Investors and Traders Wait on AAPL

SUMMARY:
- Many bemoan a weak session, but the intraday action was constructive as investors and traders awaited AAPL’s earnings.
- Apple blows out earnings and tops guidance. Solid after hours response, but is it enough to push a new upside charge to resistance?
- For the first time in awhile an FOMC meeting has some meaning.
- Plenty of good patterns still in the market versus resistance ahead and the idea of just how much better can the news get after AAPL.
- Stick to the plan at this point as it has worked thus far.

Market shows decent action waiting on Apple.

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MARKET OVERVIEW

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TO VIEW THE NEXT SESSION VIDEO CLICK THE FOLLOWING LINK:

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I am starting with the intraday and after-hours trade in AAPL because it is likely to dominate the trade on Wednesday. It announced earnings after hours, and the stock is trading up about 30-35 on the news. The results were boffo. 13.87 on the bottom line versus 10.10 expected. 46.44B revenues versus 38.9B revenues expected. Guidance was a twist. AAPL usually sandbags, and it gave a 32.5B versus 32.1B expected. If this is sandbagging, then what will the next quarter bring?

The results were outstanding. Analysts are stunned by the strength of AAPL. Indeed, it has had its impact on other stocks. CRUS feeds AAPL. It closed at 21.87 and it is trading over 23. BRCM feeds AAPL products, and it is trading up as well. This happened to all of those who funnel their products to AAPL. NUAN is another one. It closed around 28, and it is trading to almost 29.50 after hours. AAPL has coattails, and it is carrying other stocks to the upside. Looks like a no-brainer that the market will trade upside on Wednesday. It could. This is not blowing out the after hours, however. It is not racing all stocks to the upside.

The S&P futures are up around 131.96 after closing around 131.36. A significant move. We will see if it translates into a new rally. There was some action during the day before AAPL announced. That was positive. A lot of commentators were bemoaning the day, saying the S&P was going to have its first down day in 8 or 9 sessions. Those statistics are irrelevant. You just know it has had a good move up, and you start watching for signs that the move could be running out of juice. It was testing. Yes, that is something a market, index, or stock does after it rallies as this one has. But the action was not negative.

SP500 finished lower, but it was not a negative day. What do I mean? Stocks started to the downside. Futures traded lower, stocks bottomed right after the trade began, and they started to recover. It was not a huge move. They moved back up to basically flat and then moved laterally into the last hour. They tried to pick up the pace and then faded into the close. It is tough when a huge stock such as AAPL announces earnings. It is tough after such a good run to the upside. After hours, the SPY is moving to the upside along with all of the AAPL companies that hang onto that stock. Great. Let us hope it can work. There is great news after hours. There were constructive intraday moves.

Looking at the test on SP500, it reached down toward the 10 day EMA and bounced back up. It has been moving laterally for three sessions. Three tight doji, virtually no movement except a bit up or down intraday. On Tuesday the action was positive and still holding well above that October high. Same action on NASDAQ. It gapped lower and recovered to the upside. The Dow tested lower toward the 10 day EMA and recovered to the upside. It still finished lower but recovered to the upside. SP600 tapped at the 10 day EMA on the low, recovered to the upside, and posted a nice gain on the session.

This shows that growth moved upside. Large cap NYSE (the industrials for the most part) finished lower but virtually flat after the comeback.

SP500, -0.1%; NASDAQ, +0.1%; Dow, -0.25%; SP600, +0.7%; SOX, +0.35%.

The NASDAQ 100 was down. GOOG and AAPL were lower on the session, and that dragged the largest 100 NASDAQ stocks to the downside. It was not a negative day, but if you turned on the financial stations at any point in the day, they were talking about what a lethargic session it was where the market lost its movement. It has lost a bit of its momentum, no doubt. When you have these kinds of runs, you run out of momentum. The question is how you handle it. Do you roll over and sell off? One fellow said last Friday was the top and things were falling over. This certainly does not look like action where the market is falling over. It is pulling back to test, and it is still showing good intraday action. If you pile on continued good-looking patterns on results and earnings that are not really that great, that suggests that the big funds still want to put money into the market. They are not chasing performance to the end of the year anymore. They are looking to put money to work in stocks that are quality but have not made big moves. Of course they also move into stocks that have made good moves but have pulled pack.

I am talking about stocks such as OFIX. A nice move the past few weeks, and here you have this big cup. They are playing this sweet spot as are we on these stocks as they move to the upside. There are other stocks that have shot to the upside, such as LULU, but they still want more of them. Different patterns are still garnering money from the funds. I do not want to sound hyper bullish. Lord knows the analysts gushing after hours about AAPL provided all of the optimism you could ever need or want.

I still have a problem with this market moving much higher. I am still looking at SP500 in the range of 1345-1360. It is not a specific point in space, but it could be anywhere in that range. With the index trading at 1315, that still gives it 35-55 points to move. That is still a moneymaker for us. We can still make money on new plays that are carefully chosen even at this juncture.

There is your synopsis of the day. There is a lot of talk about AAPL. APPL’s coattails are pulling a lot of other stocks higher. Remember that the market has plenty of good patterns moving to the upside as we have seen. Overall, we still have a cap on this move that spans from April and even February on SP500 at 1345. But the peaks are in April, May, and July. Good action. We have a cap. Is it like the old phrase about an irresistible force on an immovable object? It could be. We will have a showdown at some point. It sure does not look like negative action right now. Slowing, yes. It is losing a little momentum, of course, but not rolling over just yet.

