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Stockhaven’s market take 1/6/13

The S&P500 comes into this trading week at its highest point in over 5 years. I’ve got three main questions that I hope to get answered:

  1. How high can the market go without AAPL coming along for the ride?
  2. Does the VIX stay depressed below 15-16?
  3. Can the Dow Jones Transportation Index take out its 2011 highs around 5,620?

I believe the answers to these questions will ultimately determine if January is closer to the highest price we see in the market during 2013, or closer to the lowest.

Technically AAPL advanced 3.1% last week, but if we’re playing that card then we also have to acknowledge that it’s already in the red for 2013 (closed 12/31/12 @ $532). Going into Friday ($542.10 was the prior days close), I wrote the following down in my notebook under the section titled gut feeling: 

“Looks like it wants to fill gap down to $532-$535, but there is no reason to go back below $530 unless $500 is back in play.”

Well after closing Friday at $527 I am officially declaring $500 back in play for AAPL. To me, the bears seem to have a real chance to test and break $500 before earnings on 1/23 and I suspect they take advantage of that chance. After the initial rally from $510 to $550 most people probably cited the conclusion to the tax debate as the reason for AAPL’s rally. However, the consequential price action, which saw AAPL fall back below $530 now calls that reasoning into question if not nullifying it completely.

AAPL’s drop is clearly about something more fundamental in terms of the view of the company. The fact the drop came after it looked like the bottom was definitely in, and with the market rallying sharply, leaves me no doubt that the bears are in control here. I bet had AAPL held gains we would’ve seen SPX trade above 1,475 by now, but it didn’t so we didn’t.

I was impressed though that the market still closed where it did, and it looks like it can continue higher without AAPL on the backs of the banks and strong performance from other tech giants like GOOG, AMZN, CRM, FB, etc… I still maintain the view though that SPX is going to have a super hard time advancing much passed 1,475 (I see a real struggle with getting above 1,500) without AAPL at least holding its recent bottom.

Moving onto the VIX, which had its biggest one week drop ever recorded last week (more than 40%), its had a pretty good base in this 13-14 range over the last year and I expect that to continue. Nonetheless, anyone who was betting on higher volatility (and judging by its 40% rise throughout much of December lots of people were), got absolutely creamed so I don’t think we see any quick turn around to the upside from here.

To support this argument, I’d cite the ‘ole adage of “fool me once shame on you, fool me twice shame on me.” Lots of bears got fooled and they’d be stupid to get fooled again, at least this soon in the year. Therefore, I’m looking for continued upwards, but albeit choppy price action, as SPX sets up to test the 1,475-1,500 area. With that said, if we do see a quick bounce in the VIX back towards 16 then I’d expect SPX to trade back towards the 1,440-1,450 range.

Lastly, make sure you have your eye on the Dow Transportation Index (ticker $DJT on etrade pro and $TRAN on stockcharts.com). DJT broke out in a major way starting on December 18th and accelerated that breakout greatly last week. Even with the breakout though, DJT is still below its post financial crisis high at 5,627 (closed last week at 5,534).

Why is the DJT an important index to follow? Because it is a key component of Dow Theory and if it breaks that 5,627 level it will give of a technical buy signal to followers of that theory. Obviously there is no perfect science in trading, but the more bullish technical set ups out there the better, for the bulls anyway.

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