Half-empty or half-full

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Oct 302012

Wednesday will be the first time people will have the opportunity to trade their changes in sentiment due to Sandy, Europe, and the election.  The market almost never goes this long without trade and that can lead to a healthy skew between sentiment and portfolios.  Of course keeping the markets closed prevented wild swings in the market and will most likely lead to a rational open.  The interesting thing will be watching how trade evolves after the open as the market starts looking forward to employment reports and elections.


As everyone knows, the markets have been closed for two days.  In many ways this was a blessing for countless participants because it stopped them from making stupid and emotional trading decisions.  Keeping the markets offline through the duration of the storm prevented low-volume and fear from triggering volatile swings in the market.  Stability in is essential in cultivating investor confidence and was a major factor in the decision to keep the markets closed even though the exchanges had the backup resources available to continue electronic trading.

Not having pricing information for four days has left a lot of holders nervous about the value of their portfolio, but with markets waiting to open until after the storm dissipated and everyone has a better sense of the damage will greatly decrease the probability of a fear induced selloff.


The one thing about having the markets closed it is prevented us from getting a read on what other traders were thinking, and more importantly how they were positioning their portfolio.  Being closed for four days let people’s opinions and sentiment drift away from how their portfolio is positioned.  Wednesday we’ll see a lot of trading bringing sentiment and portfolios back in line.

We can look to global markets for clues on how we might open on Wednesday.  Europe struggled Monday, but rallied nicely on Tuesday due to some good news in that part of the world.  The dollar also weakened versus major currencies and the pattern over the last few years has been a weak dollar boosts equity prices.

There has also been a fair amount of talk that while the storm will negatively impact economic activity in the near-term; the rebuilding boom will boost economic activity for some time to come.  It will be interesting to see which half of the glass the market focuses on when it opens.  Often the markets are really good at looking past the present and pricing based upon future expectations, especially when present events are fairly well quantified.

A lot of my trading ideas come from swings in sentiment and how that affects trading, but while we’ve seen wild swings in sentiment over the last few days, no one has been able to trade their emotions.  While this is a good thing for most people because trading fear is usually a bad idea, it is taking away a trading opportunity for anyone willing to pounce on that emotional market crack.


This is purely a guess on my part, but we could see one of two potential trades tomorrow.  The market could open up as investors look at the silver lining and anticipate the economic boom from rebuilding.  Or the market could open lower if investors who felt trapped by the closed markets just want to get out.

I don’t know which side will win that tug-of-war at the open, but I suspect the market will then trade the rest of the day in the opposite direction of the open.  So if it opens strong, it will selloff through the day.  If it opens weak, it will rally through the day.

Based on some of the trader commentary I’ve picked up on over the last couple days, my gut senses a lot of positive talk and it feels like the market will open higher, but that optimism could fade through the day and stocks decline from that early high.  The question that needs answering is who will buy after that early pop to keep the market headed higher?  And with everyone on edge after the storm, selling could beget more selling throughout the day.

But either way, there is no reason to force a trade tomorrow and Sandy will be ancient history by Wednesday afternoon, as the market starts obsessing about employment and the election.

As a bull, I’m rooting for a healthy selloff over the next few days to get all those half-empty people out of the market so the rest of us can start focusing on all the opportunities ahead of us.

Stay safe

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 Posted by at 10:55 pm on October 30, 2012

Head fakes and sideways trade

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Oct 272012

S&P500 daily at end of day

Another day of head fakes and sideways trade.  Expect the market to reveal its hand next week, but the question is which way will it take us?


Another day of sideways trade.  Early on it looked like the market wanted to breakdown, but that turned into a head fake as it quickly bounced back to 1410.  This is the fourth day we’ve traded around this level and obviously this can only last so long before the market reveals its next move.

There are four possible outcomes.  The two obvious ones are breakout or breakdown, but what about the other two?  The market is often devious and will mislead us before revealing its true intentions, so a fake breakout before turning lower, or a feigned plunge before rebounding hard.  Sometimes the market plays straight poker and others it bluffs; that is what makes it so hard to for traders get an edge.  Right now the trend is lower and more often than not the trend continues.  We need to plan for further weakness until the market proves otherwise.


