AM: Where are we going?

AM Update

Stock are down and retesting 1550 after yesterday’s rebound.  AAPL is oblivious to market weakness and higher on hopes of a rebound.

MARKET BEHAVIOR

Stocks opened lower and are retesting support at 1550.  The market is on track for four out of five down days, but even with all the selling, the market has not lost much ground.  Either this is supportive of a continuation, or the ground eroding under our feet.  Our job is figuring out which and how to trade it.

MARKET BEHAVIOR

The market is doing its best to abuse both bulls and bears with these head fakes and it is doing a good job.  We make new highs, then break down, only to rebound again.  A trader reacting to these moves is getting killed because this whipsaw volatility leads to buying and selling at the wrong times.

Tops and bottoms are some of the most erratic periods because this is where bulls and bears are on equal footing.  The dominant side is losing its grip and the underdog is coming on strong.   While the top will be identified as a single day, the process takes months to complete.  If this is a top, it started last month with the drop to the 50dma.  Most rallies do not end on their first dip and that was the case here as the market rebounded decisively to new highs.  But as this process continues, each rebound is less and less powerful, eventually ending on the dip that doesn’t bounce.

Currently we are building and testing support at 1550, just a few ponts shy of all-time highs.  Everyone expects us to take out these highs and that is why we struggle to get there.  Traders who normally wait the breakout bought early in anticipation.   Bears are not shorting because they are waiting for new highs first. Everyone is mostly just waiting around and that is why we are not moving and volume is so light.

To figure out where the market is going we need to understand what other people are thinking and how they are positioned.  If most bulls are in ahead of the expected breakout, the actual breakout will not trigger a wave of buying because everyone is already in.   If shorts are holding back until we make these new highs, a breakout will actually be greeted by a wave of shorting and profit taking.

I’ve been waiting for a high-volume surge to signal an exhaustion top, but the way the market is set up here, I don’t know if we will get there.  Rather than end with a bang, this rally leg could exit on a whimper.    The bang ending requires a pool of reluctant buyers chasing in the final moments, but it feels like many of them are already in the market and there is no one left to power the chase higher.

INVESTING OPPORTUNITIES

Expected Outcome:
There is little reason to own this market.  Most of the upside has already been realized and a lot downside is underneath us.  The trend remains higher, so it is a risky short the market, but that does look to be the next high-probability, high-profit trade.

Alternate Outcome:
This will be the third year in a row the markets top in the April.  I like the precedent, but I worry about the predictability.  The market hates being predictable and is this too much?  I would be more worried if talking heads were making a big deal out of it, but so far it is not getting much coverage.  People are talking about pullbacks, but each bounce back quiets the pessimistic commentary.   I have no idea what will happen next, but I do see the odds stacked against a continuation. But even if the chances for a pullback are 80%, that means one time out of five this rally will continue higher.  Low-probability or not, we need to watch for the continuation and buy it when it invalidates our previous analysis.

INDIVIDUAL STOCKS

What do you know, AAPL is up when the market is down.  This stock is operating in a world of its own and AAPL traders have such intense tunnel vision they don’t see, nor care about what is going on around them.  The benefit for the bull is even if the broad market sells off, AAPL could surge higher on a break of the 50dma as traders chase the rebound.  But if people are buying the stock strictly for technical reasons, expect them to sell for technical reasons too, likely running into resistance near $485/$500.  Enter and exit a technical trade on technical levels.  Enter and exit a fundamental trade on fundamental data.  This story is still missing the fundamental catalyst necessary to reclaim much higher levels, so don’t let a technical bounce convince us to hold for larger gains when this will most likely be a temporary bounce.

Stay safe