET SENTIMENT

What a difference a week makes.  Last week’s negative headlines disappeared and all of a sudden the world is a much better place.  This is a bit of an exaggeration, but the market’s attention has moved away from pessimistic worries and is focusing on upbeat data that justify the recent strength.  This is the typical tail wagging the dog that goes on in the financial press.  Journalists look to see what the market is doing and then dig to find plausible reasons to explain the move.  If the market goes up, they report positive developments.  If the market heads lower, they highlight the negative.  I don’t blame them for this, they are journalism majors and just doing their job, but as traders we have to see through the noise and figure out what is really driving the market.

We came from an extreme oversold condition following the election and no matter what the news was (impending Fiscal Cliff showdown), we were bound to rally because after all the sellers sold, supply dried up and there was nowhere to go but up.  And here we are, 140 points higher and no one can claim the market is still oversold.

So where do we go from here?  The economy is slowly improving, recent earnings have been decent, and politicians are making progress on the Debt Ceiling, but that is what we already know and how traders justified buying this rally.  To get the market heading even higher we need even more.  Either we get better than expected fundamental data or we need these fence-sitters to jump in and start buying.  Without these catalysts, the market will probably trade sideways and let the moving averages catch up.  And this is not a bad outcome either.

TRADING OPPORTUNITIES

Expected Outcome:
Sentiment has improved dramatically in recent weeks and the market isn’t paying nearly as much attention to negative headlines.  The Debt Ceiling is a page three-story as the teflon rally breeds complacency.  I have little doubt the market can keep heading higher next week as we find new shorts to squeeze, but I’m not in the business of picking tops.  I want to make worthwhile a profit and then move on to the next trade.

To clarify, this position is only intended for the more active traders who try to time the market’s regular fluctuations.  Longer viewed holders should keep holding, but expect some near term volatility before the market continues rallying.  While many of you hold for longer periods of time, understanding what the market is doing in the near-term helps manage the anxiety when the market goes through a normal and healthy dip.

Alternate Outcome:
The market can continue climbing from here.  The distance above moving averages is still not at extreme levels and we have room to go.  There are shorts still hanging on and pessimists to be converted.  This could give us one more push higher, but what’s another 20-points gain on a 140-point rally?  If a trader got in early enough, it isn’t worth risking existing profits for a few more dollars.

And don’t get me wrong, I’m not predicting a crash or a sizable pullback, just step back after two big steps forward.  I swing-trade the market and try to take advantage of these smaller market moves.  Depending on market action, next week I could jump back in if I like what I see, but this is my trading strategy and time horizon.  You need to follow what you are most comfortable with.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL had an exciting week as the stock broke recent support at $500 and plunged to $484 before finding support.  Most of the selling was from a high concentration of automatic stop-losses placed under the widely followed $500 level.  But as soon as these autopilot orders were triggered, the market found a bottom because most of the holders who bought during recent weakness are willing to hold through some volatility.  They are value investors taking a longer view on the stock and were not going to let a $15 dip change their entire investment thesis.

AAPL’s earnings are coming up next week and will mark a significant turning point for the stock.  Bears have leaned into the stock recently and the burden of proof falls on them.  The stock sold off in anticipation of slowing growth and shrinking margins and that has been the lead weight dragging the stock down.  If it turns out the concerns were overblown, expect this weight to be cut free and the stock to pop higher.  But there are no guarantees in the market, especially when dealing with such a polarizing stock.  The safer play would be to trade the stock after earnings.  If earnings are bad, the stock will be oversold before value investors step in and prop it up.  If it beats, the stock will surge higher over coming days and weeks.  In either case, the stock would be buyable after earnings and you avoid the risk of holding through earnings.  The one circumstance I would not buy after earnings is if the stock traded flat.  Without an oversold dip to buy or a strong rally to jump on, I’d stay out and look for something better to trade.

Stay safe

PM: Is it finally time to be cautious?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Markets recovered from early selling and set new highs, but rather than celebrate, I’m growing nervous.  AAPL is settling around $500 leading into earnings, but look for big upside and limited downside after earnings.

MARKET BEHAVIOR

The market opened weak and finished strong, this time adding a third of a percent and setting another new high.  Volume was 12% higher than average and a tad above Thursday’s breakout.

MARKET SENTIMENT

Stocks had two strong intra-day surges, one recovered early losses at mid-day and the second pushed to new highs into the close.  No doubt these strong rallies were fueled by shorts covering and day-traders buying the now routine afternoon recovery.  For weeks the market has opened weak and finished strong, to the point of being a broken record, but beware of the market’s trap.  Once you think you have things figured out, the market changes the rules.

