Monthly Archives: August 2012

Employment numbers crush bears

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

Big gains in the market after employment numbers smashed expectations. This blew all the bears and swing traders out of the water and this run up was due in part to a huge short squeeze. When too many market participants are on one side of the market, this sets up an explosive move in the opposite direction. And that is exactly what we’ve seen over the last month and a half as all the biggest moves have been to the upside.

This explosive upside behavior is a departure from the way the market traditionally acts where downside moves are bigger. But while this recent pattern is contradictory to market convention, the sentiment causing these large pops is exactly the same.

Large moves are almost always driven by fear of loss. Most often we see this to the downside, but over the last month the upside moves have been most dramatic because the large short interest. This sets up for a short squeeze where bears are sent rushing for the exits when the market moves against them. To close out their short positions, bears must buy stock, adding fuel to the rally. And as of recent, these powerful short squeezes show just how bearish this market is.

MARKET BEHAVIOR

The market made another new high without the market falling to the low of the trading range, showing we are moving out of this channel. So far this move seems to be breaking out to the upside. Now the challenge will be to figure out what the next pattern will be while there is still lots of time to trade it. A bull rally into the election would be nice, fingers crossed.

TRADING OPPORTUNITIES

Today’s strength furthers the case for a bull rally. It won’t be an easy buy because they never are, but hopefully we’re transitioning past the 40 point swings we’ve been living with all summer. Find the best growth stocks and stick to your trading plan. Buying right is what will keep you from getting shaken out and if we the market continues to find support, we can start holding for larger gains instead of selling for quick profits like what was required over the summer.

Stay safe

ECB lets down the markets

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The stock market foolishly expected fireworks out of the ECB today, but all they got was lip service.  This disappointment lead to today’s sell-off.  We’ve given up most of last Friday’s stellar gains, but the silver lining is the market clawed back some of those losses in the last hours of trade.

So where does this leave the markets?  There continues to be a bearish overtone as a large number of traders are anticipating a major sell-off due to the sagging global economy and the fiscal disaster in both the US and Europe.  But if this is a widely held view, then it is already priced in the market.  No doubt we could see a panic driven slide if some ruinous headline crosses the news-wire, but baring that, I expect the market will find its footing quickly given the large amount of bearish sentiment already baked in at this point.  For this reason the contrarian in me continues to be bullish over the medium and long term.  But the near-term volatility is a tougher nut to crack.

If the Europeans continue to play nice, we’ll see a rally into the US elections regardless of which party is polling the strongest.  No matter what the partisans tell you, the market is agnostic when it comes to politics and political parties.  We’ve hade massive rallies under Democrats and bone crushing crashes under Republicans.  What the market really can’t stand is uncertainty, that is why the closer we get to the election, the more positive the market will be.  At this point it will be able to anticipate the eventual winner and thus extrapolate the rules and regulations going forward.  For example, who would have guessed the stock markets would rally after the Supreme Court shocked everyone by upholding Obamacare?  Surely that was horrible and unexpected news for the market, so why didn’t the market tank?  It wasn’t because the markets liked the bill, but because the market can live with the bill and knowing what to expect is far more palatable than having the health care debate reopened.

It is examples like the reaction Obamacare that confuse many investors because they can’t understand why the markets didn’t respond the way they expected them to.  But this is where it is critical to understand what matters to the market when trying to make reason of the market’s rhyme.  In this case, the markets hate uncertainty more than bad news, and thus the rally.  No doubt the same thing could play out with the issues currently facing us.  Bad news or not, the market can very easily rally simply through clarity coming from leadership in the US and Europe.  Part of this will come from November’s elections.

MARKET PERSONALITY

The markets were down for the day, but the afternoon trade recovered some of those losses.  An interesting trend has developed recently where the markets would plunge on bad news (Obamacare ruling, Fed inaction, ECB inaction, etc), but then quickly bounce back.  The swing traders would jump on the short bandwagon as soon as the news broke and drive the market down sharply, but nearly as quik as it started, value buyers would jump in and turn the market right back around.  In fact, most of these bounces turned into multi-day rallies.  Will we see this same thing happen here too?

It all depends on why the value buyers were buying.  Was most of the buying coming from bulls banking on the Fed and ECB cranking up the printing presses and now that their hopes have been dashed, their will to support the market has vanished?  Or is the market simply too bearish already and every attempt at luering in new bears fails because everyone is already on the bear side and no one is left to sell?

TRADING OPPORTUNITIES

Tomorrow will be a key day.  If value buyers step in and support us at these levels, that will go a long way to show this market is on firm ground.  But if all of the recent support was simply swing traders trying to get in ahead of a major announcement by the Fed or ECB, then that foundation will crumble as if it were built on quicksand.  If the market rallies on Friday, that is a green light to start getting aggressive with leading stocks.  But if the market struggles, look to close out positions as a hedge against a further move lower.  We could find support at the 50dma but I wouldn’t count on it.  Failing to find support at the 50dma or 200dma could easily lead to a sell-off taking us down to June’s low.

Stay safe

Consolidation continues

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The market continues trading sideways for a third day.  This demonstrates strength since we are at the top of the obvious trading range and many technical traders are expect a pullback.  Holding strong in the face of that expectation means there is support behind this market and we could see a breakout to the upside.  Many swing traders are shorting the market in anticipation of a pullback, but the market is refusing to budge.  Any positive news will have these shorts rushing to cover and the market will surge higher due to their buying.

The big news events on tap are comments from the Fed on Wednesday and the ECB on Thursday, but we shouldn’t expect anything surprising form either of these.  They both know the market is on egg shells and will be very careful with every word because saying one wrong word will crater the markets and make their jobs even more difficult.

S&P500 daily @ 2:05 EDT

MARKET PERSONALITY

The market has traded withing a tight 40-point ascending channel since May, but we should be prepared for the market change its character soon since patterns usually change after they become obvious to everyone.  We are already seeing a slight change with this three-days of tight trade after a run up.  Past rallies reversed quickly, so by that measure we have already broken part of the pattern.  The other interesting thing to note is that over the last few months sideways trade always preceded a move higher. This sideways consolidation could be building a base for another leg of this rally.

TRADING OPPORTUNITIES

Plan A:  Both market sentiment and personality indicate there is more upside left in this rally.  At the very least a swing trader should be reluctant to short the market here.  The more adventurous should be buying these strong breakouts in leading stocks.

Plan B:  While a move higher seems more probably the way the market is setting up, an unexpected news event could sent the market sharply lower and paranoid holders will run for the exits and bears will pile on the shorts.  Given the strong potential for a move higher, any weakness will invalidate this thesis and we should then look for a market breakdown and an extended move to the lower end of the range.

In the markets no one can know for certain what will happen next.  The best way to approach this uncertainty is to have a multiple plans ready for various outcomes and always be prepared for whatever the market gives you.  In addition, anticipating multiple outcomes helps mitigate the dangerous tunnel vision that occurs when a person spends too much time thinking about a single outcome.

Stay safe