Doing the “1200” Swing

As I mentioned in my wrap up last evening, the 1200 level on the $SPX remains a key psychological price point for the broad market.  So far today, we gapped down to 1190 this morning, only to catch a bid that has us currently up to around 1205.  This market can best be described as being in a short term neutral state.  Thus, I am resisting the urge to make bold bets either way.  I did sell out of my $DPZ today because the stock started to drift a little too much on me.

With a 60% cash position, I will simply let things develop from here, as I am reticent to put on any further longs below 1210.  I do like some long setups such as $GLW, $LZB, $FST, $PETS and $DKS, but the broad market dictates the direction for at least seven out of ten stocks on average, and to disregard that would be reckless.

Despite the conventional wisdom amongst traders that a correction to the most recent rally is a foregone conclusion, this market has consistently been a tough nut to crack for the bears.   In particular, today’s session had all the makings of a huge “sell the news” reaction to $AAPL‘s earnings yesterday, yet the broad indices rallied back from the red to finish nearly even, as the $SPX closed down 0.10% at 1205. Indeed, we may be in a topping process, but the longer we consolidate above 1200, the more likely it is that the bulls will regroup and take us to new highs. Keep in mind, as the chart below illustrates, that we have already had a successful test of the 20 day moving average.

Psychologically, finishing comfortably above the 1200 level was a big plus for this market today.  I would use that round number as a good “tell” as to which direction we go from here. If we drop below there tomorrow, then I am looking for another test of the 20 day moving average. If, on the other hand, we can move above 1210, then I believe the bulls will have seized control yet again for another move higher.  Note also that a big down day tomorrow will cause the market to break down below the pink trend line in my chart of the rally since February.  So, we really are at a critical point in terms of the short and intermediate term direction of the market.

As for my individual trades, I had some nice gains in $EPAY, $DPZ, as well as two new additions to my portfolio: $AES and $COCO.  As stated in my trading video last night, I took a decent sized chunk of profits out of the 7% move in $EPAY.  I still have a large cash position and will likely continue to do so until we get through the heart of earnings season.  If we do break down tomorrow, I will buy the ultra short materials ETF, $SMN, due to the absolute and relative weakness in that sector over the past week or two.

As I said I would in my $EPAY video last evening, I took 60% of my position off of the table today into the great strength the stock is showing. If the stock pulls back and retests the break out point, I will look to buy back those shares. Congrats to anyone who played along with me on that one.

I also bought a position in $COCO. I like the chart on this one a lot, and the education sector has been doing well.

Earlier this morning, I also bought a position in $AES, piggybacking The Fly.

Trading Video–$EPAY

I hope you guys find it worthwhile. I am not trying to pump $EPAY (although I am long and I do like it here), so much as talk you through my thinking on ascending triangles and pennant formations in general.

UPDATE: What the $AAPL bulls are thinking tonight…

UPDATE  #2: I am encouraged by the overall market action. I would like to see us move above 1210 tomorrow on the $SPX for me to really consider using my large cash position on the long side.  I really like The Fly’s $AES buy today, and  I believe that stock could have a nice run above the 50 day m.a..  Of course, if we fall below 1200 on a “sell the news” type of day, then I will look for swing trades on the short side–going long $SMN being at the top of my list because the $XLB materials have looked weak.

I am still going Dr. Lecter style, being restrained from going all-in long on this market.  For those pressing their shorts the past few days, the frustration of seeing this market hold up incredibly well must be beyond belief at this point. Personally, I am enjoying wins in my top two positions today: $DPZ and $EPAY.  I wish I had taken my own advice and bought the high-flying $COIN, which was one of my top setups for the week that I posted on Sunday night.

As stated in previous posts, I am still holding a very high cash position–north of 50%.  We are still in earnings season, and I still have my suspicions about today’s action.  I am concerned that today could be a mere dead cat bounce before we head lower the rest of the week.  I would have liked to have seen more definitive action today, but it appears that we are drifting in front of $AAPL earnings tonight.  Times like these test the true discipline of a trader.  You have to be able to watch the action closely without making any trades, which is exactly what I will be doing the rest of today.

The $SPX closed up 0.45% to finish at 1197, as the action under the surface today appeared to be much weaker than the broad indices.  Many individual issues sold off pretty hard in the morning, only to see a slight recovery by the closing bell.   As the chart below shows, there are decent arguments for both bulls and bears to make.

On the one hand, we successfully tested the 20 day m.a. around 1183.  On the other hand, we closed just below the trend line of the rally since February.  If we fail at the 20 day tomorrow, then I expect the correction to deepen fairly quickly as we likely head back to the 1150 area. If, however, we show solid strength tomorrow, I will look for longs.  I believe the setups we are seeing right now offer no distinct edge to either bulls or bears.  Situations like these are precisely where traders make mistakes.  So, I am willing to sit on my heavy cash position and see how things develop in the next day or two.

With that said, I would give the bears the slight edge here.  Some key charts are indicating bearish patterns.  The financial sector is one example.  See the chart below.

The materials sector is also showing weakness, which points to a decrease in risk appetite as well.

However, to keep a big picture perspective, many charts are still healthy. It’s just that they look to pull back in the short term. The semis are a good example of that idea.

We have some more big earnings reports ahead of us, notably $AAPL.  You should be focusing exclusively on the reaction to the earnings, as opposed to the numbers themselves.  A good example of that idea was $IBM tonight, which reported an earnings beat after the bell.  Yet, the stock was down 2% after hours.  I think that reaction, if it carries over into the trading session tomorrow, indicates that an awful lot of optimism has been baked into the cake in the short term.

It is important to be open minded and nimble as a trader. Both of those skill sets will come into play tomorrow and Wednesday, as the market should tip its hand which way it wants to go in the short term.