Monthly Archives: December 2012

PM: Fiscal Cliff plunge = rally?

By Jani Ziedins | Intraday Analysis

PM Update

What was the least expected price action today?  That is exactly what we got.  Markets don’t move on fundamentals or technicals, they move on supply and demand.  Run out of sellers and markets rally, cliff or no cliff.

MARKET BEHAVIOR

Stocks were up 1.7% on the final day of the year.  The market opened lower, but rallied through the day on Fiscal Cliff hopes.  This put the hurt on bears as the obvious Fiscal Cliff collapse turned into a monster rally instead.

MARKET SENTIMENT

A lot of traders were positioned for a Fiscal Cliff collapse and this rally caught them by surprise.  People pay too much attention to the news and not enough to how other traders are positioned.  Deal or no-deal, the Fiscal Cliff is a drag on the economy, but if you trade the fundamental story, you would be on the wrong side of this trade.  This is because markets respond to supply and demand, not fundamentals or technicals.  Everyone saw the Fiscal Cliff coming from a mile away and sold ahead of it.  There is no supply of new sellers remaining, thus we rallied in spite of the headlines.

Speaking of headlines, lawmakers have a couple more hours to strike a deal and avert the cliff, but this focusing on the wrong thing.  We are obsessing over “deal or no-deal”, but this isn’t a binary event.  A deal doesn’t save us and no-deal doesn’t ruin us, but that is the way people are trading it.  Once we are past the deal/no-deal hoopla, the market will move its attention to something else.  Maybe that is the ramifications of the compromise, maybe it is Europe, or maybe something entirely new.  Remember every ECB meeting or employment report from last year that was supposed to “make or break the market”?  The Fiscal Cliff will be just like that, hours later and it will be ancient history.

TRADING OPPORTUNITIES

Expected Outcome:
Most of the selling already happened and the high probability trade is to the upside.  All the sellers have sold and supply is drying up.

Alternate Outcome:
Within hours of the New Year and we still don’t have a deal.  When markets open on Wednesday, that could pressure prices, especially since we had a strong short squeeze Monday.  But even renewed weakness presents a buying opportunity because the market is so overly pessimistic and most of the weak hands have already sold.

INDIVIDUAL STOCKS

The strength of the indexes was only out-shined by the monster run AAPL had, up nearly 4.5%.  This stock is finding buyers and running out of sellers, a recipe for higher prices.  It won’t be a smooth ride because there is a lot of overhead supply to work through, but the stock has probably seen the lowest of the lows.  I’m not an AAPL bull by any stretch and think they will see real competition from Samsung and Microsoft next year, but the stock was oversold and presents a great buying opportunity as we will probably see $650 this year, maybe even before summer.

Stay safe

AM: Waiting on DC

By Jani Ziedins | Intraday Analysis

AM Update

Churning sideways at 1410, but the asymmetric trade remains to the upside as most traders fearing the Fiscal Cliff already sold and holders are willing to hold in the face of this risk.

MARKET BEHAVIOR

Markets are down a half-percent in light trade as everyone awaits developments out of Washington.  We bounced off 1400 yesterday and are holding around 1410 today.  So far 1400 is the line in the sand, break below this and we could see a wave of technical and stop-loss selling hit the markets, but so far bulls have successfully defended this key level.

MARKET SENTIMENT

The Fiscal Cliff continues dominating headlines at the expense of everything else.  Yesterday’s bounce off 1400 started when the House announced it was reconvening on the 30th.  While there is little hope a deal will be reached over the next few days, this development was enough to squeeze bears out of the market.  This hints at the upside potential if good news comes out.  On the other side, most traders are already resigned to falling off the cliff.  Those afraid of headlines already sold ahead of the 31st expiration, leaving few sellers still in the market to actually sell the news.  If anyone was convinced we were headed over the cliff and this would lead to a massive selloff, who wouldn’t sell ahead of it?   These pessimistic expectations and positioning create an asymmetrical trade to the upside since most of the downside has already been realized.  This isn’t to say we cannot see further near-term weakness.  While we won’t see a massive wave of selling, a dearth of buying can also pressure prices, but the upside potential at this juncture is greater than the downside.  Success n the markets it isn’t about predicting the future, but knowing the probabilities of various outcomes and trading those when they are in your favor.

TRADING OPPORTUNITIES

Expected Outcome:
Most of the Fiscal Cliff selling has already happened, meaning we should only see modest weakness after the event, and might even see the market find support in a sell-the-rumor, buy-the-news phenomena.  While dysfunction in Washington is not a good thing,  once all the selling happens, supply dries up and the market has nowhere to go but higher.  Since this is such a well telegraphed event, most of the Fiscal Cliff selling will happen ahead of time and the new crop of buyers are willing to hold through this volatility.  The ironic thing about stock holders expecting volatility is they eliminate volatility.  This is because confident holders don’t sell the headlines and that is all it takes to put a floor under the market.

Alternate Outcome:
Since we are so close to 1400 and all the stop-losses resting just below this technical support level, even modest weakness could drop the market to the point where it sets off a wave of autopilot selling. But while the avalanche might feel scary, it will find a floor not long after because the autopilot selling will climax fairly quickly when it isn’t followed up by real selling.  Many of the holders bought after the election and in the face of Fiscal Cliff headlines, meaning they have a longer-view of the market are harder to shakeout.  Their confidence in the future prospects will keep a bigger wave of selling at bay.

INDIVIDUAL STOCKS

AAPL is holding near $510, giving traders another opportunity to jump in at the $500ish level.  Funny how when the stock is $550 or $600 people wish they bought at $500, but when it retreats back to $500, it is hard to pull the trigger because it looks like it is breaking down.  My experience is the hardest trades to make often work out and the easy trades blow up in my face.  If a stock seems too high, it keeps going higher; if only fools would buy it, it probably bottomed.  On the other side of the coin, if a rising stock is a sure thing, it is probably peaking and if a falling stock looks like a great buy, then it will probably continue lower.  And this isn’t just hyperbole, there is a lot of psychology and supply and demand dynamics that make this a very real phenomena that we can get into at some other time.

Stay safe

AM: Testing 1400

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR

Stocks are down for the 4th day and finally breached the 50dma.  Volume is light in the holiday shortened week, but volatility and uncertainty remain high because of the ongoing Fiscal Cliff debate in Washington.

MARKET SENTIMENT

Not many big money managers are interested in buying stocks this holiday week.  As we discussed last week, most senior decision makers are on vacation and the junior traders manning the desk don’t have the authority to make new buys and are just there to sell stock if we break key technical levels.  Today we find ourselves at two of these key levels, the 50dma and 1400.  Will stocks fall further as automatic sell orders are placed and value buyers are on vacation and not there to put a floor under the market?

There are few optimists remaining who think a Fiscal Cliff deal will happen before the end of the year.  Falling off the cliff is already baked in and we don’t need to fear a massive selloff when we officially go off the cliff next week.  It is so widely expected, anyone who fears the cliff already sold, limiting the amount of new selling to hit the market when it actually happens.  But while we won’t get hit with a wave of selling, lack of buying can also push prices lower and we could see further weakness until value buyers come back to work next week.

TRADING OPPORTUNITIES

Expected Outcome:
Most of the Fiscal Cliff fears are already baked in the market, meaning there is more upside than downside at this point.  Traders can wait for more weakness to develop, but don’t pile on the short-side expecting a plunge because most of the selloff has already happened.  Instead start looking for the next big opportunity on the long-side as the market moves past Fiscal Cliff worries.  Finding support at 1400 would signal a good time to buy stocks.  Buy the rebound instead of trying to catch the falling knife.  A dip under 1400 could trigger more selling before we finally bottom, so wait for the confirmation.

Alternate Outcome:
While a lot of the professional Fiscal Cliff selling has already taken place, the wildcard is an emotional selloff from 401k investors.  Will these less experienced investors hit the panic button when the January 1st headlines are screaming Fiscal Cliff collapse?  There is a chance we could see a repeat of the cascading post-election selloff, but that seems less likely because November’s selloff shook out most weak and emotional hands, leaving us primarily with holders that are less skittish in the face of uncertainty, hence the reason they are holding in the face of the Fiscal Cliff worries.

