Trend Remains Up (With Possible Surprises)

“The fundamentalist studies the cause of market movement, while the technician studies the effect.” – John Murphy

$SPX Climbs Mildly From Flag Pattern

By Friday, the $SPX inched slightly above its short-term flag pattern.  Noted leaders (small cap's, transports, cyclicals) showed more upward progress.  The tech sector even showed up to lead price on a couple of light volume days, and remained noisy enough to avoid a pull back (e.g., a close below $NDX 2720).

$SPX Daily (QE infinity remains underneath the market)

Technically, the inter-market relationships presently support the equities continuing their move up.  Volatility remains way down, bond yields remain mildly elevated, total market volume is low, and dips continue to be bought.

While the trend up remains intact, I still have some concerns about how quickly the markets have risen since November 2012.  Price continues to rise daily (squeezing shorts), but market accumulation is less clear.  Overall, I think some buying caution is warranted here.  Entering OpEx week, I would not be surprised by a price pull back (like ES 1450-51).  Also, the slow grind higher this last week suggests to me that we could see a pull back sooner rather than later.  As I am writing, this news just came out:

Coin-mageddon (watching for a shock event in futures Sunday evening)

The above news event is a reminder that over the next 45 to 60 days that a single news event about the debt ceiling can enter the market picture quickly.

Noted Technician Calls A Top

The prospects for an $SPX 1500 top gained some attention this week when Tom DeMark (a well followed TA guy) suggested a top is near at $SPX 1492.  I would comment that his system's record is actually pretty good at calling broader swing tops and bottoms.  Here is a Bloomberg article about that.

Tom DeMark Article (Bloomberg)

Technically, it is my understanding that Tom DeMark uses an exhaustion top model (waiting for 13 exhaustion days) to call market tops.  Based on his $SPX calculations, the US market has seen 12 exhaustion days in this climb (so far), and he warns that the 13th is close at hand.  I do not follow Tom Demark myself, but if interested, you can find his books on Amazon and Stockcharts.

I do not implicitly trade off of market top calls like this.  I am interested though in related crowd behavior and dynamics, as they can be a viable counter-trading tactic.  Related to this, in the last few days the AAII survey was released suggesting that investors sentiment is changing (a divergence).  Furthermore, recently I have seen far too many traders calling for a specific climb to a $SPX 1500 top.  When that happens my radar props up and I often watch for surprises for “the crowd” of people following the top caller.

AAPL Update (Cause and Effect)

I had mentioned AAPL as a short trade in my last blog post.  Personally, I traded AAPL short this past week (entry 529) with a planned exit and option target below 515 (e.g., a break of fib support), however I covered on Friday (521.50) when it became apparent it was not going to work the way I had planned the trade.  I was also concerned about the theta burn on my options.  I held my AAPL short position for a few days .. long enough for a break of 515 area to present itself, but that level held on 2 tests of 515 this week.

When a trade does not work as planned, I often will take it off.  However, AAPL remains on my short radar until: (A) its earnings date (January 23rd), and/or (B) until bulls can break through 532 and trend line resistance on the daily chart (below).  With the earnings event about 10 days away, I expect to be executing some shorter-term trades (1 to 2 holds) before that date.

Apple Daily (AAPL earnings on January 23rd)

Apple Weekly (its bear market and $500 BIG support)

Much like the quote above, for Apple, its earnings (fundamentals) are the cause and its technicals are the effect.  Normally AAPL is an earnings powerhouse, but with tablet pricing and consumer choices becoming more competitive globally, AAPL earnings could present a surprise in either direction.  Android is gaining ground in countries where the high end, much higher priced Apple products are less affordable to the masses.  This is primarily why I will most likely stand aside during and around the AAPL earnings day.

To my trading eye, AAPL's down trend remains its most important technical feature.  However, I see an emerging technical problem for bears as AAPL gets close to its earnings date.  January 23rd conveniently arrives closely to when the current declining trend line (see daily chart) intersects the 522 to 531 range.  Technically, a break up above the trend line becomes very easy near its earnings, and a break of the downward trend line would invalidate the primary trend that I have been trading off of (e.g., my edge disappears).

My Intention

In closing, I want to emphasize that my market observations are my own.  The presented technical and trading ideas should NOT be construed as a recommendation.  My intention here is to demonstrate: (1) how someone might technically trade a stock, (2) a decision process associated with short term entry and exit, and (3) to others how to explore and test their own trading ideas using technical analysis.

I am on Twitter most days (@facesincabs), where I socialize with other traders, share entries and exits, and share real time observations about the markets.  Good luck with your own trading (luck = preparation + opportunity + a little risk).