The market is holding 1410, at least that is what it wants us to think.  This stability is frustrating bears and seducing bulls.  It’s saying, “Come on in, the water’s fine.”  But the thing to remember is the easy trade is often the wrong trade.  If the market feels like it is firming up and tempting us to venture in, it is probably a trap.

Frequently the hard trade is the right trade.  We need to ask ourselves what is harder to do right here, hold or sell?  Has this pullback put fear back into the market?  How scary can a 4% decline really be?  Is that enough to chase out weak hands and clear the way for a move higher?  Or does the market need to drive a spike through the heart of hopeful bulls still hanging on by their fingertips?  Fear fuels rallies and right now there is not nearly enough fear in the markets to power a meaningful rally.


This week has been a day-trader’s paradise with the strong directional intra-day moves, but the market made very little progress for either bulls or bears as three of the last four days closed within one point of each other.  Every move by one side has been matched with an equal response by the other.  Where does that leave us?  When all else is equal, stick with the trend.  We need a high-volume capitulation point to shakeout weak investors to set the stage for the rebound.

We’re within shouting distance of 1400 and that represents both psychological and technical support.  No doubt a dip under this key level will trigger all sorts of autopilot stop-loss selling and aggressive shorting by bears.  But that selling will be the end of the move, not the start of something bigger.  Once the stop-losses are executed and the shorts sold, the selling and supply of available shares will dry up in a hurry and there will be nowhere for the market to go but up.  The market will bounce somewhere between 1400 and the 200dma so if you are short, don’t get greedy and be ready to harvest your profits before they disappear.

And of course the above is just my best guess based on sentiment, historical patterns, and probabilities.  Nothing is certain in the markets and it is foolish to trade that way.  The market could bounce next week and push up to 1450 crushing any and all shorts.  It could also plunge through the 200dma on panic selling when Obama is reelected.  While either of these moves might cause me to lose some money, I don’t mind because these new moves create more opportunity.  I trade extremes in sentiment and my best trades are going against big moves.  This stuff in the middle of the range is the hardest to anticipate and has the lowest probabilities.  I might get this move wrong, but a wrong trade here just leads to another opportunity to profit.   I’ll never make all the money and I’m fine with that.

Stay safe

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 Posted by at 12:03 am on October 27, 2012

Volatile, but indecisive

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Oct 262012

S&P500 daily at end of day

A lot of nothing in the market.  We broke out to the upside, made a new low, and then finished in the middle.  Not the most decisive of days, but we’ll get there soon enough.  The trend is lower and that is the direction we should plan for.  I would be suspicious of any rally from here without a decisive shakeout first.


We had a volatile, but indecisive day.  The S&P500 exceeded Wednesday’s trading range on both the upside and downside, but it finally finished in the middle of the day’s range.  While the day eventually ended higher as compared to Wednesday’s close, it would be hard to say the action was bullish or bearish.  The market opened higher but then sold off, and it made new lows and then bounced back.  It gave a little something for both sides to hang their hat on, but it was a lot of nothing for the rest of us.  To get a better read on the market we’ll need to watch for more decisive clues tomorrow.  But the trend is lower and with all other things being equal, the trend will continue.  We should expect further weakness in coming days unless the market conclusively tells us otherwise.


Bulls had the opportunity to trigger a short-squeeze at the open and bears could have started an avalanche of selling with the new low, but neither was able to get the job done.  What we can tell from today’s trade is both sides are dug in and prepared to stand their ground.  Bears resisted the assault on the upside and bulls were resilient in the face of a push lower.  But these were fairly modest moves and no doubt a larger penetration in either direction will put the hurt on and lead to a cascade of stop-loss selling.