Republicans offered a deal that would push the Debt Ceiling back three months and the market seemed to like that combined with other positive earnings related news.   After the market is clearly marching higher, predictions of a pullback have been silenced by relentless strength and repeated 52-week highs.

Rather than be lulled by the complacency taking hold in the market, the savvy trader is getting nervous.  Anyone buying the rally here is late to the party and is taking a huge risk.  The market is most dangerous when it feels the safest.  This is the invincible rally that nothing seems to phase, but that is what I am most afraid of.

TRADING OPPORTUNITIES

Expected Outcome:
I’m increasingly cautious here and anyone who has been reading these posts will detect the change in tone.  The rally into the close is what finally gave me pause.  Ideally we would have traded sideways for a bit before marking a new high, allowing us to build more of a base.  No doubt we can continue higher, but this seems like a good time to take profits and look for the next high-probability trade.  The goal isn’t to make all the money, just take the easy stuff and let the gamblers try to pick the top.

There are two ways this rally will continue, on is fast and the other is slow.  Fast is not sustainable and will reverse without warning.  The second is steady and deliberate.  The latter is what big moves are made of, but given the slow nature of  sustainable moves, there will be plenty of time to jump back onboard once the market proves itself.

Alternate Outcome:
If the expected trade is taking profits, then the alternate is doubling down.  No doubt we could see the market surge higher as more shorts get chased out of the market, but this is not a sustainable phenomena and buying will climax and reverse quickly.  Timing these moves takes the kind of precision that can only be achieved through pure luck and is not a game I want to play.

No doubt I’m getting out of the market early, but I’m okay with that.  If I’m wrong, it is a lot easier to get back in than recover lost profits from holding too long.  If we see the market pullback and find support at 1473, I’ll consider buying back in.  If the market surges higher, I’ll look for a place to short the market. If we break under 1473, I’ll also look for a short entry.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL dipped under $500, but recovered mot of those losses by the end of the day.  The $500 level is far less significant after all the stop-losses were triggered earlier this week.  That is why this break under $500 today was fairly uneventful.  We are a couple of days from earnings and shouldn’t expect the stock to do much before then. Both sides made their case and now we wait to see who is right.

If the stock disappoints, expect initial weakness but the stock will quickly find a floor as value and income investors snap up discounted shares.  If AAPL surprises to the upside, look for a big move on the release, but continue holding for additional gains over coming weeks as the pessimism is flushed from the stock.  Limited downside and huge upside makes for a great asymmetrical trade.  But as always, no matter how confident you are in a trade, make sure you can be wrong and still survive to trade another day.

Stay safe

AM: Early weakness is bullish

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:09 EST

AM Update

Markets opened lower, but found their footing in midday trade.  AAPL broke $500 today, but it was a nonevent this time and already found support.

MARKET BEHAVIOR

Stocks opened modestly lower and the S&P500 slipped back under 1480, but the slightly negative trade is supportive of the recent breakout.  The market is still above previous resistance at 1473 and a slight pullback shows buying isn’t getting out of hand.  The most sustainable rallies are two-steps forward, one-step back.  Markets that lunge ahead without pauses are more prone to breaking down.

The recent pattern is trading down in the morning and rebounding in the afternoon.  We will see if this trend continues, but even if it doesn’t rebound today, closing above 1473 and bouncing back on Monday will still be supportive of a continuation.

MARKET SENTIMENT

The pessimists are already shooting holes in this breakout because of this morning’s selling.  “A one-day breakout that fails immediately is not a positive technical sign.” @bespokeinvest  But I am on the other side, I see early weakness as a sign of strength and continuation.  Rallies are fueled by cynicism and I will be most concerned when we run out of naysayers.

The least sustainable move the market could make is two more strong up-days.  That would suck in all remaining buyers and the market would collapse on the subsequent lack of demand.  While that would have been and ideal setup for a swing-trade, our current dip is more supportive of a continuation.

The market is setting up for a near-term correction, most likely triggered by Debt Ceiling bickering, but the market is not ready for that trade just yet.  Ironically, the Debt Ceiling correction won’t happen until everyone forgets about the Debt Ceiling.  When the market is rallying, the financial news is generally upbeat.  Between the positive price action and improving sentiment, traders will be lulled into complacency.  When the group appears calm, the individual tends to relax too, but the instinct that worked so well for our ancestors is ill-suited for the world of high finance.

