Monthly Archives: April 2014

Drifting Higher

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Another calm day as the market rallied modestly following the Fed’s policy statement and continued Taper.  Volume was above average and continues the streak of elevated trade following Monday’s rebound.

MARKET SENTIMENT
Stocks shrugged off shockingly slow first quarter growth before the bell and took the afternoon’s continued Taper in stride.  This further reinforces the notion that anyone who would have sold negative headlines is already out of the market.  Those left either held through Ukrainian drama and economic uncertainty, or bought the dip in the face of it.  These owners showed a willingness to hold risk and that confidence kept them from hitting the sell button today.  If they didn’t succumb to a dip under the 50-dma Monday or 0.1% growth Wednesday, they will likely be hard to shake free regardless of what the market throws at them and the resulting tight supply props up prices.

High-fliers have been hit hard in recent weeks, but blue chip stocks held the larger market near record highs.  Unsustainable markets, like the dot-com bubble, often see people dump safe stocks to chase speculation.  In this situation, we have the opposite.  Traders are fleeing obnoxious valuations and embracing consistent performers.  That is rational behavior, not a prelude to a crash.

TRADING OPPORTUNITIES
Expected Outcome:  Coasting higher on the back of short covering.
The S&P500 is one point from breaking near-term resistance at 1,885 and that will send some bears running for cover.  The rest will be flushed out when we break 1,900 for the first time in history.  But after shorts and breakout buyers finish buying this strength, the market will likely stall as follow-on buying fails to materialize.  We’ve struggled to extend last year’s rally and the summer doldrums are often a poor time to find support from big institutions.  Most likely the “buy weakness, sell strength” trade will remain the best trade through the summer.

Alternate Outcome:
Recent volatility cleared a lot of weak holders from the market, building the foundation for the next move higher.  Sometimes we need 6 months of consolidation, other times less.  If the market holds 1,900 following a breakout to new highs, this market could defy conventional wisdom and have a strong summer season.

Trading Plan:
Dip buyers should already be in and bears are better served waiting for a better entry point.  Long-term investors should continue holding, but wait for better prices to add to their favorite positions.

Plan your trade; trade your plan

Calm returns

By Jani Ziedins | End of Day Analysis

End of Day Analysis

MARKET BEHAVIOR
Volatility virtually disappeared on a calm climb 0.5% higher Tuesday, a welcome break following Monday’s 60-point whipsaw.  There was a little movement in the first couple hours, but after that the market settled into a couple of point range just under 1,880.  This level morphed into a ceiling we bumped into several times and were unable to break through.

MARKET SENTIMENT
Everyone who wanted to sell already sold and the lack of reactive trading allowed the market to calm down climb higher without much fuss.  There is a finite supply of owners that can be spooked out by gloomy headlines and near-term volatility, and it seems we reached our limit when Monday’s price-action undercut recent technical levels.  That was the signal for the last of the hopeful holdouts to cut bait and once they finished selling, the market rebounded on the absence of selling.  Reacting to pain often flushes traders out at the exact wrong time and that appears to be the case for anyone who sold the dip under 1,860.

While we ran out of sellers, the next question becomes, who will buy this rebound?  The near-term answer is shorts getting squeezed, momentum traders, and breakout buyers will provide lift to 1,900, but after that it is harder to identify the incremental buyer.  In prior tests of record highs, demand dried up and we stumbled lower.  Are buyers finally ready to embrace these fundamentals and political headlines?  I’m not so sure this is the start of the next rally leg.  More likely the sideways trade will continue until big money managers return from summer vacation this fall.

TRADING OPPORTUNITIES
Expected Outcome: Challenge recent highs, but struggle to find new buyers needed to sustain the move.
While recent predictions of a 20% correction appear premature, not bad doesn’t automatically mean good.  We saw large gains last year and it is perfectly reasonable to trade sideways for an extended period.  Barring some headline catastrophe, the summer will probably be relatively uneventful as we continue trading between the 1,800ish/1,900ish levels.

Alternate Outcome:
The market chopped around since the start of the year and that goes a long way to consolidating last year’s gains.  Fear and respect for the market has returned to relatively healthy levels and those contribute to building a foundation for the next move higher.  While that move might come this fall, it could also be here earlier than anyone expects.

Trading Plan:
Buy weakness and sell strength.  The best time to buy this market was when everyone was scared, not as it breathes a sigh of relief.  As we push toward the highs, this is a better place to contemplate taking profits than initiating new positions.  While we likely have more upside, use a trailing stop to protect recent profits.  Bears need to wait a little longer before challenging this rebound.

Plan your trade; trade your plan

Cleared for takeoff

By Jani Ziedins | End of Day Analysis

End of Day Analysis

MARKET BEHAVIOR
It was a volatile but productive day.  Stocks surged higher in early trade, imploded and sliced through support, and rebounded back into the green by the close.  The volatility saw us move more than 60-points intraday and trading volume was the most enthusiastic we’ve seen in some time.

MARKET SENTIMENT
If someone was bored Monday, clearly they were not paying attention.  The price action was as dramatic as it gets and left both bulls and bears bloodied.  It seduced dip buyers with early strength, crushed their soul with a 30-point collapse, built up the hopes of the bears before smashing them to pieces with a late day rally back into the green.