An FOMC meeting started today. It is a two-day affair that will end on Wednesday. We will have an announcement and a little Fed talk. There is rough 25-35% possibility of the Fed announcing QE3 according to the Fed Fund Futures contract. That is not very high. Typically it needs to be over 50% for it to be considered a probability. That certainly makes sense. Nonetheless, there has been talk of QE3. I even suggested that it was more possible than not even though the numbers were looking better in the economy. It would make sense that there should be no QE3. The other markets are suggesting something of the same.

Someone talked about my comments with respect to Ben Bernanke leaning toward QE3 and helping the markets. They said he is a Bush appointee and a Republican. He said he would not push the President’s agenda. Well, yes, he would. Who cares if he was a Republican appointee? He knows who likes him and who does not. If any of the Republican nominees become President, then he is out of a job. He wants to ensure his legacy. That is what people who seek these jobs do. They may go up there with good intentions to do the right thing, and they may still want to do the right thing, but they also want to ensure their legacy.

Bernanke knows that will not happen if a Republican is elected President. He would tend to push the policies that he believes in, and it may just so happen that they are in line with what the administration wants to achieve. There would not be any problem with that from a philosophical or honor position, but it goes to prove my point further that they probably believe in the same things, so he is more in line with the current administration than he would ever be with the Republican party right now.

WEDNESDAY

Wednesday the economic data starts back up with the Pending Home Sales, the Housing Price Index, as well as the FOMC rate decision. That rate decision could actually have some meaning for a change pause there is this possibility of QE3. It has been awhile since an FOMC meeting meant a darn thing, and this one does because of the speculation fostered by the Fed and many of those on the Fed in their public statements. They said they could be leaning toward a new round of Quantitative Easing to get those asset prices up again and get everyone feeling richer just in time for the election.

Earnings will play the big role. Earnings and the technical picture. Of course we have AAPL after hours with its earnings. We have good intraday action, we have good patterns still ready to lead higher. We have great movement from stocks related to AAPL. They will continue their gains. I mentioned some earlier such as CRUS; it is up after hours and looking solid, as are those other stocks related to AAPL. But it has already put in a good move. It is trading around 2331. It closed at 2188, so it has another good gap ahead of it. How far can this go? How much more room to these stocks have? CRUS gapped to the upside with a breakaway move, and it is still running up without much of a test at that gap. That is great. We love it because we are in it. But how far can it go?

The point is that the good news is getting mostly built in. We run into this earnings saturation every earnings season. Whether the news is bad at first and stocks bounce to the upside or the news is good and stocks rally at first and then get to the point of saying “Eh, it is just another beat.” This season is a bit different, as I noted last night. The beats are running less than trend. It is not a great season, but stocks have moved up into it and have continued to move up sporadically over the last week. The indices are moving more or less laterally, though individual stocks are running well. How much more do we have? With AAPL, how can you get much more good news into the market? The best company in terms of growth, what they are putting out, and popularity has announced the best quarter it could announce. How will things get better? With their speculation things could get better because AAPL usually sandbags, as I noted earlier. But that is down the road. We will have to see how this plays out.

What does it mean for us? It still fits in our plan. We were looking for something to give us that burst to the upside where we can take some more gain off the table. Then we will have to see how this plays out. Will it continue? Will this be the news that actually breaks the indices higher   or at least gets them back up to their prior peaks? Either way, we make good money. If it keeps going, it keeps going. As I said before, we do not know how far the market can run. It can always move farther than we rationally thought possible. In that way the market acts irrationally, going too far (as I often say) in the short term before it comes back. It may be just too far to us and others. The market does what it wants to do.

The market looks like it will continue higher. Things to watch out for: Does the market reverse off of these numbers? What would provide it the opportunity to do that? Something called the FOMC tomorrow afternoon. A good run higher, and then the FOMC does not produce any QE3. Even though it is not expected, an investor could still think ” They are not announcing QE3, AAPL has put up great numbers, and who else will lead this market higher? Nobody. Okay, let us take some gain.” That is kind of the thought process.

We are getting what we want. If we get another bump higher, if we can take some gain, you take it. Then you see where things are going. Will we buy more positions? We might. But the risk/reward at this level gets a bit tougher. There are still great patterns, but you have to look at it and think it is already so high. How much higher can it go? That is a trap you can get into because it can go as high as it wants.

We will take gain where it is logical. We have been doing that and will continue to do that. We pare stocks that are not performing as we want them to. We lighten up, and that is fine, too. Then when we take new positions, we do not take full positions. We just take some partials. If they work out, we will get another chance to buy. We always seem to get another chance to buy. On good stocks you do.

That is how you play it here. Let what we have run, and then take gain after the next move upside. If a stock does not participate, you might want to consider closing it out. We have been doing that. Take some gain, lighten up, and maybe close some positions entirely. We can still pick up new plays. Maybe money will rotate to another area. If it does, if there is volume and if there is the move, put some money to work. Just do not get too enthusiastic after all this good news until we see just what the market will do with it all.

I will see you in the morning. We will see what happens with AAPL and what happens with the Fed. We will figure out if the market will top up here or if it wants to make it up to 1360 or so.

Have a great evening!

Jon Johnson
Stock Splits & IH Alerts, Editor
InvestmentHouse.com