As a contrarian, I find it so difficult to be part of a consensus view in the market.
For example, earlier this week when it seemed like the whole world was against Apple (AAPL) , I took a look and thought, well, heck it could bounce off $130, while everyone else was calling for a break. Now Apple may very well break $130 and who would be surprised with a chart like that? But when everyone all of a sudden discovers something has been acting poorly after it has already tumbled 20 points, the contrarian in me says, not so fast.
If Apple fails to get up and over $140 on this oversold rally, then I would think it’s pretty weak since Apple tends to eat into resistance when it is not that weak. Look at “Point A” on the chart and notice how AAPL was able to chew through that resistance, suck folks in with a minor higher-high and then have a rug pull.
Look at “Point B,” where it did something similar. Oh, sure, some might say, “But it got to $175,” and I would say, “That’s the point, Apple tends to eat into resistance rather than stop right at it.”
“Point C” might not be the best example, but here, too, it chewed into resistance and then gave it all back and more. So why aren’t I using $135 as my line in the sand? Because it only fell under $135 for two days. If it does fail here, then that would be a sign it really is quite weak, but I am willing to use $140 instead. It’s subjective.
Sticking with my contrarian theme, I find myself in the uncomfortable position of being consensus. I get that so few thought we could even muster a day of rallying for Santa and here we are with two days in a row (barely). But the thought that we will then come back down again in January is fast becoming consensus, which is what my indicators have been saying for a while. Can we all be correct? Doubtful.
So, either, something has to change to get folks to stop talking about coming down again in January (similar to the way everyone had a 4100 target on the S&P in October and when we got there they all decided we should have more upside) or we’ll all probably be wrong.
In the meantime, the Investors Intelligence bulls did back off to 37% and the bears notched up a smidge. I would consider them in the middle of nowhere now although there are still more bulls than bears.
What I will be watching is the Daily Sentiment Index (DSI) on the Volatility Index, which is back to being a teenager again (19). The way it should work is that once it gets to 15, it’s a warning to expect more volatility, so if we do get some more upside to this oversold rally, that DSI is likely to keep falling. I can see the market more choppy than straight up.
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