Jun 272013
 
S&P500 daily at 2:44 EDT

S&P500 daily at 2:44 EDT

AM Update

MARKET BEHAVIOR
Stocks pushed toward 1620, recovering two-thirds of the Tapering selloff.  The market is just shy of the 50dma, which could act as overhead resistance for this three-day old rebound.

MARKET SENTIMENT
Buying opportunity, dead cat bounce, or sideways chop?  That’s the million dollar question.

The irrational, panic-driven selling ended when we bounced off 1560 Monday morning.  Since then we rallied 60-points on the back of dip-buying, short-covering, and seller exhaustion.  Talking heads attribute this strength to comments out of random Fed members and Japanese policy makers, but they overlook the simple fact market prices respond to nothing more than supply and demand.  It makes no difference what some policy maker says or doesn’t say, markets bounce when we don’t have enough supply to meet demand.  If markets reacted in logical and predictable ways to fundamental news, this stock market game would so much easier and we all know that’s not the case.

No one can accuse the market of discrimination because it is clearly an equal opportunity humiliator.  Last week bulls got whacked, this week it’s bears turn.  Anyone trying to make a directional bet in this chop is giving money away.  The best strategy in volatile periods is avoiding allegiances and biases.  Be an opportunist, not a bull or bear.

TRADING OPPORTUNITIES
Expected Outcome:
The market is stalling just shy of the 50dma.  Are we hitting our head or simply pausing while bears use this obvious resistance level to short the market?  We will know the answer soon enough.  Without a doubt some traders are selling this level, expecting another leg down, but the key is how the market responds to this challenge.  If it swallows all this selling as nothing more than a speed bump, that shows there is plenty of resilience left in this bounce.  If buying dries up and selling takes over, we are running out of dip-buyers.  No one has a crystal ball, but we can gain insights into trader’s views and positioning by how the market responds to these key levels.

Alternate Outcome:
As we just witnessed, the market likes to disguise its true intentions.  What looks like a bounce, ends up breaking down.  Something else appears like a crash, but it bounces back.  We trade moves through support and resistance, but we must be prepared to deal with the inevitable head fake.  This is a volatile and emotional market and it will send of plenty of false signals before revealing its true intentions.  Discipline is the only tool we have to get out of these head fakes in a timely manner.

Trading Plan:
The challenge putting on a trade here is we are in “everyman’s land”.  There is a solid case for the bull, bear, and swing-trader.  Bears can short the rebound to resistance.  Bulls can buy retaking major support at 1600.  And nimble-swing traders can lock in profits, look to add position if we break resistance, and short stalling at the 50dma.

There is really no wrong trade here as long as we follow our plan and honor our stops.  Bulls can buy/hold with a stop under 1600.  Bears can short with a stop above 1620.  And swing-traders can lock in profits and wait to trade the breakout/breakdown from the test of resistance.  We remain in a volatile market, so keep taking profits early and often.  And perhaps the easiest trade is taking the summer off.  Most traders give all their hard-earned profits back by forcing trades in emotional and volatile markets.

TSLA daily at 2:44 EDT

TSLA daily at 2:44 EDT

INDIVIDUAL STOCKS
Institutional investors are not coming AAPL‘s rescue here.  Cash horde, dividend yield, absurdly low P/E, brand equity, ecosystem, pipeline, etc, none of it matters as the greatest buy of the decade keeps getting cheaper.  AAPL’s problem isn’t that no one believes in it, paradoxically it struggles because everyone believes in it.  Everyone loves the company and its products, but that also means they already own the stock and there is no one left to buy.  Stock prices are not driven by fundamentals, technicals, opinion, or any of that other stuff the talking heads obsess about.  They trade on supply and demand.  When everyone who wants some already has some, we run out of new demand and there is nowhere to go but down.

The same logic explains why GLD struggles here.  “Everyone needs some gold in their portfolio”  or at least that’s what some people say.  And that is great when gold is going up, but I’ve never been a fan of broad diversification in a trading account.  Does it make any sense to offset our winners with losers?  Own it when it works and dump it when it doesn’t and clearly gold is not working here.

TSLA is putting the hurt on bears again.  There is no logical reason to own this stock here, but it is suicidal to short this stock.  Between the astronomical short-interest and the all the shares tied up by management and loyal investors, this stock will not act rationally.  It will come down at some point, but not before it defeats and bankrupts all those bears.

Plan your trade; trade your plan 

 Posted by at 12:47 pm on June 27, 2013

  4 Responses to “AM: What selloff”

  1. “The market is stalling just shy of the 50dma”. I wouldn’t call +12 S&P points a stall, unless you are trading the last two hours. Even my cab driver today mentioned the 50 day, it is incredibly popular, so I suspect a ton of traders are shorting here and could get burnt.

    • Maybe stalling is too strong of a word. Would you agree with pausing? Holding close to the 50dma in the face of all this selling is supportive. A break above this widely followed level will trigger a truckload of short covering, but I’m keeping an eye on 1600 just in case I’m wrong.

  2. “The irrational, panic-driven selling ended when…” Who can take this article seriously when it has such a slanted view? Why is the author not listed and hiding under “CrackedMarket”?

    • From my POV, last week the Fed didn’t say anything new or surprising. They would continue buying $85b in bonds each month but are monitoring the situation. Is that any different from what they’ve been saying all along? So when the market plunges on the same old news, yes it is acting emotionally. Further, seeing how quickly we bounced from those levels reinforces the notion it was irrational, panic driven selling. Feel free to disagree with me, that’s what makes markets.

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