Monthly Archives: October 2012

Oct 30

Half-empty or half-full

By Jani Ziedins | Intraday Analysis

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

MARKET BEHAVIOR

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

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

MARKET SENTIMENT

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

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

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

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

TRADING OPPORTUNITIES

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

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

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

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

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

Stay safe

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Oct 27

Head fakes and sideways trade

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

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

MARKET BEHAVIOR

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

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

MARKET SENTIMENT

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

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

TRADING OPPORTUNITIES

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

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

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

Stay safe

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Oct 26

Volatile, but indecisive

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

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

MARKET BEHAVIOR

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

MARKET SENTIMENT

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

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

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

TRADING OPPORTUNITIES

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

ET CETERA

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

Stay safe

Oct 24

Selling slows down

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

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

MARKET BEHAVIOR

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

MARKET SENTIMENT

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

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

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

TRADING OPPORTUNITIES

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

Stay safe

Oct 23

Hopeful bulls get kicked in the gut

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

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

MARKET BEHAVIOR

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

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

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

MARKET SENTIMENT

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

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

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

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

TRADING OPPORTUNITIES

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

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

Stay safe

Oct 22

Bottom pickers getting sucked in

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

The early selloff reversed and the S&P500 finished flat for the day.  Was this the panic driven capitulation that marks a solid market bottom?  Not likely.  The high-probability trade remains lower.

MARKET BEHAVIOR

Friday was the biggest single-day decline in months as bulls are losing control of this market.  In the last few months, down-days were muted and lacked a meaningful punch.  The real power came from upside moves, but that dynamic is obviously changing.  The ironic thing is the bear camp regained its strength only after its numbers dwindled.  But that is the way the market works, the side with the greatest numbers is the weakest.

Since June every pullback has been a buying opportunity and that trade has become fairly obvious.  Is it time for the market to change its personality to keep it from being too easy and predictable?  We’re about to find out.

MARKET SENTIMENT

There is so much analysis and research out there about what a ‘normal’ market does, but then the prognosticators always follow that up by saying the market we are in is not normal.  We have the Great Recession, Euro Contagion, unprecedented money printing, and countless other reasons why this time is different.  But can anyone name a time that felt normal as it happened?  Is there anyone who traded a normal market where everything was so predictable and easy that they were making more money than they knew what to do with?  The two takeaways, the market is never easy and looking back ten years from now this market won’t seem so special.  The repeating patterns that are evident in hindsight in past chaotic and unique markets will also be present in post-analysis of today’s market.  It is our job to see these ‘obvious’ patterns in real-time and profit from them.  This market is no more special than any other market, once we lose that bias, it becomes a lot easier to understand the market.

We had a big down day on Friday, the largest price decline in months.  The selloff continued this morning, but reversed in the last hour of trade to finish unchanged.  Is this a clear reversal or simply a dead cat bounce?  Given how low the volume was, it would be hard to count this as a panic-driven capitulation point and a legitimate bottom.  Most likely bottom pickers are looking for the rebound and were sucked into this low volume reversal.  Price is truth and gains are gains no matter what the volume, but this bottom is highly suspicious.  I feel we need some real gut-wrenching down-days to clear the deadwood before we can resume the rally.  Dropping under 1400 over the next few days would certainly do that.  I don’t know if that will happen, but the sooner the market spooks out the weaker hands, the sooner the rally can resume.

No doubt the impending election is weighing on the markets and tonight’s debate will influence expectations of the outcome.  We’ll probably see another week of volatility, but we are in the home stretch and many people are already casting their ballots in early voting.  The market will pick the winner soon and will have already moved on to the next thing by the time Election Day rolls around.  My best guess is we’ll see weakness into the election and rally after.  But that is just a guess.  We need to follow market sentiment daily and adjust our expectations as new information becomes available.

TRADING OPPORTUNITIES

Most likely today’s rebound is a dead cat bounce and anyone who is trading the long side should cash in early and often. We could see prices climb for a day or two, but we really need additional high-volume down-days that clearly violate technical support levels.  This selling panic driven selling creates buyers for the next rally.  It still seems like this late-stage rally is built on hope and the market needs to crush that optimistic sentiment.  Markets rally in the face of fear, not on the back of hope.  Lets get some of that fear back so the market can resume its uptrend.

The higher probability trade remains lower, but we could see a bull-trap rally over the next day or two before breaking support.  And of course my predictions of support violations could be premature and we retest the upper-end of the trading range over the near-term.  But there are never certainties in the market.  We make the high-probability trade and over time the odds will work out in our favor.

Stay safe

Oct 18

Taking a breather

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR

Markets opened slightly lower Thursday morning.  There was news, some of it good, some of it bad, some of it indifferent.  But there is news every day; what matters to us is how other people trade.  We’ve had a steep run the last three days and obviously that can’t continue indefinitely.  Today seems to be the day the market pauses to catch it’s breath.  But where do we go from here?

We are a few points from an upside breakout, or we are a few points from the ceiling of a trading range, or we are peaking before a correction.  Up, down, or sideways.  How insightful of me.  But we have to look at the ammunition each side has so we can determine which outcome is more likely than the others.  Trading with the odds in our favor is how we make money in this game.