INDIVIDUAL STOCKS

AAPL is making a move for the $500 level again on the back of broad market weakness.  Recent support at $500 might encourage more adventurous value investors to jump in at these levels.  As risky as it seems owning AAPL down here, this is the safest time to own AAPL in nearly a year.  AAPL has gone from everyone’s favorite stock to the favorite whipping boy with countless reasons not to own it.  The recent slide made it hard to remain positive on the stock, but this change in sentiment was inevitable given how bullish everyone has been for so long.  Can the stock slide under $500?  Absolutely, but buying AAPL at $500 is without a doubt safer than buying it at $700.  Keep an eye out for a material penetration under $500, but 10% risk to the downside and 20% opportunity to the upside sets up for a nice trade.

Stay safe

AM: Merry Christmas

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR

Stocks are down fractionally on Christmas Eve as most buyers and sellers are taking the day off.  We are sitting at 1425, but we need to be wary of any dip under 1410 that would violate the recent bounce and 50dma.  This would trigger a wave of stop-losses clustered below these technical levels, further pressuring the market.

MARKET SENTIMENT

Friday’s selloff didn’t continue and overwhelm today’s light pre-holiday trade.  While we might see more weakness in coming days, don’t expect a major collapse.  All the bears who are pessimistic about this economic and political environment have leaned into this market with all their might and the best they coud manage was a 20 point decline.  The market also tried to shake out weak holders and but failed to induce many traders to bail on their positions.  Most of the holders in this market are willing to hold through the headline risk and that bodes well for the bull case.

News doesn’t drive markets, people trading stock does.  If bears are already out/short and holders are willing to hold through volatility, then markets defy gravity and negative headlines slide right off.  This description fits our current situation pretty well.  Going into next year how do things look?  We have all this headline risk and pessimism already priced into the market.  If we have already realized most of the downside, it doesn’t take a genius to figure out what the markets will do once we see a constructive resolution to these risks?

TRADING OPPORTUNITIES

Be ready to buy the rebound in the second half of this week.  We could see some initial weakness, so wait to buy on strength.  Shorts really need to get out-of-the-way of this market and should use weakness today or Wednesday morning to go flat.  Most people now anticipate us moving into the new year without a Fiscal Cliff deal, so don’t expect major selling when that widely expect event comes and goes.

INDIVIDUAL STOCKS

AAPL is up modestly in spite of broad market weakness. The low $500 range attracts buyers as we bounced off this level three-times already.  So far this has provided firm support for AAPL shares and is a key line in the sand going forward.  AAPL is buyable as long as we hold above this line.  Drop under $490 and we need to reevaluate.  I would largely discount selling due to another analyst downgrade or other opinion based analysis.  The only thing that would concern me is a material change in fundamental data out of the company in their upcoming earnings report.

Stay safe

LA: Light volume trade be misleading

By Jani Ziedins | Intraday Analysis

Look Ahead

MARKET BEHAVIOR

Markets were positive last week, but finished on a sour note after Friday’s selloff.  The big question is if the market will continue the weekly trend higher, extend Friday’s slide, or the third option, a bit of both, further weakness before rebounding higher.

MARKET SENTIMENT

The holiday-shortened week will see light volume as most big-money managers are on vacation.  Obviously these guys cannot closeout their positions before leaving, so to manage risk their only alternative is leaving stop-losses to protect their portfolio.  Some of these are electronic, others are junior traders stuck manning the desk through the holidays.  But while the junior traders have the authority to sell shares if the market hits predetermined stop-loss triggers, these young traders don’t have the same authority to initiate new buys.

What makes this noteworthy is it creates an imbalance with sell triggers piled around key technical levels but very upside catalysts where automatic buying will take place.  The light volume also increases the opportunity for volatility because smaller orders carry more weight and can move the market. It could make for an interesting week with a slight negative bias.  But often these holiday week moves are not fundamentally driven and do not stick once the decision makers return to work.

TRADING OPPORTUNITIES

The lack of massive selling last Friday on the Fiscal Cliff breakdown, shows the market is not spring-loaded to the downside.   This is encouraging news for bulls looking to buy this market.  We could see some carry over from Friday’s selloff, but barring panic induced selling, we are close to the bottom.  As I shared above, the holiday week could result in a negative bias, meaning we might wait to buy until the back half of the week to see how things develop.  We could easily see the market take off on light volume, but we could also see it plunge if stop-loss selling kicks in.  But either way expect the market to stall after the initial flurry of orders is filled.

I continue being constructive into next year as the market stops worrying about the Fiscal Cliff and a lot of this new money from special dividends and 2012 tax selling gets pumped back into equities.  Even longer-term there is huge upside potential as money starts flowing out of bonds and back into equities.

INDIVIDUAL STOCKS

AAPL is the exception where I expect there are many automatic buy-orders near the $500 level with big money itching to get back in the stock near these lows.  If there is weakness in the markets, we could see AAPL find a floor near $500 as junior traders are under orders from their bosses to buy any time AAPL dips to $500.  For those holding the name, this could provide some downside protection.  Of course breaking $490 and all bets are off and you’ll see a lot of stop-loss selling punish the stock.

Some people criticize my analysis because I lay out two different scenarios.  But the truth is I don’t have a crystal ball and I cannot know for certain what the market will do in the future.  I trade the higher probability, but even low probability events happen on a regular biases   I am always considering multiple outcomes so I am prepared for whatever the market throws at me and I know how to trade different situations.  In AAPL’s case, I expect to find support at $500 and the stock is buyable here, but dip under $490 and expect a wave of stop-loss selling to punish the stock.  How a person trades that cascade of selling depends on their timeframe and holding period.  But having a plan at $490 helps alleviate some of the fear and doubt that inevitably happens when a trade moves against us.

Stay safe

WR: Weekly chart says this was a good week

By Jani Ziedins | Intraday Analysis

Weekly Review

In spite of how the week ended, it was a positive week for the market and Friday’s selloff was fairly modest if that is what a Fiscal Cliff breakdown looks like.

MARKET BEHAVIOR

For all the drama on Friday, market still had a good week, finishing higher by 1.2%.  We hit 1450 on Tuesday, fell to 1422 on Friday, and closed the week at 1430.  Volume swelled in part due to options expiration.

This week markets notched a higher-high, breaking above the early November pre-election high and snapped a trend of lower-highs and lower-lows dating back to September.  The weekly chart shows the uptrend is still intact in spite of all the pessimistic headlines flying around.  Taking a step back and looking at weekly charts helps eliminate the daily noise and whipsaws that mislead so many traders.

MARKET SENTIMENT

Markets remain skittish and everyone is wary of the next breakdown, but it just hasn’t come.  The most we’ve seen is a 20-point selloff.  No doubt the fear of a selloff is preventing the selloff.  Many of the potential sellers are already out of the market and the current crop of owners are comfortable holding in these uncertain markets.  This confidence and cool hand by current owners is preventing a wave of selling to flood the markets and pressure prices.

Friday’s apparent collapse of Fiscal Cliff talks left many traders expecting us to cross into 2013 without a deal.  For such a widely feared event, the market’s reaction was fairly constrained.   This shows the market is not ready to plunge into the abyss and defeats a major pillar of the bear’s argument.

TRADING OPPORTUNITIES

Some of the worst news was realized and we didn’t see a wave of panicked selling consume the market.  In this case, the elevated anxiety and lack of complacency was a buffer that prevented the very thing the market feared.  This is just another example of how you can safely ignore what everyone is talking about.  No doubt we could see further weakness in the light holiday week, but barring a collapse of the market, stocks look attractive here for both short-term and long-term investors.

INDIVIDUAL STOCKS

AAPL had a nice week, also finishing in the green by 1.9%. Weekly volume fell off, which is a good thing at this point because it shows a lot of the emotional trade is winding down. The stock might rally modestly into the January earnings report and that will be the next catalyst either up or down.  Given the widely divergent views on the stock it is hard to imagine the stock not reacting to earnings as it proves one side right and the other side wrong.