TRADING OPPORTUNITIES

Expected Outcome:
As long as we hold 1473, that supports a continuation.  We can’t go up every day and dips are a natural and healthy part of going higher.

Alternate Outcome:
There are two things that will kill this rally, 1) a huge surge higher and 2) complacency.  Keep an eye out for either of these.  The Debt Ceiling debate is around the corner and that could be the catalyst to kick off the corrective wave.

AAPL daily at 1:09 EST

INDIVIDUAL STOCKS

AAPL traded under $500, but just like we described yesterday, the stock has already been-there-and-done-that, so a violation of this level didn’t trigger a second large wave of stop-loss selling.  Dipping to $496 this morning was a non-event and the stock already found support is trying to regain $500.   Success in this game is knowing what the other guy is thinking and how he is positioned.  It isn’t hard, you just have to know what to look for.

Stay safe

PM: Reasonable and measured breakout

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Stocks finally broke 1473 and sent bears running for cover, but the price gain and volume was not enough to exhaust all the available demand and more fuel remains.  AAPL took the day off, but it is an earned and deserved rest after Wednesday’s powerful rebound.

MARKET BEHAVIOR

The S&P500 decisively broke through resistance on higher than average volume.  But while the day was significant, the 0.6% rally was far from overdone and represents a reasonable and measured move.

MARKET SENTIMENT

Bears and pessimists had another bad day.  When there is so much wrong with the world, but the market is rallying, you have to side with the market.  There are countless reasons the market should be weak from too-far, too-fast to the Debt Ceiling, and I can’t think of a single fundamental reason the market should rally 180 points over two months, but that is exactly what happened.

When a technician or fundamentalist looks at this market, all they see are reasons it should go lower, but if you judge the market by sentiment and supply and demand, it is pretty clear that the only place for this market to go was higher.  There is real psychology and economics behind this.  When everyone says the market should go down, they act on this expectoration and sell in anticipation of the market breaking down.  After all the pessimists get out, selling climaxes, supply dries up, and there is no where for the market to go but higher.  A lot of people say it is foolish or even impossible to predict the market, but that is just because they are doing it wrong.  If you know what to look for, the market’s behavior start making a lot of sense.

TRADING OPPORTUNITIES

Expected Outcome:
Thursday’s breakout was not overdone and the pullback from the day’s high shows this breakout was not overdone.  There is still some doubt and cynicism left and that is the fuel to keep the rally going.  But at the same time, don’t be greedy and get ready to take profits.  We’re in this to make money, not top-tick the market.

Alternate Outcome:
Nothing is certain and no doubt there is downside risk.  Every point higher elevates this risk and we need to be more cautious the higher we get.   Recent support at 1473 should provide support in the near term.  If the market rolls over on Friday and can’t hold the breakout, the market is most likely headed lower to at least 1450.  But more often than not, rallies like this end with surge higher on strong volume before reversing. A 0.6% gain and 10% above average volume are far from overdone in my book.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL traded mostly sideways, holding a slim margin above $500.  It missed the broad market’s rally, but given the huge surge yesterday, a rest day today is healthy and expected.  Most of the negative supply chain reports and analyst downgrades are out there and factored into the price.  By this point most bears and bulls have positioned themselves ahead of next week’s earnings.  Unless some new information comes to light, the stock will probably trade sideways into earnings.  The big advantage for bulls is the stock is at the lower end of the recent trading range, reducing the risk of a downside move on disappointing earnings.  Expectations have been dramatically lowered and the stock already cleared out all the stop-losses under $500.  While there are no guarantees in the market, it seems like there is less downside as compared to the upside.

Stay safe

AM: We finally did it

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:44 EST

AM Update

Stocks finally broke the logjam at 1473 and surged higher on all the autopilot buying.  Can we keep this up or is the market peaking?  Should we be concerned that AAPL is not participating in today’s rally?

MARKET BEHAVIOR

It finally happened, the S&P500 broke 1473 and continued higher through the morning.  This decisively set a new 52-week high and pushed us into levels we haven’t seen since 2007.  We clearly put the post-election selloff behind us and almost everyone with a diversified portfolio is holding winning positions.

MARKET SENTIMENT

The rally easily sailed through resistance at 1473 as early buying came from bears covering shorts and momentum traders jumping on the breakout.  Whenever you have a lot of people watching the same level, it makes for an exciting trade when we finally break through.