The trend is lower and the trend is more likely to continue than reverse, so we should plan for further weakness.  But at the same time, bears are getting pretty aggressive and we might see a short-squeeze thrown in before heading lower just to keep things entertaining.  The market doesn’t like to be predictable and a short-squeeze before plunging lower would zing both sides and humiliate everyone equally.

At this point I am looking for a plunge lower on gigantic volume to signal this correction is bottoming.  I would be reluctant to buy a rebound from this level without a huge selloff.  Lacking that, the rally won’t have the ammunition and sentiment necessary to sustain a move higher.  The market rises on fear and we need to scare everyone to get this rally going.  The only exception I would consider is if the market traded strong for four or more days.  I could get on board with that kind of strength, but that rally wouldn’t have the same upside potential as a market that had a decisive shakeout.


There is no reason to be in this market and the conservative trader is in cash.  Let the gamblers figure this out and wait for a higher probability trade to emerge.  For the gamblers out there, the best trade continues being short this market, but only the most confident, experienced, and disciplined traders should attempt this.  A lot of money can be made quickly shorting a correction, but timing is everything and oversold markets bounce back hard, steamrolling anyone who showed up late to the party.  We’re in the later innings of this correction and probably only have one more leg lower before rebounding.  If you don’t have a profit cushion already in place from shorting earlier in this move, I’d suggest staying out and waiting to trade the rebound.  The risk/reward dynamic for initiating a short here isn’t worth it.  We are within a couple of weeks of the rebound, so wait patiently for that trade.


Just to clarify my commentary about the impending election, expecting the market to rally after Obama is reelected has nothing to do with my personal political views or affiliations.  I don’t support or endorse Obama and my commentary is exclusively related to anticipating the market’s reaction.  And as far as that goes, it is pretty obvious to me, if everyone expects the market to tank if Obama is reelected, then clearly it will rally.  Supply and demand at its best.

Stay safe

 Posted by at 12:02 am on October 26, 2012

Selling slows down

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Oct 242012

S&P500 daily at end of day

Markets closed on the day’s low but most likely we’ll find support at these levels for a couple of days before we see further declines.  An Obama reelection is setting up nicely for “sell the rumor, buy the news” trade.  The most unexpected outcome is for the market to rally after an Obama win and that is exactly why it will rally.


Markets ended modestly lower after yesterday’s big selloff, but still held up relatively well given the last several days of trade.  We mostly arrested the decline and did not trigger another day of avalanche stop-loss selling, but the market did close on the day’s low.  What does that mean for tomorrow?  Will we see more sellers get shaken out as we undercut support at 1400, or did today’s weak close induce most of the selling and we’ll see prices rebound tomorrow?


The impetus is on bears to continue pressuring the market.  There were a lot of latecomers selling and shorting today, but usually the obvious trade is the wrong trade.  That leaves us trying to figure out which direction the largest number of gullible traders are going; are they anticipating a market crash, or are they buying the dip?

Today didn’t feel like a lot of dip buying and we saw the shorts pile in over the last hour of trade.  Of course selling often begets selling and declining prices can transform a confident bull into a spineless seller in no time.  But those cases are extreme and reserved for infrequent market crashes.  We are not crashing here, just correcting from an overbought condition and as such, we are already a good way through this correction.

Volatility is picking up as fear is creeping back into the market.  But any bull should be excited about this transition because we need fear to rally.  Fear is what keeps traders out of the market and watching from the sidelines.  But over time those traders wade back into the market and their buying pushes prices higher for the trader savvy enough to get in early.


My honest assessment is we will find stable footing for a couple of days, maybe even see a rebound attempt as bottom-pickers rush in and shorts get chased out.  But not long after we’ll see another leg lower once that buying dries up.  Then as quickly as the market drops and pierces support, it will bounce back from a climax bottom.  And of course all of this lines up nicely with the impending election.  I expect weakness anticipating an Obama reelection and a rally after the election when the market moves past politics and focuses on whatever new obsession it discovers.