Stay safe

 

PM: Finding a floor

By Jani Ziedins | Intraday Analysis

PM Update

MARKET BEHAVIOR

Stocks sold off after Fiscal Cliff negotiations bogged down.  The encouraging sign is the market didn’t collapse after the initial hit and managed to close above the lows.  Between the weekend and Tuesday’s holiday, there are fewer opportunity to trade changes in sentiment if the Fiscal Cliff situation evolves over the weekend.

Volume was huge, almost 50% higher than average as a flurry of stock changed hands between the headlines and options expiration.  Much of the trading was market makers unwinding positions and day traders and high-frequency traders taking advantage of the news driven volatility, but there was also some real trading as fair-weather holders transferred shares to braver value investors.  If these new owners are more committed to holding, it should soak up supply and calm the markets.

MARKET SENTIMENT

Traders had the opportunity to punish the market, but selling abated in the afternoon.  We found support and bounced near 1422, ultimately returning to 1430.  Obama left for Hawaii and most of Congress went home, so we probably won’t see new developments from the Fiscal Cliff until after Christams.

Personally I think the market has been too obsessed with deal or no deal and little attention paid to what the deal might look like.  Take Boehner’s offer and Obama’s offer, split the difference and see how that looks.  If we are okay with that level of austerity, then the market is a buy here.

TRADING OPPORTUNITIES

If the market finds a bottom on the heels of a Fiscal Cliff meltdown, there is not much left to break this bull.  Monday will be a throwaway day on extremely light volume.  It will be hard to get a good reading from that price action and we will need to see a confirmation later in the week to validate either support or continued slide.

I continue my bullish inclination and seeing the market hold up next week will confirm those views.  If the market finds support it becomes a good buy into next year.  The interesting thing to watch will be how the markets move in the time leading up to the Fiscal Cliff resolution.  If the market rallies into a deal, then we might see a sell the news trade develop.  If the market remains cynical and stays flat, we could see it rally on a deal.  Either way our trading strategy evolves as the sentiment in the market changes.  It is not about being a perma-bull or perma-bear, but trading the hand we are given.

INDIVIDUAL STOCKS

AAPL showed strong resilience in the face of the market’s headwind by finishing at the top of the day’s range.  A lot of nervous holders were flushed out of the name in the selloff and the new crop of resolute owners brought stability back to the name.  I’m not sure when or if the stock will break $700, but there is plenty of upside without making new highs.  AAPL’s buy and hold days might be behind it and it will likely take rangebound strategies like swing trading or selling options to continue making money in the stock.

Stay safe

AM: Divided we fall

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR

Markets gapped lower at the open after Boehner’s Plan B crashed and burned.  Overnight S&P500 futures dipped 1.7% but the market eventually opened down 1% this morning.  The market attempted an early rebound, but that fizzled in the second hour and we are currently making new lows.

Technically speaking the market is still in good shape.  We are well above the 50dma and currently holding above support at 1420.  While the headlines are scary, the market is not in a bad position yet.  Of course the big risk comes from a potential wave of supply hitting the market if we break these key levels and trigger a lot of new selling.

MARKET SENTIMENT

Right now the market is suffering a crisis of confidence.  The recent rally priced in a fair amount of optimism over a timely resolution to the Fiscal Cliff, but yesterday’s developments put that in doubt.  Many of the buyers who were sucked in by the “everything’s fine” aura put off by the market are fleeing in droves.  The question is if this new selling will shake the confidence of previously steady holders.  A lot of traders are apprehensively sitting at their desks with their finger on the sell button this morning.  If further weakness develops and we start making new lows, these potential sellers will hit the market with a new wave of supply.

I’m actually surprised at the market’s reaction to the failure of “Plan B” because Plan B was dead on arrival between the Democrat controlled Senate and Obama’s veto.  Of course these fractures in the Republican party give Democrats the upper hand; united we stand, divided we fall.  A lot rests on Boehner’s shoulders right now.  He can put forward a more moderate plan that would win the endorsement of moderate Republicans and Democrats.  Or Boehner could let ideology trump reason and stubbornly push an all or nothing agenda.  Boehner will cave at some point, but politics is a game of showmanship and expect Boehner to put on an act for his constituents before letting a deal happen.

There are three reasons the market will sell off, changing fundamentals, normal swings in supply and demand, and a wave of emotional selling.  I’m assuming the Fiscal Cliff deal will get done eventually, so the fundamental picture doesn’t change much.  We were poised for a normal pullback after the strong 100 rally in a month.  These are modest corrections and don’t go too far or too fast.  And there is emotional selling, the most unpredictable of the group.  The on trait often seen with emotional selling is it often goes further and longer than anyone expects.  The post-election selloff is a perfect example.  The thing we have to watch for here is if this is just a normal rebalancing of supply and demand, or if it turns into an irrational and emotional selloff.  We should know pretty quickly if this thing finds support or selling gets out of hand.

TRADING OPPORTUNITIES

Markets are lower, but the losses are not accelerating in the first couple hours of trade.  We are standing on a trapdoor, but it hasn’t opened yet and it might not open depending on what other market participants think.  If we hold these levels, anxious owners will start to relax and buyers will begin nibbling.  But if the market cannot find a floor, selling will pick up as we break through levels of concentrated stop-losses at 1420 and the 50dma.

How to trade this.  Long-term holders should no watch the intraday market, it will just shake your confidence.  Look back at the reasons you bought and make sure they are still valid.  If so keep holding and mentally prepare yourself for potentially more downside before things rebound.  Swing traders, watch for a buying opportunity, but don’t get in front of this selloff.  Let things settle down before jumping in.  This might be a modest correction or it could turn into an avalanche.   In cases like this it is better to be a little late than a little early.  Shorts should start looking for an exit to lock in profits.  You can hold for a little longer, but don’t get greedy.  The market and economy have not fundamentally changed, so don’t expect a major market crash.  We will find a floor over the next few trading days and if you don’t lock in profits, you risk giving them all back.  And for those considering putting on a short today, you are risking have this market snap back in your face.  It is best to get in ahead of these things because chasers almost always end up holding the bag.

INDIVIDUAL STOCKS

AAPL is holding up fairly well all things considered.  It gapped lower at the open, but is still trading above the daily lows as the market is making new lows.  This behavior shows most of the weak holders in AAPL have already sold and there is some price stability as the new owners are much more willing to sit through some volatility.

Stay safe

 

PM: Fiscal Cliff here we come

By Jani Ziedins | Intraday Analysis

PM Update

MARKET BEHAVIOR

Stocks traded flat for the first half of the day, but rallied into the close on above average volume.  This was a nice win for the bulls, but all seems for naught as overnight futures are down sharply after conservative House Republicans rebuffed Boehner and his Plan B.  These dysfunctional developments make it less likely we’ll reach a workable compromise before yearend.

MARKET SENTIMENT

If the drop in overnight futures holds into Friday morning, we could see a wave of emotional and stop-loss selling hit the markets.  For many traders this will be a sell first, ask questions later situation.  But the big question isn’t how we will open, but what will happen in the second hour of trade.  Will value investors jump in and take advantage of the newly discounted shares, or will buyers prefer to wait and see how low this will go before stepping it?  No doubt we will see sellers in the morning, but the ball is firmly in the buyers court as to when they chose to prop up this market.  If they step back for a couple of days we could see a noteworthy slide in stocks as they fall in the vacuum of absent demand.

But here is the thing, the Fiscal Cliff is an event created by our politicians and it will be solved by our politicians.  This is not a sub-prime lending scheme that is about to collapse the global banking sector.    This is simply our politicians kicking a can down the road.  Maybe US debt will be downgraded by a ratings agency or two, but paradoxically this will probably  lower our federal borrowing costs as traders seek shelter in US Treasuries.

TRADING OPPORTUNITIES

Watch early trade to see how buyers and sellers respond Friday morning.  The 1.7% dip in overnight futures might even mark the low of this event.  After-hours and overnight markets are far less liquid than the primary markets, so a few panicked sellers can have a far more dramatic impact in these markets before cooler heads prevail at 9:30 in the morning.  Or not…….