While it was tough to be optimistic midday, the strong close on high volume was as bullish of a sign as it gets.  The best capitulation bottoms undercut recent support, sending optimists scrambling for cover.  This surge of selling eventually exhausts supply and we bounce higher when shares become scarce.  That was exactly what happened today and likely means 1,900 is easily within reach.

TRADING OPPORTUNITIES
Expected Outcome:  Push toward all-time highs
Today’s move was as bullish as it gets.  We flushed out weak owners and replaced them with confident buyers willing to own this weakness.  If anyone could hold this volatility and fear, there is little that will scare them and they are in it for the long haul.  When the majority of the market becomes uninterested in selling, supply tightens and prices head higher.

Alternate Outcome:
While it is hard to be bearish given how the market traded today, failing to build on these gains will be a huge warning flag.  Undercutting 1,850 over the next couple days means the lows in mid-April are in jeopardy.  We’ve been given the green light to go higher, but if the market cannot rally following this textbook capitulation bottom, then plenty of downside remains.

Trading Plan:
The selloff is over and shorts should cover if they haven’t already.  Swing traders can hold on for a test of old highs, but I’m still not convinced this move will lead to another large rally leg.  Instead, expect the sideways trade to continue into the Fall and take profits early and often.

Plan your trade; trade your plan

Anxiety flares up

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks sliced through 1,870 support and tumbled all the way to the low 1,760s by midday.  The market is still above the 50dma, but this level is in danger if the selling keeps up.

MARKET SENTIMENT
The media claims this weakness is due to tensions in Ukraine and disappointing earnings out of AMZN and F.  I guess that excuse is as good as any, but for all the anxiety this weakness is causing, we have only given up 20-points of a 70-point rebound.  When taken in that context, this move appears more normal and healthy than scary.

The more closely a person follows their positions, the bigger deal these gyrations appear.  For the vast majority of 401k investors, a 15-point decline doesn’t even register, but for the guy who follows tick-by-tick, this is a huge move.  If we pullback from the 5-minute chart and look at the daily, today’s “plunge” hardly shows up.  But markets function by convincing people to overreact.  Every dip feels like the start of a larger selloff because if it didn’t, no one would sell, and without selling we wouldn’t have the dip.

Sometimes markets under appreciate the risk involved.  This happened during the financial crisis when no one had a clue about the huge house of cards Wall Street built.  Is that happening with the Ukrainian crisis?  We’ve known about this unfolding event for a couple of months and the market largely brushed it off.  Was it being naive?  Are things deteriorating?   Last time we went through this, Russian troops invaded Crimea and the market actually rallied.  Now we have Russian troops amassing outside eastern Ukraine.  Is this significantly worse than last time, or is it more of the same?

If we learned anything from the first round, it’s that Europe needs Russia, and Russia needs Europe.  Most of the words exchanged are little more than political grandstanding and it is highly unlikely we’ll see meaningful sanctions put on Russian energy exports or Russia withholding energy from Europe.    The threat of a civil war is escalating, but the market’s proven time and time again over the years that revolutions and civil wars are not a big deal even when they involve oil exporting countries.

For the most part, this Ukraine story is recycled news and anyone who owns the market here either held through the Crimea crisis, or they bought during it.  Anyone afraid of these kind of headlines sold months ago.  The main thrust of this mornings weakness is to punish late dip buyers.  While it felt safe to buy after four or five up-days, today’s price action is proving otherwise.

TRADING OPPORTUNITIES
Expected Outcome: Rebound to the upper end of the trading range.
Today’s weakness is cathartic for the market and clearing the way for a move higher.  The fearful and pessimistic are selling to the confident and opportunistic.  The fewer weak owners we have in the market, the more likely it will rally simply because we run out of sellers.  Confident dip-buyers willing to hold through weakness makes it less likely we will encounter that weakness simply because there are fewer people willing to sell.  Tight supply almost always equals strong prices.  While this weakness could go a little further before it is done, selling off on recycled headlines is typically far more shallow than if the market was blindsided by something new and unexpected.

Alternate Outcome:
Markets go up and markets go down.  If anyone could figure out why, they would be extraordinarily rich.  Sometimes they behave as they should, other times they do the opposite of what we expect.  Last time we rallied on the takeover of Crimea, maybe this time we crash on the takeover of eastern Ukraine.  This game would be too easy if the market were predictable.

Trading Plan:
Buying on the fifth consecutive up-day, when everyone felt good, didn’t turn out to be such a good idea and selling here when everyone is freaked out probably isn’t the right move either.  The trade of the year has been buying weakness and selling strength and that pattern likely remains intact.  Maybe we haven’t found the bottom of this move yet, but it is safer to buy todays weakness than it was after a six-day rally pushed us up to 1,885.

Plan your trade; trade your plan

One Step Back

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks are down fractionally in midday trade.  So far the market is holding 1,875, but struggling with former resistance at 1,880 that stretches back to early March.

