Monthly Archives: July 2012

Swing traders are unable to push the market down

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:28 EDT

MARKET SENTIMENT

The markets are trading in a tight range for the second day in a row.  So far this is showing good support at these levels as the swing traders are unable to push the markets lower at the upper end of the trading channel.  They are selling into this strength anticipating the next swing lower, but the market is holding up nicely.  The recent rally chased off all the bears and tempted in a few bulls on the breakout, but adding further gains to this breakout will give a larger number of cautious bulls the confidence to wade in, pushing the market higher.

Of course we do have some downside risk if all those bears sitting on the sidelines decide to try again and pile on the shorts in unison.  If this happens, the key level to watch will be the 50dma to see if the bears can finally break the back of this rally.  But so far the bulls are still in control and the bears are licking their wounds.

Looking at the bigger picture, even thought we are close to 52-week highs, there is a large amount of bearishness in the markets.  There is a lot of cynicism toward this rally and that is part of the reason the market is holding up so well.  All of these cynics have already sold or shorted the markets, meaning they can no longer pressure the markets.  And in fact they are built in buyers if they end up covering their shorts or are forced to chase a rising market.  This is exactly what we saw this winter as the markets had the best first quarter in decades.

But the thing to be careful of is oftentimes the bears are right, just early.  Success in the markets is all about timing, so early is the same thing as being wrong, but just because the market is holding up doesn’t automatically mean the bears are simply paranoid and wrong.  NFLX was one of the most heavily shorted stocks last year at $200.  While there was still a lot of upside left in the name as it eventually rose to $300, any bull would have done himself a favor to at least acknowledge the risks the bears were bring up.

The market is holding up very well right now and we are trending higher in the face of all the negative sentiment.  Conversion of bears to bulls could fuel a powerful rally, but any bull at least needs to recognize the risks bears are bringing up.

MARKET PERSONALITY

The markets continue to be heavily influenced by the currency markets and technical analysis of the EUR/USD is far more predictive of the equities market than the actual equity market charts. This skew from the foreign exchange markets is making it difficult to read the equities markets based on traditional behavior.  Globalization is making it a challenge for investors to specialize in one market and ignore all the others.  The more intertwined the world becomes, the more diverse successful investors will need to be.

S&P500 daily @ 2:24 EDT

Right now we are at the upper end of the trading range, and if we keep the recent pattern of staying within in this 40 point ascending channel, we will see a sell-off to the 1340 level.  But this will be the 5th swing of this pattern and it is getting a bit obvious and the market hates being obvious.  And we can see that as we are holding up near the high of the trading range for the second day in a row.  Past reversals happened fairly quick, so this is a departure already from the previous pattern.  If we do in fact have a lot of swing traders shorting the market here, but the market is not going lower, that could indicate a move higher since the bullish demand is offsetting the swing-traders selling.

TRADING OPPORTUNITIES

As always the market can head higher or it can head lower.  Brilliant insight, I know, but the market is at a turning point.  Right now the market is setting up for a move higher.  Between all the existing bearishness and holding at the upper end of the range indicate the market is ready for another leg higher.

But there is still very real risk lower since we have so much air under us from the recent rally and being near a 52-week high.  But the market has proven that it is willing to rally in the absence of horrible news.  This means barring a major shock to the system, the market will hold up.  But if we do hit a downdraft, be prepared to pull the ripcord quickly because the down-leg has room to run.

Based on what I see, trade the long side, but proceed with caution and be ready to run for cover.

Some leading stocks are doing really well over the last few weeks as the weight of the market has been lifted off their shoulders.  But do be careful because the higher they rise, the harder they fall if the market gets sucked into a correction.  Limiting any new buy to no more than 5% past the proper buy-point and that will greatly reduce the risk of getting shaken out in a normal pullback.

Stay safe.

Market trades flat after two-day rally

By Jani Ziedins | Intraday Analysis

I’m trying a new layout for these blog posts where I break it down into sections of Market Sentiment, Market Personality, Trading Opportunities, and Other Thoughts.

MARKET SENTIMENT

The markets opened higher this morning, but gave back those gains and traded slightly in the red for the rest of the morning.  Who knows what the news was, but it really doesn’t matter because the crowd is moving the markets, not the news.  Thursday and Friday’s strong rallies ran off all the bears in a powerful short squeeze.  Friday exceeded July 19th’s high, marking yet another higher-high.  You could see the last of the bears covering their shorts in the intraday chart as we surged higher after breaking through the previous high of 1380. These were the last of the weak-kneed bears running for cover.

With most of the bears already run out of the market over the last couple days, that source of enthusiastic buying will dry up.  To continue higher we’ll need bulls to step up and commit fresh capital at these levels.

On Friday IBD said the market started a new confirmed uptrend given Thursday’s powerful rally.  The interesting thing was reading the article’s reader comments to yet another change in the market pulse.  As I stated earlier, the harder it is to buy a breakout, the more likely it is to succeed.   Everyone was buying the earlier breakouts and they failed.  But here we are countless failed breakouts later on both the low and high side, and both bulls and bears are getting highly cynical and reluctant to be fooled yet again.  But the ironic thing is these breakouts going forward are far more likely to work than the earlier ones everyone was excited about.

MARKET PERSONALITY

The market has inched higher in a series of higher-lows and higher-highs.  While the ups and downs felt dramatic, the upward channel we’ve been tracing is only 40 points wide.  So far the best trade has been going against the market each time it reaches the upper or lower bounds of this channel.  But we are now working on our 5th swing in this channel and this pattern is becoming obvious to even the most inexperienced traders.  The market doesn’t like being obvious and chances are we are getting close to a change in personality, most likely represented by a breakout above or below the channel lines.