Watch early trade for signs of selling accelerating as the floor falls out from under the market, or alternately buyers step in and we rally off the early lows.  Fundamentally this is largely a non-event, but the media has done a good job of hyping this up that could lead to a wave of emotional selling. But I love emotional selling because that is how we make money.

The same ideas hold for Friday as they have all week.  Long-term holders, don’t lose your resolve.  You knew this volatility was a real possibility, don’t lose you nerve now.  Short-term traders don’t try to catch the falling knife.  Wait for a bottom to form before buying discounted shares.  Shorting would still not be advised because this market could bounce at any time.  If you simply must short the market, don’t hold for more than a couple of days, which would be hard given the upcoming calendar.

INDIVIDUAL STOCKS

AAPL will likely get caught up in any selling, but none of this changes the fundamental story.  If AAPL was attractive at $525, then it is even more attractive at $495.  Trade your conviction and don’t let near-term volatility spook you out of a good trade.  We knew this could happen, we accepted the risks when we thought about it rationally, and now we must come face to face with these risks when the market moves against us.  But whether it is in AAPL or anywhere else, if you are uncomfortable, sell, regroup, and wait for the next trade.  Always live to fight another day.  If that means selling at the bottom, so be it.  There are old traders, there are bold traders, but there are no old, bold traders.

Stay safe

AM: Waiting for the next move

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR

The S&P500 is trading near flat this morning after yesterday’s big selloff.  A new wave of sellers failed to show up, but buyers are also taking a wait-and-see.  And here we are waiting for something to bump the market one way or the other, giving bandwagon traders something to jump on.

We are quickly approaching the holiday and trading volume will fall off with each day closer to Christmas.  There are two effects to watch because of this light volume.  First, big money managers are on vacation and without their approval, junior traders manning the desks will have limited buying authority.  Second is the low volume will make it easier for smaller blocks of trading to move the market.  Because of these,  expect more volatility with a slightly negative bias.  Of course a surprise Fiscal Cliff deal could pop the thin market in a painful way for any shorts.

MARKET SENTIMENT

Yesterday’s selloff brought a little life back to bears and made bulls a touch nervous.  But all the failed breakdowns recently sound a bit like Chicken Little and many traders are paying less attention to them.  You could same some complacency is creeping into the markets and that is never a good thing.  Traders seem more hopeful of a Fiscal Cliff deal than fearful of gridlock.  And fundamentally they are right about not reaching a Fiscal Cliff deal by the end of the year since most of it can be unwound retroactively.  But that discounts the emotional selling from the average retail investor who has been spooked by the 24/7 coverage of the Fiscal Cliff.

TRADING OPPORTUNITIES

If we think about the market like a spring, the recent rally unwound the upside potential and it is getting a bit stretched at this point.  Further, the downside spring is more coiled that it has been in a while.   While my medium-term bias continues to be positive once we get past the Fiscal Cliff debate, supply and demand might dictate some temporary weakness.  This is not a sure thing, but just something to keep in mind if you see some down days over the next couple weeks.  The Fiscal Cliff could spook the market, but it won’t crash the market.

How to trade the coming days, longer-viewed traders should hold positions through the weakness.  Swing traders should lighten up and look for better prices to buy in at and shorts should be extremely careful because the market could pop at any moment if our politicians actually do their job and compromise for the sake of the country.

INDIVIDUAL STOCKS

AAPL is trading lower, extending yesterday’s slide.  This is a volatile name and speculators are driving this thing all over the place.  Up, down, up, and down again.  Day and swing traders should lock in profits quick on this name because it will reverse on a daily basis.  But longer-viewed holders just hold tight.  The key to making money in the markets is buying right.  And if you bought right, you should be okay with this volatility.  If anyone wants to get in on this trade, wait to buy the dips, don’t chase the rallies.

Stay safe.

PM: Off again

By Jani Ziedins | Intraday Analysis

PM Update

Markets struggled as the Fiscal Cliff deal is off again.  It wouldn’t be surprising to see the market pullback and consolidate some of the recent gains.

MARKET BEHAVIOR

Stocks retreated to 1435 as collaboration in Washington predictably ground to a halt.  The selloff came with the largest downside volume seen in over a month.  This puts us just above the 1430 level that provided support and resistance dating back to early September.  Inability to hold Monday’s breakout doesn’t bode well for a continuation and we might see more weakness here.  Look for selling to pick up speed if the market cannot hold 1430 and the dip starts taking out automatic stop-losses.

MARKET SENTIMENT

Political negotiations took two-steps forward last week as both sides were making constructive progress toward a deal, but that reversed today and we had a big step-back as the rhetoric picked up again.   The market was rallying in anticipation of an imminent deal over the last few weeks, but today’s bickering threw a wrench in those plans.  But this is standard operating procedures for both DC and the markets and shouldn’t surprise anyone.

As much as we want to put the Fiscal Cliff behind us, if politicians agree too quickly, each party’s base would become upset that their guy gave in too easily and should have fought for more.  If there are not multiple breakdowns and stalemates, then you are clearly doing politics wrong.  The reality is both sides are going to make compromises that will upset their base and the political leaders will put up a good fight so they are not criticized for giving in too easily.

And in the markets sentiment swings up and it swings down.  Chasing the market is one of this country’s the favorite pastimes.  If the market is going up, buy-buy-buy.  If it is going down, sell-sell-sell.  We all knew this market could not go up forever, the only question was when it would pullback.  Maybe today was that day, or maybe this is just another short-squeeze.  Only time will tell for sure.

As we covered in yesterday’s post, Tuesday’s high volume was noteworthy and acted as a potential warning flag of dwindling demand.  Everyone will point to the rhetoric out of DC and say that lead to today’s selloff, but two weeks ago the market rallied strongly in the face of similar bickering.  What made the difference between then and now?   Supply and demand.  Two weeks ago the market was grossly oversold after the emotional post-election slide.  That selling flushed out all available supply and after that dried up there was nowhere to go but higher, regardless of the headlines.  And today we saw similar headlines as two weeks ago, but this time we sold off because all the recent buying created a fresh crop of available sellers.  People claim news drives the markets, but it only seems that way when the buying and selling follows the news.

TRADING OPPORTUNITIES

I wouldn’t buy today’s dip, not yet.  We will most likely see slightly more attractive prices over the coming days.  The political side of this will probably get worse before it get better and that could shake out some of the recent buyers expecting a smoother outcome.  We are approaching the holiday week and many big decision makers will be on vacation, leaving junior traders to man the desks.  These rookies will have clear sell orders if we cross certain levels, but most lack the authority to initiate new positions, limiting buying over the next week.  Short of a surprise Fiscal Cliff deal, expect the market to be flat to slightly lower next week.

INDIVIDUAL STOCKS

AAPL finished at the lower end of the day’s range, but it did not give up nearly as much of the previous two-day rally as the indexes did.  This shows some relative out-performance.  Volume was far below average and the lowest we’ve seen in weeks.  Buyers were taking a break after two days of strong gains, but sellers also failed to show up in numbers and the stock consolidated recent gains.  Monday’s dip undercut the previous low gave a potential double-bottom.  Six-months from now a lot of people will be kicking themselves for not buying AAPL when it is trading above $600.

Stay safe

AM: Digesting gains

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR

Stocks are churning sideways and digesting yesterday’s breakout.  Buyers are not rushing to buy and sellers are not rushing to sell.  Most peaks after an unsustainable run fail within three days.  If we see constructive action for a few days, the market is poised to continue higher.  Failing to hold these levels over the next couple days means we should expect near-term weakness.

MARKET SENTIMENT

The recent rally has priced in increased expectations of a workable Fiscal Cliff compromise.  But while the market is eagerly anticipating agreement from our politicians, if we weren’t averting a “Fiscal Cliff”, what would the market think if our politicians simply announced “we are going to raise taxes and slash spending”?  How would the market react to that headline?  It is an important question to ask because that is sub-text to averting the Fiscal Cliff.  After the euphoria of a grand bargin settles down, the market will focus on what terms are in the deal and might develop an allergic reaction to European-style austerity.

