Monthly Archives: November 2012

Buy the dip?

By Jani Ziedins | Intraday Analysis

Markets sold off hard after Obama’s reelection, but most likely this is a buying opportunity for the brave and savvy trader willing to take heavily discounted shares off of emotional and panicked sellers.

MARKET BEHAVIOR

A wave of emotional selling hit the market this morning as we dipped under 1400 and pushed close to the 200dma.  If we were looking for an enthusiastic purge day to clear the deadwood for an upside move, this could easily qualify as that day.  The market bounced at 1388 in late morning and held above that level for the remainder of the day.

Little surprise the emotional selling lead to the biggest volume we’ve seen in a couple of months.  The big question we are left wondering is if this was just the first day of a larger selloff, of if this was the high-volume capitulation point that will let the market bounce back from the funk it’s been in since September.

MARKET SENTIMENT

A lot of Republicans were devastated over the election yesterday and hit the panic button this morning.   It seems clearly obvious to some people who Obama is going to wreck this country and take the economy and markets along with it.  Isn’t that what was supposed to happen in 2009 too?  Yet here we are with a fragile recovery and a market that is higher by over 100%.  Now don’t get me wrong, I’m not an Obama supporter, but I’m smart enough to realize that the economy and recovery will continue chugging along no matter who is in the White House.  If people want to panic and sell you their stock at a steep discount, I say buy it.

Today was a dramatic move and everyone was watching the markets to see how it reacted this morning.  In addition to a selloff due to the election, we also broke under 1400 triggered a wave of technical of stop-loss selling.  No doubt today was a big day in the market, big enough in fact to change the dynamic of the people who are hold stocks.  The emotional and fearful sold by the fistful to the brave and the savvy.  This change in composition is what will enable the market to rally.  Hopeful holders are fair-weather owners and are demoralized easily.  Calculating buyers are far more confident and willing to stick it out.  A large chunk of available supply hit the market today and we should see far less in coming days.

TRADING OPPORTUNITIES

I’m not a day trader and don’t try to pick exact tops or bottoms.  I might be early and we could see a couple more days of weakness ahead, but the panic induced selling is creating a great profit opportunity for the contrarian that is willing to go against the crowd.  But remember, in cases like this it is more prudent to be a little late than a little early.

No doubt today could lead to a multi-day move lower, but I don’t think it will because bigger moves lower require lots of optimism to fuel the selling.  The market has been fairly pessimistic lately and the Obama reelection was the final nail in the coffin, not the first.  I expect most of the big money managers came into this expecting an Obama win since Obama has led in both popular vote and key swing states for most of the year.  I suspect most of today’s selling came from weak-kneed retail investors and their selling will dry up pretty quick.  In often the hardest trade to make is the right trade.  Right now the most difficult trade is buying this market.  Don’t jump in front of the steamroller, but look to buy soon after the market recovers its footing.

Stay safe

Obama wins

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Obama wins.  Get ready for the contrarian trade and buy the market as pessimism climaxes.

MARKET BEHAVIOR

The market rallied and pushed toward the 50dma on Tuesday.  No doubt bears were chased out of the market as we reclaimed all of Friday’s selloff.  Low volume over the last couple days made the market more vulnerable to larger swings and enabled this volatility.  With the election decided, hopefully calm trade will return to the markets.  Of course I have little doubt the market will start obsessing about something else before the end of the week.

MARKET SENTIMENT

I suspect there were a fair number shorts anticipating the market to crash on an Obama reelection, but rather than reward their ‘insight’ the market sent them scurrying home with their tail between their legs Tuesday.

It will be interesting to watch how the market reacts Wednesday when the result is official.  Will we see a wave of retail investors who were hoping for a Romney win calling their broker and telling them to sell everything?  Or will we see the rest of the shorts expecting the market to crash under an Obama win get chased out as we break above the 50dma?

No matter what your political affiliation, you have to respect the support the market is finding in spite of all the dire headlines ranging from fiscal cliffs to European contagion.  The trap a lot of traders fall into is they try to predict what the market ‘should’ do instead of taking clues from what the market is doing and how other traders are positioned.  There are a million reasons the market should go down, but it knows that and it chooses to go higher instead.  That is a very powerful signal.