MARKET SENTIMENT
The bears identified a mountain of reasons this market should breakdown, but instead it holds within 1% of all-time highs.  There are times the market does what we think it should, and there are times we are wrong.  When the market doesn’t behave as expected, it means our analysis is flawed and there is something big we overlooked.

This morning bears are pounding the table over Ukrainian tensions, earnings, weakness in momentum stocks, head-and-shoulders tops, low-volume up-days, among many other things.  So why isn’t the market cracking wide open?  The short answer is supply and demand.  Most of the problems bears are promoting have been around for a while.  Anyone who fears these issues already sold in the dip to 1,815.  That means everyone left holding isn’t worried about these fears and they are priced in.  While there are scary things abound, we cannot forget markets only move on supply and demand.  When everyone already sold these headlines, there is no one left to sell and the market firms up on the resulting tight supply.

But supply is only half the equation.  For this strength to continue, we need fresh demand.  The last time we were at these levels, buyers refused to step up and is why we slipped to the low 1,800s.  Will this time be any different?  The most obvious near-term buyers are shorts, momentum chasers, and breakout buyers.  All three of these groups react to prices moves, not underlying fundamentals.  The higher we go, the more these guys buy the market.  Until we clear old highs, expect these traders to keep buying this strength.

TRADING OPPORTUNITIES
Expected Outcome: Pushing toward the upper end of a trading range.
All the Chicken Littles running around because of a 5-point selloff need to tone it down a notch.  Two-steps forward, ones-step back.  Everyone knows that, so why do they overreact to the smallest gyrations?  While buying here is late in the game, we most likely still have upside and a shot at cracking 1,900 in coming day.  But at the same time I expect we are still in an extended trading range and this strength will not trigger the next rally leg.  Instead we will drift back into the 1,800/1,900 trading range and stay there through the summer

Alternate Outcome:
Bears might be right.  This could simply be a false bottom and we have a date with the 200-dma in May.  While I’m not a big believer in “Sell in May”, it only matters what other people think.  If they start selling head of summer vacation, that will push us lower.  Once we break recent lows, people start selling for no other reason than everyone else is selling and we continue lower in a downward spiral.

Trading Plan:
It is too late to buy the dip after six-consecutive up days that recovered 60-plus points.  While we still have some upside left in this move, the risk/reward does not favor new positions.  At the same time, it is early to short the market and bears should wait for that last surge higher before trading against this strength.  For those with long positions, start looking for an exit and either sell proactively or use a trailing stop to protect recent profits.

Plan your trade; trade your plan

Holding the rebound

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Not a lot happening following the three-day weekend.  The market is up 0.3% in late-day trade and continues holding the recent rebound.  We remain above the 1,850 support and are 1.5% from all-time highs set a few weeks ago.

MARKET SENTIMENT
While the market appears quiet, that speaks volumes since few are fading this bounce.  Anyone who doesn’t believe in this market sold or shorted recent weakness, meaning there are few left to sell.  Those sellers were replaced by more confident buyers willing to own the volatility and downside risk.  The more confident owners are, the less likely they are to sell headlines and dips.  This churn in ownership is what set the stage for the bounce from 1,815.  Now that dip buyers are sitting on profits and owners who held the weakness are breathing a sigh of relief, the current group of owners is less likely to sell because their decisions to hold this market was reaffirmed.  Under most circumstances, confident owners means few sellers and tight supply.

TRADING PLAN
Expected Outcome: Pushing toward upper end of trading range.
If we close in the green today, that will be the 5th consecutive up-day and we all know even the strongest markets have down-days sprinkled in.  Currently we are running into resistance near 1,870, but no doubt many shorts placed their stops just above this level and we will likely see another short-squeeze when we move above this level.  From there the next big resistance level is 1,900.  But we are slipping into the summer trading session and are more likely to see sideways trade than the next rally leg.

Alternate Outcome:
If this market stalls at 1,870 and falls under recent 1,815 lows over the next few weeks, then we are on our way to the 200dma.

Trading Plan:
The best profit opportunities come from the seemingly riskiest trades.  This is buying when everyone else is selling at a discount and selling when everyone is buying at a premium.  While there is a little more upside as we approach the upper end of the trading range, it is far riskier buying the dip on the 5th consecutive up-day.  Swing traders are better served looking for opportunities to harvest profits than adding to their positions.  Bears should wait for a little more upside before fighting this market.  Stalling near 1,900 could be the next good shorting opportunity.

Plan your trade; trade your plan

Why the selloff didn’t continue

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks traded quietly ahead of the three-day weekend.  We continue holding recent gains and remain above prior support at 1,850 and the 50dma.  This bounce recovered more than half of the recent 80-point sell off and puts the market on more solid footing.

MARKET SENTIMENT
The selloff for no reason was met by the rebound for no reason.  Big moves are driven by traders changing their outlook on the future due to unexpected headlines.  Smaller moves are the result of the natural ebb and flow of supply and demand.  The recent selloff was nothing more than a modest pullback when demand dried up near 1,900.  While the selloff felt dramatic and spooked many traders, nothing happened over the last couple weeks that changed traders’ economic expectations.  Those that expected the economy to continue improving two-weeks ago still feel the same today.  We didn’t get fundamental data that made big money managers adjust their economic outlook lower and is why we bounced sooner than many predicted.