TRADING OPPORTUNITIES

If we are getting close to a change in market personality, that will create better trading opportunities than the 40 point chop we’ve been stuck in since mid-May.  The big question is which way will the market breakout, to the upside or the downside?  But as nimble traders, we can wait for the market to tell us before we commit our capital.

Plan A:  Being so close to a 52week high means there is a lot of air underneath us if some bad news comes along and surprises the market.  Most likely this will be a breakdown in the cooperation between the various European leaders trying to salvage the Euro.  A move lower could see a break under the 50dma, 200dma, 1300, and even June 4ths low of 1266.  Obviously this would be a bad time to be long stock, so it is a situation to be wary of.

Plan B:  The market could continue rallying in the face of all the uncertainty in the world.  In situations like this, it is said the markets climb a “wall of worry”.  This is because the markets are forward-looking in nature and are anticipating a positive resolution to the current crises.   It is this slow transition from a large group of worry-worts to a more positive outlook as the group slowly realizes the worst will not happen and bears turn to bulls one and two at a time. It is this slow transition from bears to bulls that causes the markets to rally.

Plan A & B are the two potential outcomes we need to anticipate and prepare to trade whichever one plays out.  We don’t know what the market will do next, but we can have a plan ready and jump on board the next trend.

OTHER THOUGHTS

Seems I struck a nerve with my criticism of gurus and systems.  The thing we need to remember is it doesn’t matter how much money WON makes in the markets, but how much money his students make.  If we are following his system, we need to evaluate the success of other followers in order to understand the capability of the system and the probability of our own success.  WON could very well have a 6th sense about the markets that lets him achieve all his success, but if he can’t teach that same intuition to his students, everyone else will fail to reach his same level of success no matter how closely they follow the system.

As always, stay safe

What’s your edge?

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:17 EDT

The market continued yesterday’s rally this morning and is getting close to exceeding July 19th’s peak.  The last couple days put in yet another higher-low and we are looking at another higher-high if this rally goes a few points further.  The market’s gyrations continue to exhibit indecisiveness, but there is an upward bias as we are slowly creeping higher with each swing.

Fundamentally speaking, earnings seasons has been at best unimpressive.  This makes it highly noteworthy to see the markets holding 3% from its 52-week high.  Over the short-run the markets can ignore fundamentals as other factors dominate the market’s psyche.  Right now Europe and the exchange rates are front and center.  As we’ve seen, a declining dollar will rally the market even when all the marquee companies are lowering expectations.  The question becomes, what is more powerful over the longer-term, the economy or the dollar?  And of course this is not an exclusive either or situation.  A weak dollar can boost earnings and a strong dollar can dilute earnings.

If you trade the markets, the one question you must answer is “what’s my edge?”  The only way to consistently make money in this game is to have an edge over everyone else.  Maybe it is inside information, maybe it is lightning quick execution, maybe it is arbitrage, or maybe something else.  But without an edge, you are just throwing darts based on a gut feeling of what will happen next.  Why is your guess about the future any better than the next guys?  The truth is it isn’t and without a quantifiable edge your success is based on nothing more than luck.

Gurus would have you believe following their system gives you and edge.  But if it is a widely publicized system, where is the edge if everyone else knows the same techniques?  There is a saying in this business, it is far more profitable to sell advice than it is to take advice.  These gurus are not rich from trading, but from selling their system.  It is noble to think these gurus are wealthy beyond their wildest dreams from trading but are so unselfish that they spend half the year away from home living out of a suitcase simply because they love teaching.  Really?  I don’t know about you, but if I were loaded, living in motels is not how I’d spend my time.

Now don’t get me wrong, teaching and helping others makes people feel good, but there is a big difference between leading a local meetup group or teaching at a community college and spending months on the road selling multi-thousand dollar seminars.  Never forget these people are in the business of selling seminars and are not helping out of the goodness of their heart.

But that is not to say these systems cannot work.  In fact most of them do work………some of the time.  The key to trading any system is knowing when it is applicable and when it is not.  For traders without inside information or supercomputers co-located next to the exchanges, this is one of the few edges left to us.  Any system is like a tool and it has a time and place where it works great.  But using it somewhere any other time is bound to lead to undesired results.

CAN SLIM is a great system, but there is a very specific window where it works exceptionally well.  The rest of the time it will produce false buy signals and erode your account one false breakout at a time.  As I’ve shared many times before, I find it very easy to make money in the markets.  The hardest part is keeping those profits.

Back to the original question, what is your edge?  What makes you a better trader than the other people in our meetup group?  What makes you better than all the other CAN SLIM traders?  What makes you a better trader than other retail investors?  What makes you a better trader than all the pros on Wall Street?  If you don’t have a good answer to this question, how do you expect to beat all the other traders in the market and consistently out perform the market?  This is a game of skill and you need that edge to come out ahead.  If you can’t convincingly answer this question, you have two options.  First, study and learn the markets until you develop that edge.  Or if you can’t beat ’em, join ’em.  Buying and holding index funds is the easiest and most reliable way to make money in the markets.

Now some people will argue with me, but if you think I am wrong, will your trading account back you up?  Are you consistently outperforming the markets without an edge?  Proof is in the pudding.  If you find the market is easy to make money off of, then I’m wrong.  But if you struggle to beat the markets, that should be sign your approach is incomplete and you need to find that missing ingredient if you want to improve.