TRADING OPPORTUNITIES

As for the contrarian trade, what is the least expected outcome after an Obama reelection and an impending fiscal cliff?  A rally.  The knee jerk reaction to Obama’s win could be a selloff on Wednesday, but get ready to buy that dip once the slide runs its course.

There are four things, and only four things that move the markets.  Abundance of buyers, abundance of sellers, lack of buyers, and lack of sellers.  This is nothing more than supply and demand.  If we have a selloff tomorrow, it will be short-lived because we’ll run out of sellers pretty quickly.  And who knows, we might not even see that selloff if most traders sold ahead of the election and the market choses instead to crush bears short the market by rallying strongly out of the gate.

As for a longer view, I really don’t see how the market could crash from here since almost all the negative headlines are already priced in.  You can safely ignore everything everyone is talking about.  The only thing to fear is what no one is talking about.

I could easily be wrong because there are no guarantees in the market, but right now the high-probability trade is a rally because the way other traders are positioned.  After everyone sells, supply dries up, and there is nowhere to go but up.  We might see some near-term softness, but that only gives us even more attractive levels to buy in at.

Stay safe

If you found this post interesting, consider retweeting it on StockTwits.  You’d be amazed at how many additional people find this from each retweet.  And if you don’t have a lot of followers; discovering, tweeting, and retweeting interesting content is the best way to build a following.  Thanks, Jani

Vote with your heart, trade with your head

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets took a day off ahead of Tuesday’s election.  Vote with your heart, but trade with your head.  This is Obama’s election to lose and don’t let political biases or talking heads influence your trading decisions.  The market is getting close to a point of maximum pessimism and that creates an excellent buying opportunity.

MARKET BEHAVIOR

The market traded between 1410 and 1420 again.  We dipped at the open, but recovered to finish in the green, near the day’s highs.  It was nice to see the markets find a floor after Friday’s reversal, but no doubt today was just filler as everyone awaits Tuesday’s election.

Technically we found rock-solid support at 1400 going all the way back to early August.  Breaking under this would trigger a large wave of stop-loss selling and send us to the 200dma in a hurry.  But at the same time, we could bounce off 1400 and never look back.  The market is trading sideways and looking for its next move.  Will that be higher?  Will it be lower?  Will it be higher and then lower?  Or lower before higher?  Great question and as traders we need to figure that out.

MARKET SENTIMENT

The headlines make it sound like the race for the White House is deadlocked.  But the thing to remember is the media is in the business of selling advertising, not educating the public.   To sell advertising they attract eyeballs by looking for creative ways to create juicy headlines and spin sensational stories.  And you better believe they are doing that here by cherry picking their data to craft a hotly contested presidential race so people will tune in.

This is not a bad thing, it keeps the electorate engaged and boosts voter turnout, but we are in the business of trading the markets and we need to leave all partisan biases at the door.  We can root for one side or the other as individuals, but as traders we need to come into this with our eyes wide-open

In spite of the headlines, the state polling data clearly shows this is Obama’s election to lose when looking at the electoral college map.  No matter what we think, want, and hope for, the high-probability trade is an Obama reelection.  Go vote, support, canvas, and everything else for your candidate, but position your portfolio for an Obama win.  Like the markets, there are no guarantees in politics and Romney could very well pull out the upset, but trading is a game of probabilities and we need to make the high-probability trade no matter what we hope for personally.

TRADING OPPORTUNITIES

Given the pervasive hope for a Romney win, especially among retail traders bamboozled by the media, creates an opportunity for a trade.  We could easily see a selloff after an Obama reelection if emotional traders dump shares due to an irrational expectation Obama will wreck this country.  That selling will climax quickly and create a great entry point for the trader who understands politics, how the markets work, and supply and demand.  Within a couple of days everyone who wants to pull their money out of equities because of Obama’s win will have done so, meaning all the sellers have sold.  At that point supply dries up and the market rallies.

Of course we don’t need to see the market selloff if most traders already sold in anticipation of the result and we could start rallying as early as tomorrow.  Watch the market and be ready to buy the breakout, whether that is tomorrow or next week.