Today’s rally puts anyone afraid of the impending Debt Ceiling debate in a very uncomfortable position.  Do they chase the market higher or risk being left behind?  Fear of regret is a powerful emotion and isn’t exclusive to declining markets.  The bigger question is if the early buying from shorts and momentum buyers entices follow-on buying from a deeper pool of investors, namely those watching from the sidelines.

While those worried about the Debt Ceiling have legitimate concerns, they are obviously early.   There are a few week before the Debt Ceiling debate reaches crisis levels and in the market that is an eternity.  Expect the market to continue trading on the imbalance between supply and demand over the near-term.

The trend is higher because supply is scarce.  Those afraid of heights or headlines bailed their positions weeks ago.  The buyers that replaced these worrywarts demonstrated their willingness to own stocks in the face of these issues when they bought in spite of all that is wrong in the world.   Their confidence makes them more likely to hold through volatility and this holding keeps supply tight.  No matter what the fundamentals, when supply is tight, prices go up.

TRADING OPPORTUNITIES

Expected Outcome:
Owners of this rally have a far better decision head of them, lock in profits or hold for more gains.  Those are the trading decisions we love to make.

Markets moved decisively higher on the automated buying triggered by the breakout, but the chase hasn’t reached epic proportions and today’s rally is still far less than a 1%.   While making a new high is significant, the resulting move is reasonable, measured, and still a ways from capitulation levels.  Swing-traders should raise their stops and keep an eye on the exit, but it is still okay to continue holding for the time being.  If the buying accelerates we will need to reevaluate.

Alternate Outcome:
Will real buying follow today’s autopilot rally?  If most traders are more afraid of the Debt Ceiling than being left behind, this rally will stall and collapse.  But that is the rational trade and often emotion gets the better of traders.  Humans are naturally wired to feel more comfortable in the group, and if it appears like the group is not afraid of the Debt Ceiling and moving on, then many traders will forget about their concerns and run to catch up with the safety of the herd.  It is okay to hold stocks here, but watch out for stalling.

AAPL daily at 1:45 EST

INDIVIDUAL STOCKS

AAPL is resting after yesterday’s monster rebound from $484.  It isn’t participating in today’s breakout, but given what it did on Wednesday, we can cut the stock some slack.  It is still holding above $500, but Tuesday’s dip greatly diminished the importance of this level since most of the stop-losses were triggered and are no longer there.

Stay safe

PM: Stocks struggle with 1473 again

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Market recovers early losses and closes at above 1470, but still can’t break above 1473.  AAPL is everyone favorite stock again as it bounced back from the yesterday’s panic selling.

MARKET BEHAVIOR

Stocks closed above 1470 for the fifth straight day and in typical fashion sold off early before rebounding.  The S&P500 is magnetically attracted to 1472, but can’t break above this hard ceiling.  Volume was below average, but in line with yesterday.  The low volume suggests many traders are waiting for the market to make its next move.  This pause is like a dam slowly building pressure, the longer we sit here, the larger the resulting move will be.

MARKET SENTIMENT

It is interesting to watch the market stall every time it bumps into resistance at 1473.  Traders support this market every time it dips, yet they won’t step over that line and buy 1473.  With five-days at this level, it is quickly turning into an endurance event between bears and bulls.  Who has the bigger war chest to either prop up stocks at these levels, or prevent them from advancing any further?

Most often you see a hard-line like this in an individual stock when a major shareholder instructs his broker to buy any time the stock dips to x, or sell any time it rises to y.  But the S&P500 is far too large for any single manager to put a lid on and it is largely a coincidence that so many traders are making identical trades at the same levels.  (Some people might have more sinister conspiracy theories, but I don’t buy into that.)

Other forms of resistance are due to a stock’s ‘memory’.  You see this when a stock is recovering from an earlier selloff and underwater  holders are finally able to get out at break-even   But that doesn’t apply here because at four-year highs, virtually everyone is sitting on a profit.  So who is selling at 1473?  It might be bears expecting a double-top and shorting ahead of the expected pullback.  Maybe it is some conservative traders locking in profits.  It is hard to think of another major group selling here..

But selling is only half the equation.  We could also be hitting our head on resistance from a lack of follow-on buying.  But the thing that’s curious is why is the market is buyable at 1469, but not at 1473?  If a person was expecting a correction and wouldn’t buy at 1473, surely they wouldn’t buy at 1469.  So I still don’t understand why we keep bouncing back to 1473, but can’t break through.  Often the market works in mysterious ways.