Last week’s reactionary selling wasn’t due to people thinking the economy was taking a nose dive, but because they thought the market was going to take a nosedive.  That a key piece of information technicians miss when they lump all trading activity together in a chart. Supply and demand moves are smaller and more common than fundamentally driven ones.  While many were calling for a 10 or 20% correction likes we’ve seen in years past, what these prognosticators forget is those corrections were driven by dramatic headlines that forced traders to adjust their economic outlook.  Euro Contagion and the downgrade of US debt threatened the viability of our financial system and is why those headlines lead to big selloffs.  Traders were no longer confident about what the future held.  This time around we didn’t have gut-wrenching headlines backing up this selling and is why I felt fairly confident this move would bottom while others were predicting we were falling off a cliff.  While the chart looked scary, we lacked a fundamental reason to drive confident owners out of the market.  While this weakness spooked out impulsive and reactive traders, there was little substance to rattle the nerves of more confident owners.

TRADING OPPORTUNITIES
Expected Outcome: There is still more upside left in this rebound, but it is unlikely to lead to a new rally leg.
Traders are breathing a sigh of relief as the emotion driven selling abates.  We will likely see more buying next week as people feel more comfortable owning this market and they chase the bounce.  While this move largely puts fears of a 20% correction behind us, the coast is not clear.  The market will likely remain in a trading range through the summer.

Alternate Outcome:
Big declines often have multiple false bottoms along the way and this weeks strength could just be a sucker’s rally.

Trading Plan:
It is a little late to buy the dip.  The best trading opportunities come from the most uncomfortable situations.  Buying after four up-days is hardly uncomfortable.  We will likely see a few down days next week that flush out the late dip-buyers and tempt the bears to go short.  While I still think there is more upside in this rebound, most of the easy money is behind us and the next couple dozen points of upside will be more bumpy.

Plan your trade; trade your plan

Reclaiming support

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
We broke through the 50dma and 1,850 barrier as this rebound continues.  This puts us back above key technical levels and gives this move credibility.

MARKET SENTIMENT
Last week many were convinced we were on the verge of a larger correction, but this week we’ve done nothing but go up.  And that is how the market works.  Everyone who expected a prolong selloff dumped shares reactively, but as soon as they finished selling, supply dried up and we bounced.  No matter what the headlines or traders’ expectations, market prices only respond to supply and demand.  Even when the crowd is pessimistic, we rally when we run out of sellers.

Volatility like we’ve seen over recent weeks churns ownership in the market.  The dip forced many weak hands to sell reactively and tempted aggressive bears to go short.  While all this aggressive selling continued the move lower, what is going on under the surface is these sellers are transferring ownership to more confident buyers willing to hold the risk and volatility.  They confidently buy the discount and patiently wait for the market to bounce.  Since they willing stepped into this uncertainty, they are more comfortable holding a declining market.    But the paradox is the more willing these new owners are to hold weakness, the less likely it is we will see that weakness.  When they confidently hold, then we run out of sellers and the market finds a bottom.

TRADING OPPORTUNITIES
Expected Outcome:  Look for the bounce to continue into next week.
This rebound should continue at least until we recover April 10th’s selloff.  From there we will have to see what traders think and how the market responds before we decide if this move continues to all-time highs or stalls out.

Alternate Outcome:
Last week we saw a painful false bottom that caught many dip-buyers off guard and the same could happen here.  Short covering pushed us back above technical support, but we need wider buying for this strength to continue.  If demand dries up, we could easily stumble back to the lows.  Undercutting 1,810 in coming days means this selloff is going to get a lot worse and the 200dma is in play.

Trading Plan:
It is getting a little late to buy the dip since we are near the middle of a move back to 1,900.  The best opportunities arise from the most difficult trades.  Buying the third consecutive up-day is late to the party and exposes a trader to greater risks of an intermediate dip.  As for bears, it is still early to short the bounce and the next shorting opportunity would be if the market stalls near 1,870.

Plan your trade; trade your plan

Huge intraday reversal

By Jani Ziedins | End of Day Analysis

End of Day Analysis

MARKET BEHAVIOR
Fascinating day as we traveled well over 60-points intraday.  We surged higher at the open, collapsed near recent lows by midday, only to see us race back up to the early highs by the close.  Volume was elevated and one of the busiest days we’ve seen this month.  We finished a hair under the 50dma and just a few points from prior support near 1,850.

MARKET SENTIMENT
Did today’s trade signal a capitulation bottom?  It sure felt like it.  Early strength pushed us to the 50dma, a technical level that often acts as overhead resistance.  Bearish traders used this mark to open the floodgates and their selling sent us down 30-points.  But as just quickly as the selling started, it exhausted itself and we rallied 30-points on tight supply.  No doubt this whiplash carried most reactive traders out on a stretcher.

This volatility is cathartic as it flushed out weak traders and seduced bears to short with both hands.  All that selling clearly pressured the market, but the frenzy stalled midday when there was no one left to sell.  When we run out of sellers, supply dries up and there is nowhere to go but higher.  And this strength is likely to continue given our proximity to the 50dma and 1,850.  Modest gains Wednesday could send shorts scrambling for cover and set off a dip-buying frenzy.