Back to the present, the markets are up for a couple days and then down for a couple.  We’re in the middle of two strong up days.  If we continue this pattern, we have one or two up days left before we pullback.  Up for a couple days, down for a couple days.  The best way to trade this market is cash in any profits after a strong day and then prepare for the reversal.  The only way to profit in this market is scalping a few percent at a time.  Wait any longer and your profits will evaporate.

The news out of Europe continues to be encouraging, contributing to this upward trend.  But what happens if we hit a rough patch when some of the anti-austerity leaders start asking for too much at these meetings and we hit another stalemate?  Things have been going smoothly for a while now, but remember these are politicians we are talking about here and they can only play nice for so long.  Given our proximity to 52-week highs, I continue to think there is material headline risk to the downside if we see one of these Euro meetings blowup.

Stay safe

ECB promises to do what it takes

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:22 EDT

The markets jumped after a strongly worded statement from the president of the ECB saying they would do whatever it takes to preserve the Euro.  That sent the US markets up nearly 2% at the open.  But just a few hours into the day the markets gave up 1/2 of those gains.  For most of the summer the markets have been leaderless and subject to knee-jerk reactions to this comment or that headline.  This choppiness makes the markets difficult to navigate and no doubt chewed up anyone that got in the way.

Will the markets rally further on this verbal support from the ECB?  Or will this be a short-lived lift that quickly settles back to the 50dma?  Any guess is simply a toss of the coin and makes it very difficult to trade.  The smart money is sitting out this market and waiting for better trading opportunities.

The US equities market continues to be a derivative of the currency markets.  Early this morning the Euro shot up 2 cents against the Dollar after the ECB president’s comments.  Exchange rates are in the driver’s seat these days and this has completely changed the personality of the equities markets.  It is no longer about fundamentals or expectations of future growth, but a battle over whose currency sucks the least. At the moment the USD sucks the least, but Congress and the Fed are trying to change that.

AAPL daily @ 2:22 EDT

Is this currency correlation just a temporary phenomena, or paradigm shift due to increasing globalization of most companies?  This overlap and correlation between the various markets and assets makes it increasingly more difficult for a trader to focus exclusively on one market.  Going forward, the most successful traders will need to understand all these interactions in an increasingly interdependent world.

AAPL failed to wow the market the other day and fell back under its 50dma.  But what was the leader of the markets in the first quarter has lost some of its influence.  A few moths ago an Apple stumble would have taken down the markets, but now the new standard-bearer is the USD and the currency markets. For better or worse the markets are constantly evolving and as traders we need to stay on top of these changes.

Stay safe

Stuck on the 50

By Jani Ziedins | Intraday Analysis

S&P500 daily @ end of day

Third day in a row we’ve flirted with the 50dma.  As with everything in the markets, there are two ways to interpret this price action.  Half the money in the market thinks we’ll head higher from here and the other half thinks we are headed lower.  The market price is the exact balance point between these two points of view and it is always moving up or down from day-to-day or even minute to minute as traders change their minds.  This is what moves the markets.

For the bulls, holding solid above the 50dma shows strong support at these levels as we are building a base to launch the next move higher.  But for the bears, failing to bounce off of the 50dma in a meaningful way shows lack of conviction from buyers to sustain a rally from these levels.  Both sides are exceptionally smart, savvy, and informed in their logic.  That is what makes trading one of the most difficult ways to make a living in the entire world.  We are attempting to outsmart and take money from people far smarter and better informed than we are.  That is the brashness required to be a stock speculator, but this is the game we chose to play, so lets try to figure it out and see if we can get an edge on everyone else.

If we bounce off the 50dma, that will continue the pattern of higher lows, a very constructive and positive pattern showing strength and health in this market.  But dropping a couple more points will trigger a wave of automatic selling at the 50dma, the July 12th low, 200dma, June 25th low, and 1300 level.  There are a whole truckload of landmines waiting for investors between here and 1300.  If we break through the 50dma, it could get ugly if we stumble into that minefield.

Three days hanging out near the 50dma concerns me because it shows a lack of follow-on buying that we’ve seen in recent sell-off recoveries.  This could indicate we are not ready yet to bounce.  IBD’s big picture is saying the market is in a correction and the conservative play is watching this unfold while sitting in cash.  I don’t foresee a big crash, but we could have some weakness ahead.  But this is a great thing for a CAN SLIM investor because it creates attractive prices for us to get in on some of the best quality stocks.  The summer is wearing on and we are getting closer to the next rally, so start looking for stocks showing unusual strength in these summer doldrums.  Many of these will be the next big stocks that show the best gains in the coming bull market.

Stay safe

Still waiting for the bounce

By Jani Ziedins | Intraday Analysis

Markets sagged again today. The saving grace is the markets bounced off of the 50dma. Is this signs of strength and an imminent rebound, or the misguided rationalization of the Titanic captain commenting about the positive aspects of striking an iceberg?

Combining crowd psychology with economic pricing models, when people run for the exits at the first hint of trouble is a good indication the market is on solid footing and not overvalued. With such skittish holders, it is hard for the market to get overpriced since there is so much selling pressure at every turn. But on the other hand, when people start making excuses and rationalizing on how the fire in the corner is not that bad and it probably isn’t a big deal, that is when the crowd has become complacent and the market is likely overvalued because people are reluctant to sell. With a lack of seller representation, the markets will be skewed to the high side.

Applying that logic to this market, we need to ask ourselves, is the market panicked over this pullback, or is it rationalizing how the 50dma is providing good support and is creating a buying opportunity?

The market is vulnerable here, so be on high alert. It is better to be out of the market wishing you were in, than in the market wishing you were out.

Stay safe

Europe strikes again

By Jani Ziedins | Intraday Analysis

Concern over Spain sent global markets tumbling. While the market and Euro recovered 1/2 of their initial losess, it was still a day where doom and gloom dominated the news.

