It’s a tale of two markets to start the year.  As we look at some sectors, one would think the market bull is still in control.  However, others illustrate a potential for a more major liquidation than seen so far.  So, who’s right – the bull or the bear?

Let’s dive a little deeper into where those signals are coming from, starting with the bearish side.  Looking at small cap stocks, the first two weeks of the year have not been kind, illustrated here by IWM:

IWM took an initial tumble, then stabilized for a bit over a week.  But on Tuesday, a new low for the year was made, and IWM seems to want to drive lower.  This can also be seen in specific sectors.  For example, XLF is starting to break after the first run of earnings announcements from financials:

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XLF was creating a long rectangle coming into the end of the year as well as earnings season.  But as earnings are being processed, XLF has broken down from the rectangle that was forming, showing a potential liquidation.  This is certainly a bad sign for the bull and could signal a sector for me to look at for bearish plays in my Outlier Watch List.

But there’s still hope for the bull, and it’s once again being driven by tech stocks.  Let’s look at QQQ:

QQQ fell to start the year, but almost immediately found buyers to re-test highs.  There’s a leading sector I always like to check out when looking at tech, and that’s semi-conductors, seen here via the ETF SMH:

SMH is making new highs, and that must get the bull excited here to start the year.

So, the markets are diverging here.  Who will win out?  And what’s the best way to play this market?

I’ll end with one possible way to play this inflection point, and that’s with one of the largest companies in the world, Apple (AAPL):

AAPL was weak on Tuesday and is testing the 200-Day Moving Average once again.  If semi-conductors are correct as a bullish leading indicator, this could be a great spot to define my risk with options and add leverage.  If AAPL can hold above the 200-Day Moving Average, it could play a bull run heading into earnings in 2 weeks.  If it falls below the 200-Day Moving Average, I’d probably rather move to the sideline or bet on the bear winning.  Either way, I like using options for this kind of play, and that’s why AAPL is certainly a stock on my personal watch list right now.

As always, go to http://optionhotline.com to review how I traditionally apply technical signals, volatility analysis, and probability analysis to my options trades.  And please, if you have any questions, never hesitate to reach out.

Keith Harwood

Keith@optionhotline.com