MARKET SENTIMENT

Is there fuel for a move higher?  A lot of bulls are invested, so we need to get other people to buy into this market to continue the move higher.  Are the undecided ready to commit?  Are the bears ready to give up and go long?  We’ve had a good move higher and a lot of the undecided have already committed to this market.  The recent short squeeze flushed out a lot of bears.  So who is left to prop up this market?

On the other side, bears have been getting killed and many have given up.  They might not believe in this rally, but they can’t stomach getting in the way of this steamroller rally any longer.  The recent three-day short-squeeze flushed out another handful of bears.  There is a market saying, don’t fight the tape and I expect many undecided and bears are being won over by the strength of this market regardless of the fundamentals and headlines.

Looking at those, it seems like there is more long bias in the market than short bias.  We are not at extreme levels that skew the probabilities clearly one way or the other, but there seems to be more slightly fuel for a move lower. But on the other side of the equation,  momentum is higher and often these things go further and last longer than most people expect.  This is because many people wait for that pullback, so the buying is initially restrained, but these tardy traders start buying every dip and that props up the market for an extended period of time.

What I’m really saying is momentum is higher, but sentiment is setting up for a move lower.  Momentum can carry us for a bit longer, but that just skews the sentiment imbalance even more.  This is how the markets work.  Tide comes in, tide goes out.  Markets go up, markets go down.

TRADING OPPORTUNITIES

Start looking for longs to lock in profits on and watch for weakness to short.  Don’t get in front of this steamroller by trying to pick a top, but if weakness forms, jump on the short and ride it through the 50dma.

I will be traveling and won’t be able to post on Friday.  Have a nice weekend.

 

Oct 17

Short-squeeze continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets continued the 50dma bounce for the third day, but how much longer can this keep up?  Where are the new chasers going to come from?  Bears are demoralized and bulls are breathing a sigh of relief.  The market’s picked on bulls for long enough, it might be time to make the bulls sweat some.

MARKET BEHAVIOR

Stocks rallied nicely for the 3rd consecutive day, pushing the S&P500 to 1460.  The chart looks like a double-bottom, bouncing off of the 50dma three days ago.  But what makes double-bottoms work is the demoralizing second down-leg that undercuts the previous selloff.  This second low shakes out the last of the weak holders and clears the way for the rebound.  I’m not sure last week’s low reached that sentiment capitulation point.  Another thing is robust double-bottoms take a bit longer to form.  The speed of the three days is more of a short-squeeze than a solid foundation.

MARKET SENTIMENT

What we need to do is evaluate is how other traders are responding to this market.  Obviously bears are getting their butt kicked for the umpteenth time and morale and resolve on that side of the fence is hitting a new low.  In the bull camp, people who sat through the pullback are breathing a sigh of relieve as their decision to hold the dip paid off.

If we look at who was buying this recent rebound, it was a lot of bears getting squeezed and forced to buy back their shorts for a loss.  We also have swing and momentum traders jumping on the bandwagon.  But what about big-money value buyers?  Are they a playing a role in this 30-point rally?  On that I’d have to say no.  Value buyers are in the more cautious and deliberate crowd on Wall Street.  Sharply rising prices makes them step-back, not chase with reckless abandon.

So what insight does this give us?  Shorts and swing-traders are climbing over each other to buy this market, but they represent a small sliver of traders and their buying will taper off quickly.  Value investors are taking a step back after the jump in prices and their buying won’t be there to continue the surge higher.  And finally, weak bulls are still hanging on because we didn’t get a high-volume selloff on the second dip.  It seems to me we are close to running out of buyers and could find some weakness over the next couple days.  If buying completely dries up, then we could even retest the 50dma and finally get that high-volume capitulation bottom that makes a sustainable move higher possible.

The markets are always about supply and demand.  For the market to continue this surge higher, we need to find new buyers.  I have a hard time figuring out who that next buyer will be to keep this rebound racing ahead.

TRADING OPPORTUNITIES

My long-term view continues to be bullish, but we could see weakness in the near-term.  We’ll probably settle into a trading range or slightly decline leading into the election, but finish the year with a rally.  As bad as the headlines seem, it the markets are closing in on a 20% year.  It is hard to do better than that.  But what made it possible was all the negativity.  When everyone is pleased with the market outlook, the only place to go is down.  So here is hoping everyone continues their pessimism next year too.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL continues living under its 50dma.  Tuesday had a nice pop, but this stock has too many blind followers to let is decline without a fight.  This is the stock everyone wishes they bought at $200, $300, $400, $500, and $600.  As a result, investors will pile in on every pullback.  That will keep any decline gradual because there is always bid under the market.  I’m a big fan of Apple products, but the stock might need a cooling off period following such a tremendous run.   Rather than keeping it as a core holding, it might make for a better trading stock going forward.  Buy the dips and sell the rips.  It would be a shame for anyone who made a great profit on this stock to let is slowly slip away.

