AM: Bounce or breakdown?

AM Update

Volatility is chewing up impulsive traders, but the rebound remains in tact as long as we hold 1500.  AAPL is holding $450, but what happens if the market takes a dive?

MARKET BEHAVIOR

Stocks gapped higher at the open, but slid through the morning, giving back all those gains and then some.  The intraday range already exceeded 1% and continues the recent trend of volatility and indecision.

MARKET SENTIMENT

The market is in a sucker’s phase where it throws in all kinds of fake signals to dupe impulsive traders.  In periods like this it is best to act proactively, not reactively.  Take profits into strength and buy dips.  Anyone buying strength and selling dips is having a bad time.  The safest trade is letting the gamblers sort this out while watching from the sidelines.

Early weakness is blamed on election polling out of Italy, but if the market is ignoring sequestration and negative GDP, why will it crash on European politics?  The ‘bad’ guys won in Greece a couple of years ago and we see what happened there.  Nothing.  Why will Italy be any different?

Of course this is the market we are dealing with and it doesn’t always act rationally.  We could implode in a cascade of irrational selling, but since that is what people expect, I have my doubts.  No one believes this rally and that is why it keeps working.

People trade their opinion and anyone suspicious of this market is already defensive and underweight.  There are far more available buyers than sellers here.  Recent support at 1500 shows most holders are comfortable holding through weakness.  This limits supply and puts a floor under the market.  On the other side, shorts and money managers feeling pressure to catch this market will be forced to buy any strength.  Limited supply and lots of demand is a recipe for higher prices.

This rally leg is getting a bit old and anyone calling for a pullback is right, just early and in the markets early is the same thing as wrong.  We will pullback, just not yet.

TRADING OPPORTUNITIES

Expected Outcome:
The market is still well above support at 1500 and until we violate this level, the rebound is alive and well.  No doubt I could be wrong and that is what stop-losses are for.  Markets like this are best suited for decisive traders who are willing to act early.  Anyone who bought the market in the low 1500s is still okay.  Those that waited for a confirmation of the bounce before buying are being flushed out for a loss.

To succeed in volatile markets like these, identify ahead of time levels that show support and resistance.  Plan trades around these levels and then stick to that plan.  Last Thursday breaking 1500 but quickly recovering showed strength and was a legitimate buy signal.  For those traders, stick with the trade until the market breaks under 1500 and don’t get sucked into the emotional selling today.  Chances are good we will not fall back to 1500 and it will be an easy hold.

Alternate Outcome:
Markets often reverses on seemingly benign news.  If reversals were obvious, everyone would be rich and we know that is not the case.  We make the high-probability trade, but use stop-losses to protect against flawed and incomplete analysis.  Without a doubt Italy could be the straw that breaks the camel’s back, but we need to stick with the high-probability trade and that remains higher.  But we cannot ignore the other side of the trade and that is a bigger market selloff.  The market can slice through 1500 but will likely find support at 1475.  Failing support at 1475 means this rally is done and we need to wait for the next high-probability opportunity.

INDIVIDUAL STOCKS

AAPL is mirroring the indexes, gapping at the open, but pulling back in midday trade.  So far there is nothing new from today’s trade and the trend is more likely to continue than reverse.  The bigger challenge for AAPL will be holding up through a 10% dip in the broad market.  Since AAPL is a high beta name, it can fall more than 2x the indexes.  A 20% drop in AAPL means there is potentially another $90 of downside risk left in the name if the broad market hits a rough patch.  Are long-term AAPL investors willing to hold through that kind of volatility?

Stay safe