MARKETS SPECTATOR: The returning bull, an erratic Apple

The market opted for a consolidation rather than pullback and now, with fiscal cliff progress, the bull is back. Meanwhile, what's happening with Apple stocks?

Early last week I wrote about the market looking over extended on a short-term basis and that it needed a period of consolidation or, hopefully, a shallow pullback.

The good news is that we saw a four-day consolidation period where the market just went sideways. The bad news is that it didn’t retreat at all, meaning there were little in the way of bargain hunting opportunities.

Now, unsurprisingly, the bull is back, this time spurred by real signs of movement in the US fiscal cliff saga. The latest development is a new offer from President Obama.

The offer, from first glance looks to be a pretty solid compromise between the two parties with the White House abandoning its effort to raise tax rates on income above US$250,000. Instead, it will seek to raise taxes on income above $US400,000 and change the way inflation is measured for federal programs such as Medicare and Social Security.

Whether or not this latest offer gets agreed upon is anyone’s guess. More importantly, what it shows is that both parties are getting more serious and are actually putting forward strong, compromising counteroffers to each other.

This is very encouraging for markets as it's just what they had wanted; meaningful signs of progress. And, unsurprisingly, markets have responded very positively.

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The above hourly chart of the S&P/ASX 200 index shows today’s strong breakout from the consolidation zone. The two zones marked show how strong the market is.

The complete lack of meaningful selling means the market just meanders sideways rather than actually retreating, much to the frustration of buyers who are waiting to ‘buy the dip’. The problem being that there is no dip.

From here, I think the market will move higher into the first week or so of January, mainly for the reasons I outlined in yesterday article (Almost never naughty, December 17).

On top of that, it looks like we’re getting some serious traction in the fiscal cliff saga, too.

Apple traps the bears again

The precipitous sell off seen in Apple over the last three months has been a massive talking point, with parties equally divided over whether or not Apple’s best days are now behind it.

In mid-November Apple staged a huge reversal on climactic volume which sparked a strong rally from lows around $US505 to highs near $US600.

Subsequently, the bears have regained control and driven prices back down to the mid-November lows.

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Last night’s price action printed what traders call a classic ‘bear trap’ pattern. After opening the session at $US508.90, Apple shares were sold down through the mid-November lows (support) of $US505.75, eventually bottoming at $US501.23.

This breakdown through support is a classic technical trading signal to initiate short positions on the expectation that the stock is headed lower.

However, what happens next is something most inexperienced technical traders never foresee.

With many traders having just opened short positions, the big money (institutions, hedge funds, etc) come into the market and aggressively buy the stock, pushing it quickly back up through the support level that it just broke down through.

Now, all the traders who just went short are holding losing positions. The weak hands start to get nervous and begin buying back their short positions. This sparks a buying frenzy, triggering a rush for the exit door as more and more traders try to escape with only a small loss.

Hence, a sharp reversal is seen in the stock. In the case of Apple, after bottoming at $US501.23 it reversed sharply as everyone ran for the exit. It eventually closed at $US518.83, up more than 3 per cent from the session lows.

I would expect to see the short-term bounce continue for at least a few days before the profit taking starts to set in.