Stay safe

Oct 16

The Romney short-squeeze

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Stocks put the hurt on bears as most of last week’s selloff was taken back.  But without a convincing shakeout below support, a lot of weak holders are still hanging on and that will probably keep the market range bound.  For the time being, the best trade for the time will be getting back into swing trading.

MARKET BEHAVIOR

Markets are putting the screws to bears in a short-squeeze as stocks are up strongly without an obvious catalyst.  Today we’re witnessing the natural ebb and flow of supply and demand.  Tide comes in, tide goes out; stocks go up, stocks go down.  People want to assign a reason for every move, but often it is simply a function of the herd moving too far one way.  Buyers push the market higher, but eventually the market runs out of new buyers, demand tapers off, and prices nose over.  On the other side, sellers push the market lower, but soon everyone who wanted to sell has sold, available supply dries dry up, and prices to rebound.

As I stated in previous posts, I would be more convinced on the sustainability of this rebound if we had a material shakeout under key support levels.  Without that, it is likely this bounce is part of a new trading range.  It could be an ascending or descending channel, but we’ll probably bounce around until one side becomes overcrowded and the market will breakout to the opposite side.  But until then swing trading will be back in vogue.  1425 is the lower boundary and 1475 is the upper boundary.  In coming days when the market test either of these levels, we’ll evaluate sentiment in real-time and determine if that is a breakout or a head fake.

MARKET SENTIMENT

The slide over the last two weeks chased out some weak holders and tempted aggressive bears to short, but on a scale of one to ten, this shakeout was a five at best.  It was slow and shallow enough that most weak holders could ride it out.  These weak holders are always potential sellers and that impending supply will remain a headwind for the market.  The best upside potential occurs when all the weak hands flee the market and there are very few sellers remaining.  At that point supply dries up and prices takeoff.

No doubt volatility will come from the impending election with bookmakers ever-changing handicapping of the race.  Obama was the clear favorite, but recent debates let Romney catch up.  My best guess for today’s bullishness is hope that Romney will score another debate win tonight.  If the President stumbles in a second debate, that could upend the assumed Obama victory and give Romney a legitimate chance at taking the White House.

TRADING OPPORTUNITIES

Tomorrow’s open will depend entirely on Romney and Obama’s performance tonight.  If Obama takes control, expect the market to return to status quo and more softness.  We’ll probably see the selloff continue to the election and then a rally into yearend.  If Romney impresses again, expect the market to rally into the election and then sell-off into yearend.  These will make good swing trades, but for position traders one-step forward, one-back is no different than one-step back and one-forward.  But if we are returning to a range bound market, the best trade is buying weakness and selling strength.

Stay safe

Oct 15

50dma bounce

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

The S&P500 bounced off the 50dma in slightly higher volume.  It is finding buyers are these levels, but the trade seems constrained and is not in the same category as the upside pops we’ve seen recently.  Those pops were fueled by an overly bearish market getting squeezed, this time it looks more like the selling simply exhausted itself.  Did today’s support mark the reversal of the slide, or is this a temporary relief-rally before another wave of selling hits the market?

Buying at the 50dma is the obvious trade.  But does the market want to cooperate with the hopeful bulls that are holding on by their fingernails right now?  Can the market resist the temptation to flush out and humiliate all those hopeful traders?  We’ll have our answer in a few days.

MARKET SENTIMENT

There are three buyers of today’s bounce.  Shorts locking in profits.  Swing-traders and bottom-pickers jumping on what they think is the reversal.  And finally value investors dipping their toe in the water after prices have declined to an attractive level.

Short-covering and bottom-picking are temporary events.  The sustainability of a rally is determined by the conviction of value investors stepping up at these levels.  To this point value investors sat on their hands as the market declined due a lack of buying.  Have we come down far enough to get them interested again?

Without a high-volume shakeup penetrating key support levels and triggering a wave of stop-loss selling, where are the new buyers going to come from?  Any rally without a capitulation bottom is built on a foundation of sand because it lacks that large pool of available buyers ready to chase the market.  Further, many of the weak holders are underwater and hoping a rebound will let them get out of at breakeven.  That will create selling pressure on any climb back to new highs.  I’m a bull here, but I’d feel better with a gut-wrenching whoosh lower that cleans the slate.

We can’t ignore presidential politics when discussing market sentiment.  Romney is surging in the polls after a strong showing in recent debates.  No doubt unexpected Romney strength could cause the market to rally into the election.  But if this is the case, the trade becomes buy the rumor, sell the news.  The markets will pop on a surprise Romney win, but more often than not the market makes as many people look foolish as it can.  If everyone is convinced a Romney win will make stocks takeoff, the market will confuse and humiliate everyone by heading lower instead.

TRADING OPPORTUNITIES

I think more weakness is needed before we can rebound decisively.  We could see more upside following today’s bounce, but the market will likely return to the 50dma before too long.  The quickest way to resume the rally is to have that flush out event now and then move on.

At this point I’d suggest keeping what you’ve got.  If you are trying to hold your stocks through the correction, keep holding.  If you took profits and are looking for the next buying opportunity, hold back for a bit longer.  It is too late to sell and too early to buy, so just sit tight.

Stay safe