Stay safe

 Posted by at 11:57 pm on October 24, 2012

Hopeful bulls get kicked in the gut

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Oct 232012

S&P500 daily at end of day

Stocks had a bad day and the selling is not done yet.  Lower prices are in our future, but we’ll see a couple false bottoms along the way.  Each of those rallies will be selling opportunities.  But at the same time, don’t get greedy on the short side and be prepared to take profits soon because this is just a pullback and not a crash.


Stating the obvious here, but the markets had a bad day.  Friday’s weakness is continuing after a brief pause Tuesday.  We clearly shattered support at 1430 and sliced through the 50dma.  Volume is higher, but not off the charts.  No doubt this is putting fear into hopeful bulls and making them question themselves, but so far there has not been a mad rush for the exits on tremendous volume.  Technically we’re resting in the upper end of August’s consolidation.  Will this provide support or are we going to break 1400 and possibly test the 200dma?

Clearly downside volatility is back in the markets and shaking up the complacency that was creeping in.  Is today enough of a shakeup?  Or will this thing go longer and lower than most expect?  And of course we have to watch for a multi-leg move lower with sucker’s rallies along the way.

It looks like the uptrend has been broken and we are seeing lower-highs and lower-lows.  There is no big news story shaking up the market, just demand drying up and prices falling without new buyers left to prop up the market.  Will bottom-pickers come in and prop up the market again, or do we need to fall far enough to tempt value buyers with irresistible discounts?


This decline has clearly rattled bulls, but has it shaken them out?  Are they selling by the fistful, or desperately holding and hoping for a bounce?   We need to shake the tree and see climax selling before this will exhaust itself and reverse.  Was today that day?  Or will the lower selling volume subject us to a multi-step decline with bottom-pickers trying unsuccessfully to prop up the market?

Markets top on complacency and bottom on irrational fear.  We had complacency and that lead to this pullback, but have we hit irrational fear yet?  By that measure, I think we still have a way to go before this thing bottoms.  I’m not predicting a crash like we saw in 2008 or even this summer, but we do need to put fear back in the markets in order to create fuel for the next rally leg.  Markets rally in the face of fear and decline on the back of hope.  We have a way to go before all that hope is replaced by fear.

The reason these contrarian trades work is basic supply and demand.  People trade their outlook and when they are bullish, they are fully invested.  But when everyone is bullish, that also means everyone is fully invested and there is no one left to buy and continue pushing prices higher.  At that point prices fall due to a lack of demand.  And on the opposite side, when everyone is most fearful, everyone has already sold and supply dries up.  Tight supply means rising prices and that is what causes the bounce.  Bringing that insight to this analysis, we are looking for everyone to sell before we can bounce back.

The above is an intermediate-term outlook, but in the more micro view I expect we’ll see multiple bull-trap rallies along the way that suck in aggressive bottom-pickers and tempt nervous bulls to continue holding.  That will temporally increase demand and tighten supply, pushing prices higher in a relief rally.  But these are short-lived phenomena and after a day or two the decline will resume.  We will keep sliding until most of the sellers are flushed out and value investors see such fantastic discounts they won’t be able to resist buying stocks by the truckload.


The trend is clearly lower with the market making a series lower-lows and lower-highs.  It is best to trade the trend, so be extremely careful with any buying and be ready to harvest any long profits early and often.  This is one of the few times when it makes sense to short the market.  We’ll probably see a stair-step pattern lower with false bottoms along the way.  Sell the rallies and buy the dips.  We’ll probably push lower and test 1400 and the 200dma over the next few weeks.  But remember the market sells off far more quickly and we’ll find the bottom soon.  Don’t get greedy and be ready to take your short profits soon.

The election is a huge psychological milestone and that could trigger a reversal in the markets.  Obama leading in the polls could make for a soft market, but expect an Obama win to send the markets higher.  This isn’t a referendum on an Obama presidency, but the markets habit of selling the rumor and buying the news.  An Obama win will already be priced in the market by election night and it will be ancient history as far as the market is concerned before the votes are even tallied.

Stay safe

 Posted by at 9:36 pm on October 23, 2012