TRADING OPPORTUNITIES

I’m bullish over the long-term because we are still in the economic recovery phase and there is a ton of money stashed on the sidelines in Treasuries, gold, and  money markets.  That is the fuel to propel the next bull super-cycle, but here in the near-term we should expect some emotional volatility.  Long-term traders ignore these daily, weekly, and monthly swings and profit handsomely from their resolve to stand above the fray.  Swing traders on the other hand take advantage of this emotional volatility.

It is still a little early to short the market, but prudent swing traders are lightening up their long exposure.  Long-term holders, whether you buy here or a few points higher or lower, you will see some nice profits over the next year as a real economic recovery takes hold.

INDIVIDUAL STOCKS

AAPL is taking its cues from the market and digesting its strong two-day bounce.  Prices are down modestly, but this is still supportive of recent gains.  But unlike the broad market, AAPL is still in the mist of a selloff and struggling with widespread bearish sentiment.  All the sellers who bailed on the stock since September might be willing to buy back in if the stock starts rallying again.  Value investors form the bottom, swing traders start the rebound, and momentum chasers push it higher.  It will be interesting to see where AAPL trades just before its earnings are released in January.  Will the bearish sentiment break before then and price in a decent quarter?  Or will the pessimism remain and the market will wait for confirmation of good news before buying?

Stay safe

PM: Beware of volume

By Jani Ziedins | Intraday Analysis

PM Update

MARKET BEHAVIOR

Stocks closed at the highs of the day and are within 2% of a 52-week high.  We easily cleared former resistance/support between 1430 and 1440 and closed just a hair under 1450.  Volume was the highest we’ve seen since the bounce off of 1400, which signaled the end of that a two-day slide.  The high volume signals a large wave of capitulation by bears and a frenzy of chasing by late bulls.  Looking back over the last few months, volume of the levels we saw today often signaled a change in direction/sentiment for the market.  Something to take note of.

MARKET SENTIMENT

Today’s high volume offers plenty of reason to give pause and assess the situation.  Is this the point where too many people bought into this rally?  Have all the bears been chased out of the market?  Have all the fence-sitters jumped in?  Is this setting up to fall due to a dearth of new buyers?  News doesn’t really matter if everyone is fully invested and no one has money left for buying.

The other day I cautioned about selling something just because it went higher, but this time is feeling different.  As I already mentioned there was huge volume today.  We cleared major resistance and triggered all that automatic buying from bears covering their shorts and fence-sitters afraid of being left behind.  Everyone on TV is talking about 52-week highs and all-time highs after that.  We’re not seeing cautious optimism out of bulls, but beat their chest and shout at the top of their lungs arrogance.  And bears are cowering with their tail between their legs, not telling everyone the market is about to collapse.  Further, it seems by listening to people the Fiscal Cliff deal is all but signed at this point.  What a dramatic change in sentiment from just a few days ago.

And so now we are left asking, where will the next incremental buyer come from?  There is a mountain of money in gold and treasuries, but those traders are very slow to warm to equities and that is the story of the next decade, not the next month.  Over shorter periods of time liquidity is more static and on a daily/weekly basis these fund-flows won’t have a huge impact.  Who can buy the market here?  I’m not sure.

TRADING OPPORTUNITIES

Anyone sitting on nice profits should consider trimming back after such a strong run.  The goal isn’t to make all the money, just the easy stuff.  Leave the top-picking to the gamblers.  The market rallied 100 points in the last month and is expecting an imminent Fiscal Cliff deal given the recent strength.   There is no reason the market can’t go higher, but every up-day brings us one day closer to the step-back.  I’m very bullish over the medium-term, but given everything I am seeing, a pullback to the 50dma wouldn’t be unreasonable.

There are three ways to participate in the markets, long, short, and out.  Each position has its own risk/reward profile, so what works for one position might not work for another.  In cases like this, selling stock you own to lock in profits is reasonable and responsible move.  If you are out of the market, stay out of the market because chasing this late in a move is never ends well.  If you find yourself in this situation, just wait for the next high-probability opportunity.  And for shorts, don’t jump in front of this rally by trying to pick a top, but watch closely for a chance at some quick short profits once the cracks start showing up.  A lot of people bought the market over the last 100 points and anything but a home run out of the Fiscal Cliff will probably lead to a let down in the market.

INDIVIDUAL STOCKS

AAPL had another good day.  Funny how dangerous it was to buy at $500, but here at $530 everyone is getting excited again.  Anyway expect some chop in the name over the near term, especially if there is weakness in the broad market.  It is still a good buy for the medium-term, but be prepared for some volatility.

Stay safe

AM: Bounce continues

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR

Stocks set a new post-election high in early trade as the bounce off the 50dma continued.  Over the last two months we found decisive bounces off 1350, the 200dma, and now the 50dma.  Anyone standing in the way of this rally had a really bad month.

MARKET SENTIMENT

It is impossible to argue with this market, either your are on board, or you are getting killed.  By now now the uptrend is so obvious, former bears and those on the sidelines are changing their tune and buying into this Teflon rally.  If you can’t beat them, join them and buying from all these turncoats is the fuel propelling this market higher.  Bears have argued this market is too optimistic, but it only gets more bullish with each passing day.  The mistake most people make is assuming the contrarian trade is going against a big move.  But contrarian trading has nothing to do with price-action and everything to do with what the market is thinking.  More often than not the contrarian trade is going with the market, not against it.  When too many people say things have gone too far and are primed for a pullback, the contrarian trade is to keep holding.  The Q1 rally earlier this year is a perfect example of this.  For months people were predicting and expecting a pullback, but it never happened and the market kept marching higher until all the sideline-sitters were forced to act or else risk being left behind.  It was the buying by these reluctant buyers that market finally topped because after that we ran out of new buyers and the 2nd quarter selloff started.

TRADING OPPORTUNITIES

What happens after a Fiscal Cliff deal largely depends on what the market does before.  If we keep rallying strongly in anticipation, that increases the likelihood of a sell-the-news event.  The market is also currently obsessing on when a deal is reached, not what is in the deal.  We could pop on the first reports of a deal, but then selloff as the actual details of the deal are dissected.

For short-term traders, start looking to lock in profits soon.  This could run a little more, but expect buying to climax and turn lower.  For longer-term holders, the market is in rally mode and don’t mind pullbacks here an there, they are simply part of the process of heading higher.  The world is getting better not worse and long is the right side to be on over the medium term.  Ignore everything people are worried about and instead fear the things no one is talking about.

INDIVIDUAL STOCKS

AAPL is continuing its bounce off of $500 and putting more margin of safety between itself and this key psychological level.  A lot of times it is easy to spot a good value opportunity, the harder part is figuring out when to take advantage of the discounts.  A lot of people thought AAPL was a bargain at $650, then it was $600 and $550 after that.  But this gets back to what we were talking about yesterday, if you are tempted to buy something, it is probably still too early.  If you want to buy a stock on the dip, wait a little longer and the price will get even more attractive.  The time to buy the dip is when everyone has given the stock up for dead, when they are convinced it will keep going lower.  And that is AAPL here at $500.  Too many dip buyers were burned by buying higher up, and have since given up trying to pick the bottom.

Stay safe

PM: Markets rally on hints of compromise

By Jani Ziedins | Intraday Analysis

PM Update

MARKET BEHAVIOR

Stocks bounced off the 50dma and regained all the losses accumulated during Thursday and Friday’s selling.  Volume was just a smidgen higher than average.  We are again at 1430 that has proved to be a difficult level to close above.

MARKET SENTIMENT

Stocks took off on half-full developments out of Washington.  We don’t have a Fiscal Cliff deal yet, but talks between Boehner and Obama seem more productive as each side is showing more willingness to compromise.  Today’s price action was a combination of buy-the-rumor and a massive short-squeeze.  In spite of what everyone thinks, the market wants to go higher and you cannot get in the way of that.

TRADING OPPORTUNITIES

Bears were thwarted again as they got squeezed for the umpteenth time.  I often say the best trade is the hardest trade.  Right now the hardest trade is owning this market because there is just so much negativity out there.  Can anyone point to one genuinely positive financial headline?  Even a lowering of the unemployment rate is overshadowed by a shrinking labor participation rate.  And that is what makes genuine contrarian investing so difficult.  To do it right, you have to go against your instinct.  You buy when your gut is telling you to run and you sell when you are patting yourself on the back for being a market genius.