Continuning the recent pattern, markets bounced from their early selloff. In weeks past, this marked the low of a down move; will it do the same here? Every trend must come to an end, and so will this one, but to make money in the markets we also need to nail the timing. So do we buy the dip, or sell the bounce?

The positives are the market bounced off of the 50dma again, showing accumulation at this level in addition to the bears inability to push us below it.

We also maintained the a lower trend line connecting the lows of this recent move. All highly encouraging developments. But as a contrarian, the question I am left asking is if this pattern has become too obvious, and thus suspect to breaking down?

This will be the 4th bounce and even the most novice chart reader can see the pattern. The problem arises if the most novice of chart readers is also the ones buying this dip. After they’ve committed their capital, who is left to buy and support the market? Without follow on support, the market will inevitably turn south.

As any regular reader of this blog knows, I’ve been fairly skeptical of this most recent rally and am not sure it has the foundation and support necessary to break summer’s trading slump. I’m not predicting an economic crash, just expecting we need more basing before resuming the longer-term bull market. But that my attitude will quickly change if we start making new highs again.

The poke above the previous high last week could easily be a short squeeze, but to return and superseded those levels so soon after will show material support from larger investors and make the breakout buyable.

I’m on the road again, so my blog posts will come later in the evening. I apologize for any disruption this may cause. Further, this post is coming from my iPhone and as most people know, the editing capabilities are not the best so please excuse any typographical and spelling errors.

Stay safe

Turning back from yesterday’s new high

By Jani Ziedins | Intraday Analysis

The markets are down today as the Euro is making a new low against the USD.  It is not unusual to see the markets pause after a strong run like we’ve seen over the last several days.  But what we really want to know is if this a pause before continuing higher, or hitting our head on the top of a trading range and returning lower.

IBD moved the market back into confirmed uptrend today, but given their recent track record of making the exact wrong call at the exact wrong time, we should pause before blindly following IBD’s recommendation.  I don’t fault IBD’s systems for giving us false signals, it is simply the nature of a trend following system in a trend-less

S&P500 daily at end of day

market.  It is our responsibility as savvy investors to know when to use what systems given he market conditions.  This is the art of making money in the markets.  No system works 100% of the time and it is critical to understand this.  Of course for every wrong signal, we move one step closer to when IBD’s system will start working again.  Maybe today’s call is when they are right again, or maybe it will be next time, or the time after, but I feel we are getting closer to exiting this trading range and directional systems will start working again.  If not this move, soon.

The last few attempts the bears made to push the market down failed and resulted in them getting chased out in a short squeeze.  After getting their head handed to them a couple of times in a row will make anyone a little more cautious the next time presented with the same situation.  So here we are at the next time.  If the aggressive bears are more timid due to their previous failed attempts and not plunging in on the short side today, that means there are other sellers pressuring the market and causing us this weakness.  This goes back to earlier discussions of real and artificial buying or selling.  Artificial trading is driven by fear and greed, a temporary phenomena that quickly fades.  Real trading is driven by large institutions selling for fundamental reasons that are unlikely to change in the near term.  Volatility is a product of artificial trading as aggressive and emotional traders try to push the market one way or the other, but directional moves are made by larger changes in sentiment and fundamentals.  Is today’s sell-off artificially driven by aggressive bears and emotional bulls rushing for the exits?  Or is it driven by real and methodological selling by larger institutions and the move is more likely to continue?

This is a tough call and I feel the market at a key juncture.  Reclaim the recent breakout and we’ll continue the uptrend.  Fail to hold the breakout and we’ll probably slide back to the lower end of the trading range.  How to trade this, if the market holds the breakout, that would be a greenlight for CAN SLIM trading, failing to hold the breakout would mean swing trading is still the name of the game..

Stay safe

New high

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:12 EDT

This morning the markets tagged a new high, which is not unexpected as market makers like pushing the market into areas a lot of automatic trading will be triggered from breakout buyers and stop-losses from short bears.  This is how market makers pay their alimony and kids private school tuition.  But the big question remains, with the market more richly valued than it has been in three months, are value investors still going to line up and buy at these higher levels?  Or will the buying taper off once all the autopilot buying has run its course?

This is a critical juncture for the markets as it will chose between a directional move higher or returning back into the trading range.  Traders need to decide if they want to buy this breakout or sell it.  Over the past three-months, buying the dips and selling the rips was the only reliable trade that made money.  Will this swing-trading pattern continue here, or is the market ready to move into a new phase?

In individual stocks WON likes to see a convincing breakout on higher volume that demonstrates large institutional support.  The same type of price and volume action in the indexes today would be reassuring for a buyer of this breakout.  A feeble breakout will show a lack of conviction and could indicate this rally is in the last stages before breaking down.

Double bottoms and double tops are common reversal patterns.  A key to the double top/bottom is the second move must exceed the first.  In our case, the second peak must exceed the previous peak.  The reason this pattern works is a large portion of investors trade technical levels of support and resistance.  Previous highs and lows make popular areas where traders will cluster buy and sell orders.  They assume crossing these previous highs and lows will clearly indicate a breakout or breakdown.  The double bottom and double top patterns work because the second leg triggers a flurry of automatic buying or selling that quickly fades away before the market reverses.

If you ever want to know what the market will do next, the most reliable indicator is identifying what move will make the greatest number of people look stupid.  There is a lot of complex psychology and pricing theory behind this phenomena, but figuring out what direction the market is headed is no more difficult than determining what direction will hurt the greatest number of people the most.