TRADING OPPORTUNITIES
Expected Outcome: We most likely put in a bottom to this modest selloff.
The most profitable trade of 2014 has been buying weakness and selling strength.  It appears this is no different.  The best time to buy is when everyone fears we will continue lower.  Anyone expecting lower prices already sold and they were replaced by confident dip-buyers willing to own the risk.  Purging weak-hands and infusing strong-hands is the best way to turn this market around.

Alternate Outcome:
Every dip is buyable until the one that isn’t.  While I still believe we need a headline event to dramatically lower investor’s expectations of future profits and earnings, sometimes fear is all it takes to turn confident owners into panicked sellers.  Even as this volatility flushed many weak holders, without a doubt we could easily see another leg lower before this is all done.

Trading Plan:
The best trades are often the hardest to make.  Buying recent weakness was not easy and will likely turn out to be the right trade.  Shorts should consider locking in profits, or at the very least protect themselves with a trailing stop.  Dip-buyers should get ready to ride the short-squeeze higher.  Since we are in the middle of a holiday shortened week, we should expect continued volatility due to lighter than normal volume.

Plan your trade; trade your plan

Market bounces

By Jani Ziedins | Intraday Analysis

End of Day Update

MARKET BEHAVIOR
Stocks closed higher and recovered most of Friday’s losses, but it was a wild ride getting there.  After an opening gap higher, the market slipped to break even before staging a late-day rally back to the early highs.  Volume was well under average on the first day of this holiday-shortened week and the S&P500 remains under the widely followed 50dma.

MARKET SENTIMENT
Sometimes markets are overwhelmed by surges in supply and demand, other times they move because no one is buying or selling.  Today’s low-volume rally had selling take a break as we floated higher on tight supply.  This strength took pressure off nervous owners, but it didn’t do much to tempt reluctant dip-buyers that were burned by last week’s false bottom.  While there were few buyers, there were even fewer sellers and is why we ended the day higher.

With the S&P500 down over 4% and the NASDAQ 8%, many are claiming this is the 10% correction that is long overdue.  These people point to similar corrections in years past, but to me there isn’t much similarity because the examples they hold up were driven by some fundamental change that altered investor’s outlook on the future.  Euro Contagion and the downgrade of US debt were the two biggest selloffs of this 5-year old bull.  While the technical setup might be similar, we still lack the fundamental catalyst that changes confident investors outlook on the future.  Without those fear mongering headlines, this dip will likely be little more than the normal back-and-forth.

TRADING OPPORTUNITIES
Expected Outcome: Without a fundamental reason to sell off, we will remain range bound.
While I don’t see any reason for the market to implode here, there also isn’t much reason for it to race off to the moon either.  We trade sideways more often than directionally, so why are so many people taking sides, predicting a launch higher or collapse lower?  Why can’t we simply hang out in a 100-point trading range through summer?

Alternate Outcome:
Sometimes we don’t know why markets selloff until after the damage is done.  Maybe there are people far smarter and connected than we are and they are liquidating positions ahead of the imminent market collapse.

Trading Plan:
While it is fun to predict market collapses, smart money bets on a continuation of the previous trend.  That’s because a trend will continue countless times, but only reverses once.  It’s a numbers game.  While it is hard to get excited about the upside, the market is in a better position to bounce than continue lower.

Plan your trade; trade your plan

Finally time to buy the dip?

By Jani Ziedins | End of Day Analysis

End of Day Analysis

MARKET BEHAVIOR
Stocks sliced through any semblance of support as the selloff continues.  We fell over 80-points from the all-time highs set last Friday.  This includes breaking the 50dma Thursday and continuing lower on Friday.

MARKET SENTIMENT
It is hard for the financial press to come up with a justification for this selloff other than “profit taking”.  There are no fundamental headlines dominating trading rooms and it largely seems like people are selling for no other reason than everyone else is selling.  The high-flyers are taking it the hardest, down 20 and 30%.  Some claim the death of these mo-mo stocks signals the end of this bull run, but here is the thing, markets typically top when the hottest stocks continue higher while everything else drops back.  During the dot-com boom, brick-and-mortar companies were shunned while everyone was piling into speculative internet stocks.  Today we have the opposite.  The momentum darlings are down double digits while the broad market only slipped a few percent.  Is this the end of the bull market?  Not if we use history as a guide.

Stocks fall for only two reasons, waves of selling or lack of demand.  A rush of sell orders is the stereotypical selloff and fairly intuitive.  This is when everyone hits the sell button at the same time and that surge of supply overwhelms demand, crushing prices.  The less intuitive reason prices fall is lack of demand.  This is when most traders still believe in the market, but prices come under pressure because prospective buyers wait patiently for more attractive prices.  

Surges of buying and selling often see volume leap 30 and 40% above average, but over this 80-point slide, the most elevated volume we’ve seen was 8% above average.  That hardly qualifies as a mass exodus.  The lack of huge selling volumes suggests most owners are confidently sitting through this weakness and these price declines are largely driven by lack of demand.  This is important because it gives us insight into where we are headed next.  