I always found a great cue for what the market is thinking by looking at what I am feeling.  I’m a relatively normal guy and if I am excited, then other people are probably excited too.  If I am fearful, they are probably fearful too.  When I am greedy and cocky, many other people are feeling the same way.  Further, people want data and charts to look at.  They want moving averages and standard deviations.  They want people to tell them when to trade.  They think you need to take emotion out of investing because that is what everyone tells them.  They tell you to turn off gurus and trade mechanical systems.  But my success comes from embracing emotion, not denying it.  It comes from ignoring the same data everyone else is watching.  I don’t want objective market analysis, I want opinion.  I’m not trading other people’s ideas directly, but I am sampling their opinions to see what everyone else is thinking.  Is everyone else greedy?  Are they scared?  Is everyone talking about the same thing?  Is there diversity of opinion or is group-think consuming the market?  I don’t trade fundamentals and I don’t trade technicals, I trade other traders.

The market continues flexing its muscles and defying all the critics.  The market isn’t rallying because of good news, it is rallying because all the bad news is already baked in and the market ran out of sellers.  The weakness might not be over, but the medium trade is definitely higher and it is foolish to get in the way of this rally.

INDIVIDUAL STOCKS

AAPL rallied off of the $500 level.  Volume was above average, but lower than Friday’s monster selloff.  There was another analyst downgrade this morning, but we already discussed the value of analyst opinions last week.  But even in the face of a second downgrade, the market bounced back.  At this point these events are mostly priced in and a 3rd or 4th analyst downgrade will have diminishing influence on the stock to the point of being non-events.  There is the very real possibility that if the broad market rallies going into next year, today’s price action could be the bottom of AAPL.  If the broad market breaks down, all bets are off, but a strong market will put a floor under AAPL.  Maybe we trade a tad under $500, but this selloff is very close to being done and we are debating 1 or 2% between here and the exact bottom.  If you like the story, buy the stock, if you don’t there are plenty of other things to trade.

Stay safe

AM: Another short-squeeze

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR

Markets are higher by nearly one percent as hints of compromise are leaking out of Washington.  This is squeezing all the bears who piled on the shorts last week.  Easy come easy go.

MARKET SENTIMENT

Another tough day to be a bear.  A lot of traders are expecting this market to crack wide-open, but it just isn’t happening.  On November 28th we had a dramatic selloff down to the 200dma, but it reversed and closed higher by the end of the day.  Selling last Thursday and Friday dropped us to the 50dma, but we rebounded decisively off of that level this morning.  People want to say this is a news driven market and that is making it impossible to trade, but that is just an excuse for their losing money.  Markets are indifferent to the news and only respond to traders buying and selling.  If you spend more time watching what other traders are doing and thinking, the market starts behaving a lot more rationally and predictably.

The market was pessimistic after last week’s selloff, but that pessimism is the fuel that powers rallies.  And we are seeing that fuel in action today.  As I shared in recent posts, this is a tough market to short and any short profits should be taken early and often because this market is highly prone to bouncing.  You can make money going against the trend, but you have to be nimble and quick.

The interesting thing about sentiment is I hear a lot of bears claiming the market is far too optimistic and overrun with bulls, but I don’t see any of this wild optimism firsthand.  What I see with my own eyes are uncertain bulls and confident, almost cocky bears.    I suspect this perception by bears that the market is overrun with bulls doesn’t come from conversations with other traders, but from direct observations of the market’s price action.  The market is going up a lot so that automatically equals to too many bulls.  But as we’ve discussed many times on this blog, there are other reasons why markets rally that have nothing to do with excessive bullishness.  And as many bears have found out, shorting a market just because it went up too much is a hazardous pastime.

TRADING OPPORTUNITIES

Today’s strong gains show the rally isn’t dead yet, but this isn’t an all clear signal to rush in and buy stocks with reckless abandon.  The market will probably chop around a little to equally humiliate bears and bulls alike before it resumes the uptrend.  It wouldn’t surprise me to see this bounce fizzle over the next couple days as we retest 1400.  That doesn’t have to happen, but if you own stocks, mentally prepare yourself for this renewed weakness and don’t let it shake your resolve.  For bears, this is yet another reminder to take profits early and often.  Bears are trading against the trend and that is one of the most difficult trades to execute successfully.

INDIVIDUAL STOCKS

AAPL dipped to $501 in early trade but then jumped on board the broad market rally.  I’d still like to see the stock trade and even close under the psychologically significant $500 level.  This will give the tree one last good hard shake and clear the way for a rebound higher.  Remember the best way to make money in the markets is to buy weakness and sell strength.  But unfortunately the human brain is wired to buy strength and sell weakness.  And no doubt we will see a lot of regret from weak sellers who see this name rebound without them.  The best trading advice I can give someone is sell when you don’t want to sell and buy when you don’t want to buy.  Like everything else in the markets this doesn’t work all the time, but it sure works better than following the crowd.

Stay safe

LA: Looking for support

By Jani Ziedins | Intraday Analysis

Look Ahead

The goal of this post is to look at the coming week for what we can expect and how to trade those opportunities.

MARKET BEHAVIOR

Last week was the first red week since the November 16th bottom.  We closed the week right on the 50dma and under previous resistance at 1420.  Volume has been constrained due to the typically light holiday season.  If we are looking for historical precedence, the recent three-week rally is a spring chicken and it takes far more selling than we saw on Thursday and Friday to kill a normal up-trend.  But that is assuming we are in an up-trend and this three-week rally is not simply a dead-cat bounce on our way lower.

MARKET SENTIMENT

There are a lot of people on both sides of this half-full or half-empty debate.  In fact the market price always seeks the perfect balance point between these two warring factions.  If the slightest imbalance develops, prices move a few pennies one way or the other to regain this perfect balance.  Repeat this process thousands of times a day and now you know what makes intra-day prices go up and down.  What appears like random noise to the untrained eye is really tiny movements the market makes to maintain this perfect balance between half-full and half-empty.

Why this matters is if we don’t have a tactical edge on other market participants and are simply trading the same information and techniques everyone else is using, it is impossible to do any better than random luck.  This is a tough idea for most traders to swallow, but the truth is you have to do things differently than everyone else to make money at this game.  If your typical yearly performance is close to what the indexes do, that shows you don’t have an edge on the market and your trades are simply winning and losing due to random luck.  You win some, you lose some, and at the end of the day are not that far off from the market averages.  It took years of studying the market and analyzing my performance for this to dawn on me and almost every trader I share this idea with resists it initially.  Maybe that is because we all came to the markets because we think we can beat them.  But the truth is, to win at this game we need a unique advantage.   We need to exploit a market crack.  There are several cracks in the efficient market hypothesis to choose from; structural, information, emotion, and non-profit motivated.  At some other point I’ll dig more into these areas, but the main focus of this blog is exploiting the human aspect of markets and profiting from crowd psychology.

The reason I bring this up is a lot of people are expecting the market to implode.  They cite the Fed’s money printing, US federal deficits and debt, the Fiscal Cliff, Euro Contagion, and a slowing China.  But the reason I don’t pay much attention to these ideas is because everyone knows about them.  Every bear on the street will cite the same reasons, ones that have been dissected ad nauseam in the media for years.  The only thing that scares me are the ideas no one is talking about, and so far I have yet to come across a bear with a unique and unexpected reason for the market to fall apart.

Lets use the 2008 financial meltdown as an example since that is the most recent major market crash.  In the fall of 2008 most pros on Wall Street didn’t know what a Mortgage Backed Security or Credit Default Swap were.  Even the bankers in the middle of this mess didn’t have a clue what was going on.  It wasn’t until the global financial system was brought to its knees and stock prices were cut in half did main street even get a whiff if what was going on.  Now lets contrast that with the situation we are in now.  When a barista at Starbucks is worried about something you know you can safely discount it because it is already accounted for and priced in the market.

