AM: Sideways it is

AM Update

MARKET BEHAVIOR
The sideways trade continues as the market bounces around break-even this morning.

MARKET SENTIMENT
The window for a panic driven crash came and went.  We had one dramatic down-day last week, but trade has been unremarkable, even boring since then.  Traders are an opinionated bunch and we all think the market is either undervalued or overvalued, that’s just how we are wired.  But reality is the market trades sideways far more often than it breaks out or breaks down.  No one wants to listen to an analyst say this will be a boring, quiet, and dull summer.  We want promises of drama and excitement.  We want horses to bet on.  But what we want and what we get are often different things.

Bears are right when they say the current rate of gains is unsustainable, but they are wrong when they claim we need to pullback from these overbought levels.  Sideways trade is another tool markets use to rest and refresh.  This is exactly what happened in March and April and it could easily happen here to0.

Don’t despair, there are plenty of ways to profit from sideways markets, we just need to use different tools.  Instead of buying breakouts and selling breakdowns, we buy weakness and sell strength.  Selling options is another effective tool for savvy and experienced derivative traders to profit from time-decay.

TRADING OPPORTUNITIES
Expected Outcome:
Staying in a tight range following the “obvious” top last Wednesday means that selloff is dead and buried.  Everyone who wanted to sell, or could be scared out of the market, sold days ago and there is very little supply left to shake out of the market.  We can still selloff, but it will take all new and unexpectedly bad news to drive that weakness.  This market already decided it no longer fears recycled headlines about QE ending or any of the other concerns constantly circulated by the financial press and bears.

Market go up, down, or sideways.  The stalled selloff shows there is little potential for greater declines, so that is the least likely outcome.  That doesn’t mean impossible, just less likely than the other two possibilities.  The recent rate of gains have been impressive and common sense tells us they cannot continue indefinitely.  Markets rally in steps and our step from 1550 to 1650 was a good one.  Another short squeeze could continue the drive higher, but the most likely outcome is the one on one is talking about, trading sideways for the remainder of the summer.

Alternate Outcome:
The longer we hold these levels, the less likely a panic driven selloff becomes.  But less likely is not the same as impossible.  The most important part of sustainable success in the markets is good defense.  No matter how we feel about the market and our positions, guarding our profits is always our top priority.  Look for a series of lower-highs and violating support to show buying is drying up and we need to get out.

Trading Plan:
Buy weakness and sell strength until the market shows it is ready for the next directional move.  The current range is 1635 to 1675 and swing-trade around these levels.  More meaningful support and resistance is 1600 and 1700.  Penetrating either of these indicates the market is ready for its next directional move.

INDIVIDUAL STOCKS
Much like the rest of the market AAPL is trading sideways and consolidating.  It is encouraging to see selling take a break and buyers actually continue buying these levels.  In reality the sideway trade stretches back to January and many of the weak holders and hope left the stock over this stretch.  The real test will be breaking and holding the previous high of $465.  This will be the first higher-high since last September and will be a major development of the recovery.  Failing to do this likely means the lows are not in yet.

GLD continues its volatile trade.  Today’s selloff is giving back most of yesterday’s pop.  No doubt hedge funds are scrambling between AAPL, GLD, and now the over crowded and plunging Nikkei/Yen trade.  Hedge funds are supposed to be smart money, but their results beg to differ.

Plan your trade; trade your plan