TRADING OPPORTUNITIES
Expected Outcome:
There are two kinds of selloffs, those driven by fearful headlines and those that seem to fall for no reason at all.  This week’s selloff  lacks a fundamental catalyst and these mysterious selloffs are primarily caused by supply and demand imbalances.  All of the big selloffs people remember and fear are triggered by a fundamental catalyst that sent shivers of fear through the market.  Contagion, Default, Taper, Sequester, etc.  Confident owners need a boogeyman to shatter their confidence and turn them into sacred sellers.  So far we don’t have a boogeyman and that likely means this selloff will be more shallow since fewer owners will impulsively sell the fear mongering.

Alternate Outcome:
Sometimes we don’t figure out why a market is selling off until after it already happened.  If this market continues collapsing, the financial press will invent a reason.  While today’s selloff stalled just above 1,810, we could see a fresh round of emotional and reactive selling if we breach 1,800 next week.

Trading Plan:
The best profit opportunities are born from the most uncomfortable situations.  Buying the dip Wednesday after holding support was the easy, and wrong, trade.  Buying now that we’ve crashed through support is far more difficult.  And that is what likely makes it the right trade.  Without a fundamental driver, expect this selloff to stall soon.  Shorts should look to take profits and bold dip-buyers can take a chance.

Plan your trade; trade your plan

Pausing

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks bounced off the 50dma in early trade and are holding near 1,850 as they search for direction.  So far today’s move is more like a pause than decisive rebound since we are only up a few points from Monday’s close.

MARKET SENTIMENT
For as much drama as two-days of selling caused, we are only 2.5% from all-time highs.  This can be taken one of two ways.  Either this dip is no big deal and we shouldn’t be obsessing about it, or this is the start of something that still has a long way to go.  Of course the truth most likely lies between these two extremes.

Today’s pause marks the end of two-days of emotion fueled selling.  Those with a weak hand were flushed out in the rush for the exits, but confident owners continued holding and that limited new supply.  As soon as the emotional finished selling, the market found a floor and this is taking pressure off any remaining anxious holders.  But the fate of this move is no longer in the hands of holders.  Instead buyers will be the ones to save us.  Traditionally this is a mix of value investors and dip buyers.  Today’s pause is tempting dip buyers, but it is hard to claim a 2.5% discount from all-time highs represents a great buy for the stingy value investor.  Sometimes dip buyers can do this on their own, but if we need the value investor’s help, we probably need to slip a little further before they come to the rescue.

TRADING OPPORTUNITIES
Expected Outcome:
If the marked doesn’t end this dip in a decisive v-bottom today, we will likely hold near for 1,850 over coming days.  This leaves us vulnerable to one last emotion filled selloff as those barely hanging on get flushed out.  That last dip will likely be the end of the selloff and clears the way for a continuation higher.  We saw a similar move in late January.

Alternate Outcome:
While big selloffs usually need a reason, sometimes we only come up with one after the fact.  While this is behaving like a vanilla pullback, it could devolve into bigger waves of emotional selling if dip buyers and value investors don’t have sufficient numbers to prop up the market.  Every dip is buyable until the one that isn’t.

Trading Plan:
There is not a lot to do here as we wait for the next trade.  We will likely see one last dip lower before bottoming.  This means shorts can continue holding and dip buyers can wait for a better entry.

Plan your trade; trade your plan

Sell the fear?

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks sold off for a second day, slicing over 50-points from Friday’s intraday highs.  We are just above the 50dma, but under 1,850 support.  Volume was elevated, but only just above average, so this move doesn’t qualify as a stampede for the exits.

MARKET SENTIMENT
Easy come, easy go.  Friday we set record highs following a respectable employment, but its been all downhill since then.  While there are no major headlines to speak of, many high-fliers are crumbling and that is dampening the mood in the rest of the market.  We haven’t seen major waves of selling indicating most owners are largely holding through the dip.  This weakness is primarily coming from the absence of demand as anyone with money was reluctant to buy all-time highs as we ran out of momentum chasers.

Typically there are two types of large selloffs.  The first is the familiar headline driven panic selling.  This is typified by overwhelming fear the market is about to crumble because some structural flaw has just been uncovered.  That doesn’t seem to be the case here since the best most people can come up to explain this weakness is “profit-taking”.  The other type of extended decline is the “stealth” selloff.  This is the one that sneaks up on us by lulling traders into complacency.  These are the declines that no one notices because they are trivial by themselves, but over time they add up.  The last-two days of weakness is many things, but stealth is not one of them.

The emotion and pain of the recent plunge sent most with a weak stomach running for cover.  Most of these are the late to the party momentum chasers and breakout buyers.  They are the ones that first showed losing trades and are the most likely to impulsively pull the plug.  Now that many of these flaky owners have jumped ship, they were replaced by more confident buyers willing to own the uncertainty and this is the start of the bottoming process.  This selloff will finally end when the supply of sellers dries up after all who were inclined to sell already sold.  Given how transfixed the market has been by the last two days, we are probably getting close to this capitulation point.