Anyone remember all those planes falling out of the sky because of Y2K?  While it is a joking matter now as we ridicule the paranoid people who stockpiled a year’s worth of food and water in their basement, that doesn’t diminish the seriousness of the threat.  Y2K was a very real problem, but what ultimately made it a nonissue was everyone talking about it.  Knowledge is power and when we recognize a problem before it happens, we are really good at mitigating it.  Everyone and their grandmother knows about the Fiscal Cliff, Debt Ceiling, Slowing China, prolific US Deficit Spending, Global Money Printing, Euro Contagion, Greece, Italy, Spain, Ireland, Portugal, and the rest.  But the great thing is we recognized these problems early and the smartest minds in the world are hard at work solving them.  For example Europe has teetered on the edge of collapse for three years, yet somehow they keep chugging along.  That is because they recognize the problem and working to fix it.  Going back to 2008, no one had the slightest clue what was going on including the most savvy people on Wall Street.  Bear Sterns was a $62 stock just days before JPM offered to buy them out for $2 a share   NFLX and GMCR have had spectacular declines recently but very few blue-chip stocks can drop 97% in one week!

And so where does this leave us with our current predicament?  While it doesn’t feel right and it is a bit scary, we can safely ignore all the reasons bears are using to justify their bearish predictions of doom and gloom.  Now don’t get me wrong, the market can selloff and it can crash hard at any time, but I know it won’t be for any of the reasons people are currently talking about.   Ignore what everyone is talking about and fear what is unseen.

TRADING OPPORTUNITIES

Going into this week we can do one of three things; up, down, or sideways.  While not particularly helpful when looked at that way, when we break those scenarios down in greater detail we can formulate a plan.

We can bounce near the 1400 level that has provided reliable support going back to August.  This would represent a minor reset of an otherwise bullish rebound.  There is still a lot of fear in the markets and it is often said markets climb a wall of worry.  This pessimism will continue the fueling the next rally.  Look back to Saturday’s post for an explanation on why this happens time and time again.

We can trade sideways for a while as we digest the recent 90 point rally from 1350.  Sideways trade is usually bullish because selloffs are typically quick and dramatic.  The thing many bears often overlook is the world is getting better, not worse.  The recovery is not happening fast, but no recovery is as fast as everyone would like.  These things take time

And lastly we can selloff aggressively to the 200dma.  If we can’t find support at 1400, expect the market to push on through to 1390 and even a little under before finding support.  This is about as low as I expect a selloff to get unless something new and unexpected develops.  Potentially we could retest 1350 if the market panics over a Fiscal Cliff breakdown, but that emotional selling creates buying opportunities because the fiscal cliff is a well understood event and the market rarely plunges on what it can quantify.  Markets fear the unknown, not the known.  A great  example of this was this summer’s big rally on the heels of the SCOTUS ruling upholding Obamacare.

So how do we trade these?  Expect some near term weakness, but we should find a bottom not too far from here.  There isn’t a lot of downside left to short, so if you have short profits, look to cash them in when we push down to the 1400 level.  While we might drop to 1385, holding out for those last few points of downside is just greedy and foolish.  It is easy to make money in the markets, the hard part is keeping it.  Don’t be tempted to hold too long and give back all those hard-earned profits.

On the long side, don’t try to pick a bottom and let the market find support in the 1400ish range before buying in. And of course I reserve the right to be completely wrong and change my mind in a moment’s notice. Always be on the lookout for behavior that doesn’t confirm to what you expect because it means something has changed and you need to change with it.  It is okay to be wrong, it is suicidal to stay wrong.

INDIVIDUAL STOCKS

A lot of the above analysis applies equally to AAPL.  It is way late in the game to be short and if you are lucky enough to be sitting on short profits, lock those in quick.  We might see a dip under $500 on tremendous volume, but that will likely be the capitulation point if we didn’t already see that with Friday’s huge selloff.  But either way there is very limited downside remaining in AAPL and it is time to reel in those short profits.

For the bold with a long-term view, you might consider accumulating shares here if you are willing to sit through some near-term volatility.  AAPL could shoot itself in the foot with its 4th quarter earnings, but the thing about the nearly 30% selloff is most of that downside has already been realized.  There is plenty of chatter about suppliers being told to slow production because of slow iPhone5 sales, but I’ll be honest here, if I heard that, then everyone knows it and it is already factored into AAPL’s price.  AAPL wil eventually succumb to competition like every other tech company has, but the reports of AAPL’s death are greatly exaggerated.

Stay safe

WR: Taking a step back

By Jani Ziedins | Intraday Analysis

Weekly Review

MARKET BEHAVIOR

This was the first negative week since the November low.  The market peaked on Wednesday after taking out the pre-election highs, but gave back all of those gains by Friday’s close.  Weekly volume was slightly under average, but we cannot read a lot into that since we are in a traditionally low-volume period between Thanks Giving and Christmas.

MARKET SENTIMENT

The market has only ended negative on 5 of the last 21 trading sessions.  That is a pretty impressive run and explains how we gained nearly 90 points.  As impressive as that run has been, every run eventually comes to an end.  Are we at the end of this run with two-consecutive down days on Thursday and Friday?  And what does the end of a run mean?  Is it just the end of the straight up phase of the rally?  Or does the end mean falling off a cliff?

If you look back at what has been done, our three-week rally is peanuts.  The most impressive rally was early this year where over an eleven week period we had just one week ending in the red.  By that yardstick we can’t even come close to claiming a three-week rally is grossly over-bought.  But if this market isn’t over bought, what is it?  Maybe it is just resting.  Maybe it had a few too many chasers as we broke above 1435 on Wednesday.  Maybe Thursday and Friday are just another bear-trap on our way higher.

As far as sentiment, bulls are more confident and comfortable than they’ve been in months.  A bounce off of a low will do that as it reassures holders that this was the right decision.    But it would be a huge stretch to call this market complacent.  Bullish headlines are few and far between as even non-investors cannot escape all the Fiscal Cliff chatter.  The most bullish headline of the week was a report that our politicians were fighting a little less.  Talk about a half-full reason to rally.  Further, many market participants expect us to fly off the Fiscal Cliff.  Of course politicians on both sides saying they are willing to take the plunge doesn’t help foster an optimistic environment.

Many times I’ve said markets rally in the face of pessimism and decline on the back of complacency.  This is boiler plate contrarian investing.  People trade their opinions and anyone expecting doom-and-gloom is already out of the market.  If a person is 100% in cash, the only thing they can do is buy stocks.  If the majority of market participants are pessimistic over all the economic risks in front of us, then they are already mostly in cash and the only thing they can do is buy this market.  This is exactly why the Obama selloff bottomed and rallied so strongly.  When the only option left to most people is buying, the market can’t help but rally no matter what the headlines are.

TRADING OPPORTUNTIES

Some of the commentary in this post conflicts with what I’ve written about in daily posts, but this is where timeframe makes a big difference.  Daily posts look at what will happen over the next few days.  These weekly posts look at what will happen over the next few weeks.  And in cases like this, I expect some near-term weakness, but remain long-term bullish.  That is why it is important to take a step back and look at the big picture.  The market tries to seduce and trick us with its misleading daily fluctuations, but it is far harder for the market manipulate weekly charts.  It is always better to trade with trend.  This is sailing with the wind at your back and it takes very little effort to succeed.  Compare this to the trader fighting the larger trend and he has to work very hard tacking into the wind.  Trading the counter-trend moves can be done successfully, but it is exhausting and leaves little room for error.  When contemplating shorting this market here, a person should ask themselves what is the bigger trend?  If the trend is lower, grab on and make easy money.  But if the trend is higher, shorting a modest dip is an aggressive and risky play.  It can be done successfully, but it is far more difficult.

INDIVIDUAL STOCKS

AAPL’s been giving people heartburn again. An analyst downgrade sent AAPL to its lowest close in nearly a year.  It is hard to find someone who is jumping up and down, screaming what a buy AAPL is at these levels.  The stock is 28% off its 52-wk high and that is scaring away a lot of potential buyers.  But that is one of the most odd things about the stock market, people only want to buy expensive merchandise.  Put something on sale and they turn their nose up at it because it is too ‘risky’.  But the truth is AAPL was a far more risky at $700 when everyone was excited to own it than it is here at $500.  Why do people fight each other to pay $700 for a stock and won’t touch the same stock with a ten-foot pole at $500?  It all comes down to how the mind works and what people are looking to get out of the markets.