If we were to apply this theory here, we’ll see the last week and a half knocked the crap out of bears as the market bounced hard after the previous slide.  By making a new high, the market has forced almost all of the bears out with their tail between their legs.  If most bears are bloody and on the sidelines, it is hard to hurt them any more, so who will be the market’s next victim?  There are a lot of bulls that just bought this week’s rally and today’s breakout.  But this is not a binary game of just bulls and bears.  There is a third important contingent that needs to be included, those sitting on the sidelines.  The market can humiliate people not in the market by running up sharply and leaving them behind.  This is exactly what happened in the first quarter of this year.  Everyone was on the sideline waiting for the inevitable pullback, and the market humbled all those traders by rallying non-stop and leaving them in the dust.  The pain felt by those left out of the market during the Q1 rally got so great, they ended up chasing the market higher.  The only problem is most of the chasers bought in near the top before the market rolled over in April, adding insult to injury.

Bears are knocked out of the market right now and no longer a factor, so we need to evaluate who is more venerable currently, bulls or those sitting on the sidelines.  But time frame is critical in this.  Over the short-term bulls are probably most venerable, but over the longer-term all the investors hiding out in bonds are at risk.  But the bond story took years to build up and thus will take years to unwind, so that long-term bond story is not much of factor when figuring out where we are going next week.  For this equity rally to continue higher, we need a large number of traders reluctant to buy the breakout.  The more reluctance, the greater the chances are for the rally. But on the other hand, if people are excited by the rally, then lookout below.

Stay safe

Going for a higher high

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:24 EDT

Another nice up day in the markets.  In midday trading we moved up against July 3rd’s high, pushing toward yet another higher high.  Yesterday finally provided a strong up day in higher volume, something recent up days have lacked.  Friday’s reversal was largely a short squeeze, but the last two days have added follow-on buying from a wider base of bullish investors, giving more credibility to this move.

The interesting thing to note over the last couple weeks is how all the bad news from the Obamacare ruling to yesterday’s disappointment over the Fed’s inaction led to a sharp sell-off, but then just as quickly reversed higher and ended the day positive.  There is a contingent of traders trying to push the market down after each disappointing headline, but they are quickly run over by value buyers jumping on every dip.

I still think we have a retest of the lows in our near future, but I have obviously been early in my anticipation of that move lower, and in the markets early is the same thing as wrong.  No one can be certain what the future holds and that is why we practice disciplined risk management to mitigate the losses when we are inevitably wrong.  But at the same time, just because I was stopped out doesn’t mean I’m going to give up on the trade either.  In the market it is all about timing and if you get the timing wrong, simply take a small loss and wait for the next opportunity.  Trading is many different things for many different people.  Some people have the need to be right, but I’m in this to make money, so I don’t mind making a mistake, adjusting my plan, and then trying again.

Europe, weak domestic economy, and stagnant jobs growth was widely expected and already priced in the markets.  The new information we have is the affirmation of Obamacare and underwhelming earnings results from most companies.

IBD 85/85 index @ 2:25 EDT

As I shared in an earlier posts, the Obamacare ruling can actually be positive for the markets simply because the result was decisive and we can move forward knowing what the rules are.  Uncertainty is what drives the market crazy and bad news is almost always better than uncertainty.  Even though the market doesn’t like Obamacare’s new rules, it is better than if the Supreme Court forced Congress to refight the healthcare debate.

Earnings have been disappointing, but not so bad as to crash the market.  But it has been enough of a concerting to steer large money managers into defensive names.  When boring blue chip companies like WMT are making monster runs and setting all time highs, that is clear indication big money is seeking safety.  So while the main indexes are holding up well, more speculative stocks, such as those found in IBD’s 85/85, are under performing the indexes and still trading under their recent highs.

Stay safe

A tale of time frames

By Jani Ziedins | Intraday Analysis

S&P500 5 minute chart @ 12:59 EDT

Another indecisive day in the markets.  Up 0.5% at the open, dropped negative 0.5% in the first hour of trade and then back up 0.5% again the following hour.  Moves like this make it seem like the market really knows what is going on doesn’t it?  You’ll give yourself a headache (and most likely lose money) if you think you can find patterns in this random noise.  The market doesn’t know what’s going on any better than we do and is why it is drifting around while fools and suckers try and trade the next move.

Bernanke’s testimony before the Senate Banking Committee offered no new hints of additional easing, triggering the early slide.  But this really shouldn’t come as a surprise to anyone.  The Fed has one bullet left and they are not going to use it except in the most dire situation.  And if they do use it, that should be a huge warning to the rest of us; if the Fed is nervous, we should be nervous.

S&P500 daily @ 12:58 EDT

Bernanke’s comments also affected the currency market because the lack of further money printing strengthened the USD relative to other currencies.  The inverse USD – US equities relationship continues to hold up and the strong dollar pressured stock prices early.

The recent price action coming out of the markets is garbage and can’t be relied on for any meaningful analysis.  Using longer time-frame charts helps filter out some of this noise.  A weekly chart of the S&P500 shows the indexes are doing a good job of holding the 200dma and is in a modest uptrend.   As long as we continue to muddle through this recovery without any major stumbles from Europe, China, domestic employment, or Congress, we should make it through to the other side without too much damage. We will continue to see short-term volatility, but the longer term uptrend should remain intact.

The problem with interpreting shorter time frame charts is they are are filled ominous looking spikes and drops, especially in the intraday charts.  WON primarily uses weekly charts when browsing stocks because it cuts out most of the random noise and gives him a much better feel for how the stock is actually behaving.  When you find yourself confused by the price action in a chart, change to a longer time frame and things will come into focus.