TRADING OPPORTUNITIES
Expected Outcome: A little more weakness before finding a bottom under the 50dma.
Short-term traders are well aware of this weakness and many sold as we undercut their stop-losses.  This autopilot selling is provided much of the downside pressure, but now that many of these traders are out of the market, that overhang has been removed.  What hurt us today cannot hurt us tomorrow.  While we likely have some traders barely holding on and slipping under the 50dma will flush this last wave out, once these stragglers sell, expect the market to run short of supply and bounce.

Alternate Outcome:
Nothing shatters confidence like losing money.  No matter how confident we are, when everyone else is rushing for the exits, it forces us to wonder if they know something we don’t.  All of us have our breaking point before we succumb to the emotional pressure and join the herd.  If the market doesn’t find a bottom shortly after breaking the 50dma, the selling will likely continue as previously confident holders start selling first and asking questions later.

Trading Plan:
The market will likely find support near the 50dma in coming days, but if it doesn’t bounce in a v-shaped rebound, it needs one last plunge lower before returning to 1,900.  Long-term traders should ignore this volatility, but short-term traders can look for an interesting entry point when the crowd is convinced we are on the verge of a dramatic plunge lower.

Plan your trade; trade your plan

Selling begets selling

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
We slipped over 25-points from record highs as buyers failed to embrace these new levels.   The market opened strong following a decent employment report, but we waterfalled lower as the market undercut recent technical levels at 1,890 and 1,880.

MARKET SENTIMENT
This reaction was not driven by fearful headlines and is primarily the result of traders trying to game each other.  We often see volatility surrounding the monthly employment data, but it is typically short-lived and over the last few years it hasn’t had a lasting impact on trading.  Good report or bad, the market continued its relentless march higher from the 2009 lows.  It seems unlikely today’s decent employment report that fell in line with expectations will derail this rally.

We have seen periodic selloffs during this 5-year-old bull market, but each was following some spooky headline that threatened the solvency of the global financial system, giving traders flashbacks of 2008.  We’ve seen more modest weakness recently due to political gridlock or the impending Taper, but so far we don’t have any of that headline fear mongering going on today.  That means this is not the “crash” bears have been waiting for and this move is simply a rebalancing of supply and demand.

TRADING OPPORTUNITIES
Expected Outcome:
The market is in the middle of an emotion driven selloff.  We are undercutting recent support levels as autopilot stop-losses are kicking are adding fuel to the fire, but so far there is little headline fear to shatter the confidence of bulls that have been conditioned to buy every dip.  Once the selling frenzy slows, expect the market to find a floor as supply dries up.

Alternate Outcome:
There are bullish and bearish headlines every single day.  If the market wants to sell off, it will be easy to find a justification.  Nothing shatters confidence like screens filled with red.

Trading Plan:
Long-term investors should ignore these daily moves, but shorter-term traders should be treading lightly here.  Bears shouldn’t expect the market collapse without a dramatic headline and bulls need to be careful about buying the dip so close to the upper end of the recent trading range.  Sometimes the best trade is no trade.

Plan your trade; trade your plan

Bulls love complacency

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks dipped under 1,890 after setting record highs earlier in the session.  Following four-consecutive up-days, it is not alarming to have a modest down day.

MARKET SENTIMENT
So far this weakness has not opened the floodgates of selling and we gently drift lower as most owners show little concern and resist selling.  If recent headlines didn’t spook them, an 8-point dip from record highs is unlikely to either.

I’ve been waiting for a short-squeeze to launch us to new heights, but so far we haven’t seen bears rush for cover.  We are only a few points above previous highs, so many might be holding on in the hopes this move will reverse lower.  If a person believes in the “pain trade”, we haven’t seen real pain yet and both bulls and bears are confidently sitting on their positions.

There are few upside catalysts left for this market since it has largely priced in any and all good news on the horizon.  While there are risks out there, few owners are willing to sell at a discount because they have been conditioned to expect higher prices in the near-term.  Every time they sold scary headlines or weakness in the last 18-months was a mistake and they are determined not to do it again.  While many claim complacency leads to a top, it is actually a bullish catalyst.  When owners refuse to sell for any reason, that keeps supply tight and makes it very easy for the market to rally.  Markets don’t top on owners’ complacency, but lack of demand from buyers.  To figure out where this market is headed, we need to spend more time focusing on the opinion of those sitting in cash than those owning stocks.  Given how far we are away from levels that value investors find attractive makes us vulnerable to slipping on light demand once the momentum crowd catches up to this market and becomes fully invested.

TRADING OPPORTUNITIES
Expected Outcome: At the upper end of an extended consolidation and trading range.
While we might see a short squeeze in the near-term, with so few upside catalysts remaining, we will likely continue trading sideways for the remainder of the quarter.  Unfortunately for many recent buyers, trading sideways means holding within the recent trading range that goes as low as 1,750.  We don’t get paid for owning sideways markets and this is a better place to be locking in recent gains than initiating new positions.

Alternate Outcome:
Momentum is a powerful thing and carries us far higher and longer than anyone expects.  There is enough money sitting on the sidelines following the 2008 market collapse that is finally warming up to the market.  While that is a long-term bullish catalyst and will likely lead to a decade-long secular bull market, we will see periodic selloffs and even bear markets along the way.  While we can easily continue higher, stay vigilant.