TRADING OPPORTUNITIES

Expected Outcome:
With everything else being equal, stick with the trend.  With each passing day 1473 becomes a bigger deal.  If I were a short, 1473.5 makes for an obvious stop-loss, and you better believe everyone else is using that same convenient stop.  Breakout buyers are also eying that exact level.  The more obvious and watched a level, the bigger the move through it will be.

Alternate Outcome:
While the trend is higher and holding this price level for five days is supportive, the inability break 1473 is concerning. There are a lot of buyers sitting in the wings waiting for the breakout, but if it doesn’t happen, the market can slide under its own weight if buying dries up.  The longer we hold here, the more likely it is support will crumble under our feet.  If we don’t break through and hold 1474 tomorrow, I’m going to reevaluate my expectations of an upside breakout.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL made headlines again, this time for bouncing back decisively from yesterday’s plunge.  No doubt a lot of the aggressive shorts that laid into the stock as it broke under $500 were stung this morning when AAPL turned their world upside down.  Easy come, easy go.

AAPL might dip under $500 again, but if the stock recovers to $600 in a few months, does it really matter?  Yesterday’s plunge was scary and shook out most of the weaker hands.  Anyone without strong conviction and confidence in AAPL sold yesterday, so that greatly reduces the chances of it happening again simply because all the sellers are already out of the stock.  For this reason, I expect AAPL will likely hold between $500 and $520 leading into earnings.

Stay safe

AM: $#!+ or get off the pot

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:47 EST

AM Update

The market is flirting with 1473 and AAPL bounced back from yesterday’s dip under $500.  So far it is shaping up to be a good day.

MARKET BEHAVIOR

Stocks opened lower, rose to 1473, and are pulling back slightly in the early afternoon.  The pattern of weak opens continues, as does hitting our head on 1473.  Is the market resting before making an aggressive assault on 1473 by the end of the day?  Bulls are hoping so, but stalling for fourth day at 1473 is becoming a concern.

MARKET SENTIMENT

Buying dries up at 1473 and the sideways trade continues.  A longer consolidation often means a stronger move when it does happen.  This is because a particular resistance level becomes followed by more and more traders with each passing day.  1473 is quickly becoming a key buy signal for both momentum traders and a stop-loss for shorts.  That concentration of trades around one level sets the stage for an explosive move when we finally penetrate that level.  AAPL’s trade yesterday was a perfect example of this phenomena as the stock broke under $500.

The longer we hold these levels, the more confident both sides become.  Bears are emboldened by the inability to break 1473, while bulls see each failed selloff as a victory.  There is a good mix of bears and bulls in the market, so we don’t have a strong asymmetrical trade to take advantage of.  Under balanced conditions, the side that usually wins is the one that goes with the trend.  The trend is higher and that could ultimately break tie in this stalemate.

But the more balanced sentiment in the market limits the upside potential of a continuation.  Bears and pessimists fuel rallies, and without an overabundance, the rally can’t drive too far.  An upside breakout will draw in many of the sideline watchers and chases out the last shorts, but after that buying exhausts itself, we could fall under a vacuum of new demand.

TRADING OPPORTUNITIES

Expected Outcome:
For those that are long, stay long and wait for the expected breakout.  This is a bad place to be short right now and wait for further signs of weakness before getting in front of this market.  Trading against the trend is a really hard way to make money and I don’t recommend it.

Alternate Outcome:
Failing to break 1474 today would be a red flag and if we can’t grab that level by Thursday, we need to reevaluate our position.  For the longer-term trader this is trivial because it doesn’t matter if you zig and then zag, or zag and then zig.  But for those of us swing-trading these minor moves it makes a world of difference.  If we get turned back from 1473 again, watch for a dip back into the trading range and possibly a test of 1450.

AAPL daily at 1:57 EST

INDIVIDUAL STOCKS

AAPL bounced back and recovered $500.  This doesn’t mean the coast is clear, but it is extremely encouraging to see the selling exhaust itself and reverse.  Anyone who follows this blog knows there was not a lot of supply under $500 and selling would stall once the stop-loss selling ran its course and that is exactly what has happened.

AAPL is buyable here, just like it was buyable three-days ago.  This is a longer-term trade and anyone in this name needs to expect some near-term volatility.  If you find yourself with such a large position that you can’t sleep at night after days like yesterday, then you need to lighten up.