The human mind is great at seeing patterns (even when they don’t exist) and a trend is an easily recognizable pattern.  Stock investors are in this to make money and they want to buy something that will go up in price.  Obviously a stock making all-time highs has been going up and the natural assumption is this pattern will continue.  At $700, buyers see this obvious pattern and expect prices to continue going up.  And when you flip that around, after a 28% decline people won’t get near a stock because the pattern tells them it will continue going lower.  But to be successful in the markets we have to fight our natural instinct and trade with reason and logic, not emotion and intuition.  Maybe AAPL has more downside left, but without a doubt it is far less risky to own AAPL at $500 than it was at $700.

ET CETERA

I want to thank everyone for all the positive feedback regarding this blog.  I enjoy writing these posts and am happy to hear people are finding them useful.  And for those tweeting and re-tweeting these posts, I am extremely flattered and appreciate you helping spread the word.  I don’t make any money from this blog, but sharing ideas with fellow traders has been invaluable in improving my trading and I’m glad to be able to give back to the community.

Stay safe

PM: More low volume selling

By Jani Ziedins | Intraday Analysis

PM Update

MARKET BEHAVIOR

Markets declined on light volume.  We are just a hair above the 50dma and clearly under previous resistance at 1420.  Volatility is modest as the last few days of weakness failed to trigger a large wave of selling.  Is the market growing complacent after a 90-point, straight up rally?

MARKET BEHAVIOR

Everyone knows where the market came from, but very few can tell you where it is going.  The clues are there, we just need to learn how to spot and interpret them.

Supply and demand moves stocks in  four different ways; 1) over-abundance of willing buyers, 2) over-abundance of willing sellers, 3) lack of willing buyers, and 4) lack of willing sellers.  Today’s decline on low volume was a victim of insufficient willing buyers.  The low volume selling over the last couple days reveals not many people are concerned about this selloff as they continue to holding.  Is this the result of complacency taking over?

Typically it takes large volume selling to set the stage for a rebound.  This is because on the way down, weak holders sell to more confident value investors who are willing to sit through some volatility.  After a high volume purge, you end up with fewer weak holders and more confident investors.  That is the tipping point that tightens supply and turns a decline around.  (Looking at AAPL’s chart shows some of this high-volume selling taking place and is part of the reason I think there is hope for the stock.)

We had several of these high-volume down-days in early November and that was part of what turned the market around on Nov 16th.   Since then we have seen a lot of buying push the market to new post-election highs, much of it on higher volume.  But like on the way down, high volume buying on the way up also shows the makeup of the market is evolving as conservative investors sell to the more bold who are happy to chase the market higher.  These new owners are the impulsive investors that follow the crowd, but they are also the first to panic when the market turns against them.  And so here we are, two days into a modest correction with very few people worried about the slide so far.  This might suggest there is more selling ahead.

Many discount these ideas because they think we are stuck in a news driven market and next week’s price moves are simply an unpredictable result of what the headlines are.  I see their point, but I also know news does not drive markets, only supply and demand can do that.  The news might be random, but the market’s reaction to it is not, and that is the source of our advantage.  If we know what traders think and how they are positioned, we can figure out how they will respond to different pieces of news.

TRADING OPPORTUNITIES

So where are we?  Great question.  First I want to remind everyone I do not have a crystal ball and cannot see the future.  There are no guarantees in the market, but in the market we don’t need to be right all the time to make money.  Like card counting, we look for different clues to move the odds ever so slightly in our favor and over time we will come out ahead.

It seems like the market is full of traders expecting a Fiscal Cliff resolution, or alternately assume going off the Fiscal Cliff is not as bad as most fear.  These are the traders who were comfortable buying stocks during the dip to 1350, but now that the market has rallied 90 points from the November low, we are running short of new confident buyers willing to step in front of the Fiscal Cliff.  And that is why prices have declined on light volume.

I think there is some further weakness ahead based on the above, but we are still in a bull market and counter-trend trades don’t last long.  We will probably bounce somewhere around 1400.  Maybe it is 1405, or maybe it is 1390.  Look for the high volume purge that shakes out most of the weak holders and replaces them with confident and patient buyers willing to buy shares at a discount.

INDIVIDUAL STOCKS

AAPL was pounded today, see my AM post for more thoughts about this particular selloff, but more broadly we are getting a lot of shares changing hands here in the lower $500 range.  Opportunistic value investors are buying shares at a steep discount from fearful and emotional traders who can’t handle seeing the losses mount.  The market has run short of AAPL bulls and most everyone is bashing the stock here.  The selling might not be done yet, but more selling just creates a better base for the stock.  Seeing the stock break under $500 on the highest volume in months would be a great buying opportunity because that could be the last shake-out.  Of course there are no guarantees in the market and catching falling knives is a hazardous way to make a living.  The far more conservative approach would be to let the stock bounce from that low before buying in.

Stay safe

AM: Stuck in no-man’s land

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR

Markets traded slightly lower, staying within a tight rage.  We are resting between 1420 the 50dma.  This is no-man’s land with a potential rebound on one side and a selloff on the other.  Neither camp is making an agressive move here and instead waiting to see what other traders do first.

MARKET SENTIMENT

Between the conflicting negative sentiment, strong price gains, and relentless short-squeezes, most traders are uncertain where this  market is headed and are just sitting on their hands.  We might break this log jam leading into the close as traders with more conviction start piling in on one side or the other.  Breaking above 1420 or under the 50dm could trigger a larger wave of activity from those waiting for the market to make a move.

Trading so close to the 50dma makes us vulnerable to a dip under it and the inevitable avalanche of automated orders that get executed when we break well followed technical levels.  Market markers pay their alimony and kid’s private school tuition through trading volume.  They know all these stop-losses are just a couple of points away and will do their best to push us into that area to trigger all that activity.  The bigger question is what happens after all those automatic orders are executed.  Does it trigger a larger slide as selling begets more selling?  Or will the market run out of sellers and bounce?

TRADING OPPORTUNITIES

It is getting late in the game to put on a new short.  At this point we could easily bounce back above 1430 on yet another short-squeeze.  And if we selloff, we probably won’t fall much further then 1400.  That doesn’t set up for a good risk/reward.  If you have some short profits from yesterday, keep them on a tight leash and start eyeing the exit.  You don’t have to sell today, but the probabilities and rewards are less in your favor than they were yesterday.

Anyone out of this market should start looking for stock they like and look for an opportunity to buy on this pullback.  We might see prices get a little more attractive, but don’t get greedy and wait too long.  For long-term holders, don’t let this modest selloff spook you out of your holdings no matter how scary the headlines become.  Remember, our profit comes from the market not the medida, so don’t take your eye off the ball.  We could see prices dip to 1390 and maybe even a little bit lower, but that is where selling should climax and find support.

Of course the emotional trade is the wild card and we need to watch for signs the market is cracking if traders become spooked by developments out of Washington.  But given this market’s strength in the face of recent bickering and rhetoric, current participants are not all that sensitive to what is coming out of DC and I don’t expect a panic driven rush for the exits even if talks breakdown.  But I reserve the right to change my mind on a moment’s notice as the story develops and the market reacts to it.

INDIVIDUAL STOCKS

AAPL was flattened by a downgrade from a UBS analyst.  He lowered his price target from $1,000 to $700, and that caused the stock to drop to $510.  But let’s not forget these analysts are really glorified accountants and if they could trade, they would be traders not lowly analysts.  The other thing is this UBS analyst is still very positive on the fundamental story, he is just playing stock market by trying to guess what the market will do next.  And in most instances analyst driven moves rarely stick because they are not related to the fundamental story, they are simply one person’s opinion.  Fundamental news out of the company is what triggers directional moves in a stock.

Trading wise we might see the stock break $500 on gigantic volume, forming the second dip in a double-bottom before returning to more normal levels.  A lot of people are selling AAPL by the dump truck load between the weak price action, impending tax increases, and sentiment change, but look all of those to reverse next year.

Stay safe