S&P500 weekly @ 12:58 EDT

As for trading the markets, this continues to be a very poor environment to own high beta growth stocks as defensive sectors and stocks continue leading the market.  Often the hardest thing to do in the market is nothing, and that is exactly what we should be doing right now.  Wait for conditions to improve and become more favorable before putting your hard earned money at risk.

Stay safe

Quiet morning

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:47 EDT

The markets traded between flat and slightly lower in early trade Monday morning after Friday’s strong gains.  The EUR/USD continues to be choppy around the $1.22 level and is contributing to some of the volatility we are seeing in the equities markets.  Combine that with the lackluster summer participation by major market players who are on vacation and we are left with an ambiguous, indecisive, and directionless market.   I sound like a broken record since there is nothing new to report or insight to be added.  It has simply become a waiting game as we consolidate in this range before the market is ready to make its next move.

Earnings have been lackluster with many companies lowering their full year guidance.  The stocks that are doing the best as a group are the defensive sectors, including discount retailers, consumer product companies, and medical.  Hardly the best environment to be speculating in hyper-growth CAN SLIM companies.  But this is a good thing for the patient investor since stocks come in and out of favor.  The typical IBD stocks are taking breaks and building bases, creating a strong foundation to make their next move higher once investors’ apatite for risk returns.

The most successful traders are the ones who know when to trade and when to sit on their hands.  I’ve always found it is easy to make money in the markets, the biggest challenge is keeping it.  That includes both knowing when to lock in worthwhile profits, as well as when stay out of the markets and wait for a better opportunity.

We continue to hang out in the upper end of the recent range, where we go from here largely depends on what a person’s outlook is.  A directional trader would be excited by the series of higher-highs and higher-lows.  Someone who thinks we are still basing in a trading range would expect a move lower in the future because we are currently in the upper end of the recent range.  I’m in the latter camp, but will change my tune pretty quick if we keep making new highs.

Stay safe

Strong rebound

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:05 EDT

The stock market is popping today after yesterday’s strong bounce from under the 50dma.  It would be highly encouraging for the markets if this bounce stuck because it continues a pattern of higher lows and higher highs.  The markets were helped this morning when the Euro gained almost one cent against the USD in early trade, a huge move in the currency world. The Euro has been selling-off for days and a relief day was inevitable.

But to be honest with you, the market is confusing me right now.  It feels like sentiment and pricing has disconnected.  Everyone is widely negative on the markets, but prices only fell 3.6% from the peak to the trough.  That doesn’t represent much selling at all.  How can we see such a dramatic swing in sentiment with nothing more than a 3.6% change in price to show for it?  There are few possible scenarios in a case like this.

First one, a lot of calm and collected value investors buying shares from the weak holders rushing for the exits.  These longer viewed investors see something the panicked crowd doesn’t and is willing to step in because they expect the market will head higher from here. With confident institutional money standing behind the market and propping it up, this is very bullish.

The second case is where investors are scared, but are still holding their long positions out of hope and desperation they’ll come back. This is driven by an emotional reluctance to admit defeat and give up on the chance of a getting their money back.  This is where the market becomes disconnected from reality and starts trading on hope, not fundamentals.  Most investors acknowledge the dark clouds circling the markets and this is why they are scared; China slowing, band-aids in Europe, stalling US employment, fiscal cliff, lowered earnings guidance, etc.  But the previous 6-day decline didn’t happen in a more traditional waterfall action that relentlessly punishes indecisive people until they are forced out.  It declined in steps, encouraging indecisive people to continue holding.

Typically people get flushed out when the market keeps moving against them and the losses continue to mount.  But the previous 6-day sell-off happened in steps where indecisive people were not punished for holding after the initial decline.  In some cases the indecisive traders were even rewarded as the prices rebounded from their early daily trading lows.

Given the step style decline and the modest size of the sell-off, I think a lot of weak holders are propping up this market through their emotional reluctance to admit defeat and sell.  What makes me most nervous about this prospect is the market becomes disconnected like this before a major collapse.  In August and September 2008, the market was disconnected from the fundamental headlines about banks’ financial stability.  In July 2011, the markets were indifferent to Europe’s debt crisis. We all know how those situations played out.

Now don’t get me wrong, I’m not predicting an imminent collapse, no one can see something like that.  But I am pointing out odd behavior that just isn’t jiving with me and it has potential ominous implications.  Let’s not jump to conclusions; the market gets disconnected all the time without crashing, so this could be no big deal.  It’s like skating on thin ice; you’ll be fine as long as you don’t break through.  In most instances you might not even know your life was at risk and everything goes on like nothing happened.  But unfortunately ignorance doesn’t change the risk profile.  The thing to keep in mind is while not all disconnects in the market lead to crashes, all crashes are the result of a major disconnect between pricing, sentiment, and fundamentals.  The crash occurs when the market can no longer hide from the disconnect and the gap closes in a very short period of time.  This almost always happens to the downside and is usually triggered by a piece of bad news that sets the whole thing off.

With disconnects, crashes are the most extreme resolution and only happen every few years.  Most disconnects are closed more gradually and market participants don’t even realize it happened.  That is most likely what will happen here, but it is worthwhile to at least acknowledge the risk for a big move down is here.  As it stands, I think we are one bad news story away from a 10-15% slide.  Given the limited upside from here, that doesn’t make for a favorable risk/reward on a long trade.

And of course the third possibility regarding the market is many of the normal traders are on vacation and less experienced traders are moving the markets in unexpected ways.

For me, the main takeaway from the above is the markets are acting odd and the most prudent course of action when this is happening is to just sit it out.  If I miss a nice rally, so bit it, I’d much rather miss the bus than get hit by it.  There are old traders, there are bold traders, but there are no old, bold traders.