It will be interesting to see if AAPL retests $485 or if this was the last major shakeout before earnings.  The one thing that makes me cautions is so many people viewed this dip as a buying opportunity and that makes the contrarian in me nervous.  But if these new buyers are willing to hold the stock through some volatility, that keeps supply out of the market and we should rally.  Sometimes the contrarian trade is going with the market and this might be one of those times.

Stay safe

PM: A tale of two cities

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Stocks closed positive and the recent support is indicative of a continuation.  AAPL sent waves through the market as it broke $500, but is it setting up a double-bottom?

MARKET BEHAVIOR

The market closed above 1470 for the fourth consecutive day and it was the third time early selling failed to gain traction and bounced back in the afternoon.  The market is one point from setting a new 52-week high, but it continues struggling with 1474.  Volume was below average, but higher than Monday.

Bears cannot recruit new sellers to join them in bringing down the market, but at the same time bulls cannot break through the 52-week high either.  No doubt we will see a resolution to this stalemate in the next couple days.

MARKET SENTIMENT

I see a fundamental difference between bears inability to recruit sellers versus bulls struggling to entice buyers.  It is always easier to get people to sell, especially when headlines are negative and everyone is yelling overbought.  So why are bears having such a hard time shaking anyone loose?   Most likely it is because holders don’t want to sell and are comfortable holding through some near-term weakness.  These longer-viewed investors are keeping supply off the market and preventing any selloff from building momentum.

On the other side, bulls are dealing with reluctant buyers.  There are plenty of people standing around watching, but they hang back, unsure of these new levels.  But unlike bears who have failed to trigger follow-on selling after multiple market dips, bulls have not tried to get their bandwagon rolling yet.  Things could get exciting if the market finally breaks 1475 as shorts are squeezed and momentum buyers jump onboard.  But bulls must make their move before gravity takes over and the market drifts back to the lower end of the trading range.

TRADING OPPORTUNITIES

Expected Outcome:
Holders continued holding in the face of early weakness.  Their resolve to see this thing through keeps supply out of the market and this confidence supports an upside resolution to this consolidation.  How big that move will be is anyone’s guess.  A huge surge higher might not be sustainable, but a more modest one could let this market continue higher for a bit longer.

Alternate Outcome:
Bulls only have so long to make their move before they lose their credibility and the market will at least retest support at 1450.  When all else is equal, gravity takes over and prices slip because there are many reasons people sell, but only one reason to buy.

AAPL daily at end of day

INDIVIDUAL STOCKS

This is a tale of two cities.  While the broad market is holding up nicely, AAPL had a major violation of support.  With so many stop-losses concentrated under $500, it was too rich of a target for the market to pass up.  But now the technical driven selling came and went, the question is where do we go from  here.

In the comments of last night’s post I wrote about the psychology of a double bottom and what makes it work.  I’ll copy an excerpt here for those that missed it.

“We are seeing the psychology that makes double-bottoms such a common reversal pattern. The first rebound sucks in the eager buy-the-dip crowd, but because nothing in the market is easy, they get humiliated by the next pullback. A key part of the double bottom is the second bottom undercuts the first because this flushes out the last of the hopeful holders and sets the stage for a rebound.”

“There are no guarantees in the market, we are simply playing a game of probabilities. AAPL’s recent strength brought in bottom-pickers and they are running for cover these last two days. The rest of the ownership is value buyers who bought the stock in the face of recent declines and are willing to sit through some weakness. We could easily see further weakness, but there is a limited number of bottom-pickers remaining in the stock and once they are gone, supply will dry up and the stock will bounce.”

But while I don’t see a reason to bail on AAPL after today’s selling, this is a good time to talk about risk management.  First and foremost, if you are uncomfortable and uncertain, sell and reevaluate.  It is always easier to think clearly when you are outside the market looking in.  And you can always buy back in once you formulate a new plan of attack.

Another useful strategy is to limit your risk in any one trade to 3%.  Don’t mistake this with a 3% position or a 3% stop-loss.  That 3% limit is the amount of your account value you can lose on each trade.   If you have a $100k account, that means you can risk $3k on a single trade no matter how much you have invested.  If you have $50k in AAPL then you can take a 6% loss, but if you only have $10k invested in AAPL, then you can sit through a 30% pullback.

The reason for the 3% loss limit is it lets you live to fight another day.  With this you have to be wrong more than 20 times in a row before your account value will be cut in half.  Between the 3% rule and your calculated stop-loss target, you can figure out how large of a position you can take.  The tighter the stop-loss, the larger position you can take.

Stay safe