Trading Plan:
Long-term investors should ignore these intermediate fluctuations, but they should hold off making new purchases since the patient will likely see lower prices over the next 6-months.  Short-term traders should consider locking in profits or using a trailing stop to protect recent profits.  Bears should be rooting for a strong short-squeeze that ultimately fizzles after sucking in the last of the demand.  Failure to hold those gains is the signal to go short.

Plan your trade; trade your plan

Challenging 1,890

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
The S&P500 is flirting with 1,890, setting record highs in midday trade before pulling back a few points.  In the absence of prior levels to reference, traders are naturally drawn to round numbers and today 1,890 is providing overhead resistance.

MARKET SENTIMENT
Defying skeptics, this market is off and running yet again.  So far it is only poking its head into new territory and shorts are not scrambling to cover their positions.  Either they are sitting on their bearish positions, hoping this upward move stalls, or there are so few pessimists left to cover we are not seeing the typical short-squeeze.

But here is the thing, bears should be hoping for a swift surge higher.  Trading sideways is constructive and supports a continuation.  Exploding higher on one last dying gasp is the most bearish thing this market could do.  There are no such things as triple-tops, so bears needs us to race to new highs if they want the market breakdown.  And the opposite is true for bulls, they should root for modest and sustainable gains.

There is little headline fear left in this market, meaning we are not weighed down by some overhyped risk.  This negates the profitable upside of something coming in less bad than feared.  Taper, Crimea, interest rate hikes, the market is taking it all in stride and owners are unwilling to dump shares at a discount no matter what the headlines are screaming.  Price moves often overreact on both the high and low side.  Over reacting to uncertainty creates buying opportunities, but just as often we get too high and fall under their own weight when everyone is holding on for higher prices.

Then we complicate the situation by throwing timeframe in the mix.  Sometimes the market is short-term bullish, medium-term bearish, and long-term bullish.  We can go up for two-weeks, slip to 1,700 by mid-summer, and close next year above 2,100.  Timeframe is what lets both bulls and bears be right at the same time (or both wrong if they impulsively react to the inevitable head fakes).

TRADING OPPORTUNITIES
Expected Outcome: One last surge higher before stalling into the summer doldrums.
While this rebound could stall at any time, that would be a little too easy for bears.  Often the market convinces us we are wrong just before proving us right.  Once last short-squeeze would send bears running for cover, but the market would rollover not long after if buyers fail to rush in and buy record highs.  Markets trade sideways around 60% of the time and being near the upper end of the trading range suggests we should be cautious since typical odds suggest we are more likely to fall back into the trading than race to 2,000.

Alternate Outcome:
Trading flat for the first quarter of the year took some froth out of last year’s hot market and allowed us to catch our breath.  Sideways is an important part of moving higher and sometimes three months of consolidation is all we need.

Trading Plan:
This has been a “buy weakness, sell strength” market and there is no reason to think it has changed.  As we break above old highs, we should be more inclined to sell the strength than chase the breakout.  Longer viewed holders should keep holding, but the patient will likely find better prices in coming months if they are looking to add to their favorite positions.

Plan your trade; trade your plan

Challenging old highs

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks are higher on the first day of the second quarter and the S&P500 set a new intraday record.  We are at the upper end of the 1,840/1,885 range that stretches back to early February.

MARKET SENTIMENT
Early highs did not set off an avalanche of short-covering, but we only poked above the old record by less than one-point.  Either shorts are sitting tight, or there are few shorts left to cover.  While not a scientific sample, Stocktwits’ SPY sentiment gauge reads 57% bearish, not a level suggesting we are running out of shorts.  The most likely scenario is shorts who were previously shaken out in the last month of whipsaws moved their stops a little further out.  This means we need to push closer toward 1,890 for a short squeeze to begin in earnest.

But short-squeeze or not, the future of this move to new highs depends on the appetite of the masses sitting on piles of cash.  Will they embrace the breakout, or continue waiting for lower prices?  While short-term traders on Stocktwits are wary of this market, most owners are content sitting on their profits and are reluctant to sell regardless of scary headlines like political and military conflict with Russia.  If that doesn’t spook owners into selling, I’m not sure what will.

TRADING OPPORTUNITIES
Expected Outcome: Push to new highs before stalling on lack of follow-up buying.
There is no such thing as a triple top, so it seems likely we are destined to bust through 1,885 in the near-term.  Markets typically collapse from unsustainable levels in quickly, so holding these levels for multiple weeks suggests we are not yet at unsustainable levels.  We will push toward 1,900 in coming days, but unless those with cash embrace this breakout, expect it to stall and fall back under 1,850 on weak demand.

Alternate Outcome:
The S&P500 was up a trivial 1% in the first quarter of the year and this sideways trade helped consolidate recent gains and cool a hot market off.  This pause makes it easier for the market to resume the previous uptrend.  If we break above 1,900 and hold those levels, this bull is ready to rip.

Trading Plan:
The best trade of 2014 has been buying weakness and selling strength and it is unlikely to be any different here.  We will likely challenge 1,900, but that creates a better selling/shorting opportunity than buying one.

Plan your trade; trade your plan