Stay safe

Fell under the 50dma

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:38 EDT

This morning the markets opened lower, dropping under the 50dma in early trade.  If this sell-off continues, it will be the 6th consecutive down-day for the S&P500.  There isn’t one key news story driving this slide and it is largely attributed to a combination of strong dollar, economic concern, and disappointing earnings outlooks.  The lack of a single key trigger has kept the slide more controlled up to this point, but this grind lower could elevate anxiety and eventually trigger an emotional run for the exits if it hits critical mass at some point.

The silver lining is violating the 50dma didn’t trigger an avalanche of selling and we are stable for the time being.  This is giving investors time to evaluate the situation and allowing nervous holders to hang on a little longer.  But all these traders have their fingers on the sell button and any additional weakness could lead to another leg down.  The 200dma is not far under the market and will be the next key technical level along with June 25th’s low.

But don’t let these small declines lull you into complacency like the lobster who never realized he was being boiled to death because the water temperature was only increased on him one degree at a time.  Use hard stop-losses and stick to them no matter how benign a decline feels.  Often the market takes your money slowly at first.

UUP daily @ 12:41 EDT

From my observations, it seems the recent rally was a combination of a short-squeeze and premature optimism by eager bulls.  These are unsustainable phenomena by themselves and it doesn’t take bad news to deflate a rally built on a weak foundation.  We simply ran out of buyers willing to commit new money at those higher levels given everything else going on in the world.  With a vacuum of buyers, the market will decline until it falls to the level where large value buyers find themselves unable to resist all the discounts they see.  This value buying is what finally puts a floor under the market.

By late morning the indexes are off their bottom and trying to retake the 50dma.  But are these the large value buyers stepping in to support the market, or is this support from a handful reckless gamblers trying to pick the bottom?  My guess is the latter, but as I pointed out yesterday, foreign exchange is in the driver’s seat right now and the interaction between the Euro and USD will most likely dictate where we go from here.

Stay safe

Resting above the 50dma

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:50 EDT

The market is trading in a tight range after yesterday’s dismal close.  We’re resting just above the 50dma on the S&P500 and NASDAQ.  Drop under this key line and we’ll trigger a wave of stop-loss selling, sending us down to the 200dma.  Break the 200 and we’ll push toward June 6th’s low.  The way these technical levels line up, we could see a series of dominoes fall in automatic selling if the market gets spooked from here.

How quickly the weather can change in the markets.  Two weeks ago the market was giddy with excitement as Germany signed off on bailing out individual banks and it shrugged off the Supreme Court upholding Obamacare.  But that is a distant memory as almost all current headlines have returned to doom and gloom.

Part of the problem facing the markets is the traditionally light summer volume.  Many of the senior traders are on summer vacation and this allows the market to drift around listlessly as smaller currents can move the market.  This gives us a lot more random noise in the indexes and contributes to the large number of failed breakouts we’ve seen.  These minor currents have the strength to push the market up or down, but only temporarily and they quickly reverse.

This pattern is extremely frustrating for the breakout trader who is buying a directional move moments before the trend reverses.  Yesterday’s sell-off caused IBD to move the current outlook to market under pressure.  If this FTD fails, it will be the third failure in a row.  But this shouldn’t be a surprise to most because, this summer choppiness is nothing new and the source of the popular saying “Sell in May and go away.”  But don’t get complacent if you are trading this market, the lighter volume can also lead to increased volatility because it takes a smaller number of traders dumping their holdings to trigger a big slide.

As for how to trade this market, it is really hard to make headway given the choppiness and if you have something else to do, this would be an excellent time to take a break from the markets.  A couple of weeks away from the markets will give you fresh eyes and recharge you for the more productive trading season coming this fall.

Stay safe

Strong dollar pressures equities

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:09 EDT

Stocks opened higher but slid back to breakeven as a strong dollar renewed pressure on the equities market.  The EUR/USD is making new lows again after a recent relief rally.  It is worth making this part of your daily routine because there are implications to the markets given the close inverse relationship between the USD and US equities.  If you don’t have direct access to currency market data, UUP is an ETF that follows the dollar.

Earnings season is kicking off this week and it will be interesting to watch the market’s reaction to both the Euro and US earnings.  Will these two forces offset each other or join ranks and shove the markets the same direction?  Rates on European sovereign debt from the periphery are creeping higher again, eliminating any margin of safety.  No doubt this is part of what is pressuring the Euro.  Earnings have been a mixed bag, but it is still way to early to make a a call on that.

UUP daily @ 1:10 EDT

Right now it feels like the market is stuck in no man’s land as everyone is waiting for it to break one way or the other.  There is some air under our feet and a few too many disappointments on the earnings front could drop us materially lower.  But on the other hand, a few marquee companies hitting the ball out of the park could ignite a lucrative rally.

The one thing I would like to see confirm new strength is high growth stocks taking leadership again.  There are too many defensive stocks showing the best relative strength and for us to have a sustainable move higher we need  investor’s hunger for speculative growth stocks come back.

Stay safe

Earnings season up next

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:05 EDT

The market is off in light, holiday-like volume this morning.  Seems most traders are waiting for the start of earnings season before placing their bigger bets.  It will be interesting to see what companies report and how it matches up with the market’s expectations.  We’ve been hammered all spring with bad news out of Europe and US jobs, making a relief rally seem plausible.  But seeing how we are already within 6% of 4-year highs, it is really hard to argue the market is still in an over-sold condition and poised to pop at the slightest hint of good news.

Now don’t mistake me for one of the bears who is claiming we are on the edge of the precipice, about to “financial contagion” our way back to the stone age.  The world is only dangerous when we are complacent and oblivious to the risks around us.  With all the scary headlines out there, it is hard to make a case the market is blind to the dangers surrounding of us.

But rather than simply hang out at one level until it has conclusive evidence for a move one way or the other, the market is always trying to predict the future.  We trade one way or another for no other reason than to grind up premature directional traders who are trying to get a jump on the rest of the market.  We’ve already seen this with a 130 point sell-off in May and a 110 point rebound in June.  And no doubt we could have a couple more hundred-point moves left before we break out of this summer’s trading range.

The danger of breakout trading during a flat market is you keep getting zinged from each failed breakout.  Worst case is you hold to your 8% stop-loss, which doesn’t seem too bad until you consider 3-failed breakouts in a row is a 22% loss.  This is more than most people made in the strongest first quarter rally in 20 years.  And then of course the follow on risk is all the psychological damage to you and your account will make you more reluctant to stick your neck out on the fourth follow-through-day, fearing another repeat of the first three failed FTDs.  But the thing about FTDs is each successive failure makes the next one even more likely to work out.  A fourth FTD is very likely to work out and the exact one most people will sit out after having been burned by the first three.

Of course the market could be totally hoodwinked me and my expectation of a near-term move down too.  If there are too many contrarians out there, they are no longer contrarian and now constitute the majority opinion.  At that point the real contrarian needs to go against the contrarians.  The real skill of contrarian trading is knowing when to trade against the market knowing when the contrarian trade is to go with the market.  For example in the first quarter, the contrarian trade was staying long the market while everyone else was calling for a pullback.

Just a few stocks are making the cut on IBD’s Stocks on the Move screen today.  This list identifies leading stocks up in high volume each day.  And none of the 6 stocks making the cut today are near proper buy points.  This just reinforces the market’s wait and see attitude toward earnings season.

Stay safe

Jobs let the market down again

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:58 EDT

Stock fell out of bed after yet another disappointing jobs report. But while sluggish, we are still in a very slow recovery.  The interesting thing will be to see how this plays out over time.  We’re four years into this recovery and under normal circumstances we should be on the lookout for a market and economic correction in our near future.  This is the boom and bust cycle typical of free markets.  So we need to ask ourselves, is this a normal economic recovery?

Economic boom and bust cycles are a factor of human nature.  Our minds like to project straight lines into the distant future as we expect conditions to remain stable.  No doubt we’ve all experienced this phenomena in the stock market as traders, but the same thing equally applies to business owners and managers out in industry.  When business is good, they anticipate it will continue indefinitely and they ramp up capacity and employment in anticipation of future growth.  Get a larger number of managers anticipating a rosy future and we become vulnerable to an economic correction as businesses find themselves over-staffed and start layoffs.  Fewer employed means fewer customers means more layoffs and the cycle continues until companies can’t afford to cut any more staff.  The economy is like a yo-yo going up and down overshooting on the high side and then on the low side.

So what does that mean for us right now?  I see a pathetically slow recovery and that might change how this boom and bust cycle plays out.  It would be hard to argue we are in the middle of an overly optimistic boom cycle.  The last several years have been full of nerve-wracking headlines and paranoid managers would rather sit on their hands than put their neck on the line and risk getting their head cut off by some unanticipated economic catastrophe.  This restraint on the part of business might actually keep the economy from overheating in its typical way.  This conservatism by business might allow this recovery to extend far longer than normal and there could be a lot more upside before we hit our next euphoric peak.

As I shared before, we could be in the start of a 10 or 15 year secular bull market and that is because business, banks, and investors are so overly pessimistic and restrained after the first 10 years of this century.  Companies are hording cash and the 10 year treasury is yielding far less than 2%.  That isn’t even keeping up with inflation!  There are deep wounds in people’s psyches and it will take a good long time for them to be excited about the markets and economy again, but it will happen over time and for those who have the courage to invest for the long-term in these uncertain markets will be hugely rewarded.  The market is up more than 100% from its 2009 lows and that is just the start of the move we’ll see over the next 10 years.

The US carried much of the world economically and technologically since the end of WWII, but now the rest of the world is catching up to us and the world will have ten times as many inventors, entrepreneurs, and middle class driving the 21st century economy forward.  It isn’t that the US is losing its edge, but that the rest of the world will now start contributing ideas and innovation.

But for the near term, I expect one more shakeout at the lower end of the June’s trading range before we begin our year-end rally.  Our election, Europe and China will start falling into place and the market will start rallying as many of those issues are finally put to bed.

Stay safe

Markets hold on to gains

By Jani Ziedins | Intraday Analysis

S&P500 after close

I apologize to everyone who came looking for my posts, but left empty-handed.  I had some issues in the first half of the week that prevented me from posting my thoughts on the market and hopefully all of that is behind me.

Even thought this is a holiday week, the market held Friday’s large gains.  Being a contrarian, I’m suspicious of this strong rally and  resisting the temptation to jump on board.  As self-selected investors, we tend to have a bullish bias and it only takes a few good days to get us excited to jump back in the markets.  There is no reason we can’t rally from here, it is just the market usually isn’t that easy.  The best rallies come after the most demoralizing periods.  If we want a strong rally, we need to base some more.

Pure speculation here, but the potential pullback in front of us could take us under the June 4th low before reversing higher.  From that point we could see a slow progression of higher highs and higher lows as we inch through the trading range.  But to be most effective we need one more flush-out at the bottom of the range to refresh the market.

But like always, these are just my thoughts and the market will do whatever it wants regardless of what any of us think.

Stay safe