ET CETERA

Speaking to the sentiment that this president or that president is the worst ever, don’t fall for it.  Our founding fathers created the most brilliant form of government ever conceived.  We don’t live in a monarchy or a dictatorship where one person has all the power.  What matters here is the system, not the individual.  You might like one guy more than the other, but don’t fall into the trap that one side has all the answers and the other is just a bunch of idiots.  Neither side has a monopoly on good ideas and it is the compromise between the two parties that made this the greatest and most prosperous nation in the history of the world.

Politics is an ugly sport, but the worse it looks, the better it is working.  The way you can test this is looking at Congressional approval ratings.  A low approval rating shows everyone is equally pissed off, meaning Congress found the right balance point where each side gave up something meaningful in order to reach the ideal compromise after taking all the competing views into consideration.

Stay safe

If you found this post interesting, consider retweeting it on StockTwits.  You’d be amazed at how many additional people find this from each retweet.  And if you don’t have a lot of followers; discovering, tweeting, and retweeting interesting content is the best way to build a following.  Thanks, Jani

The breakout is dead, long live the breakout

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

The breakout stumbled as the market gave up all of Thursday’s gains.  We are retesting support at 1410 and both bulls and bears are licking their wounds from the last two days of trade.  Next week’s election is setting up as a turning point for the market and we need to get ready to buy the next breakout.

MARKET BEHAVIOR

Stocks surged higher on a better than expected jobs report, but reversed within the first hour and ultimately gave back most of Thursday’s gains as well.  Stating the obvious here, but there was no follow-on buying to support Thursday’s upside breakout.  It appears Thursday was nothing more than a short-squeeze/bull-trap and no doubt it zinged a lot of traders.

Bumping our head on the 50dma and 1430 resistance is not encouraging and no doubt the last two days of bipolar trade have put a dent in bull and bear accounts alike.  On a positive note, we are still above 1410 support and we’ll see how traders respond to a test of this level on Monday.

MARKET SENTIMENT

With the election early next week, big money was unwilling to buy the breakout and is taking a wait-and-see approach.  Volume was above average, but less than Thursday’s breakout.  The somewhat muted volume shows people were not panicked and rushing for the exits en masse.  It was a lack of buying rather than a flood of selling that sent us lower.

The ironic thing about today’s failed breakout is it makes the next breakout more likely to succeed.  With so many bottom-pickers getting humiliated by all the recent head-fakes, they are losing confidence and thus less willing to buy the next dip.  What this means is the next time we see the market pop, it will be driven by more real buying from major institutions and fewer fair-weather bottom-pickers.  Why this matters is big institutions are not traders and they are far more willing to hold their positions and even add to them.  With that kind of support, an institution sponsored rally is far more likely to stick than one driven by bottom-pickers.

I don’t know when the next rally attempt will happen, but I do know there will be far fewer bottom-pickers leading the charge.  If there are fewer bottom-pickers, then by default there must be more institutional buyers, and that is the higher-probability breakout I want to jump on.

TRADING OPPORTUNITIES

We could see additional weakness on Monday as traders contemplate the outcome of Tuesday’s election.  It feels like there is still a lot of hope Romney will pull off the upset, but as we all know, hope is a poor strategy.  We need to anticipate what will happen, not what we hope will happen.  Unless the polls on Monday start showing a real advantage for Romney, the markets will begin anticipating an Obama win.  A lot of those hopeful Romney supporters might start selling due to an irrational fear of a market crash if Obama wins reelection.  The market rallied through Obama’s first-term and there is no rational reason to expect it will spontaneously fall apart under his second term.  Only a small sliver of the market holds this extreme view and the selling will dry up fairly quickly.

There is no reason to try and pick a bottom.  Let the market do its thing and wait to jump on the next solid rally attempt.  Like everything in the market, there is no guarantee the next rally attempt will work, but this is a game of probabilities.  We want to make all our trades with the wind at our back.  Most of the known bad news is already priced in the market and pessimism will climax under an Obama reelection.  Once that selling runs its course, supply will dry up and there will be nowhere to go but up.  Chance favors the prepared mind.

Stay safe

If you found this post interesting, consider retweeting it on StockTwits.  You’d be amazed at how many additional people find this from each retweet.  And if you don’t have a lot of followers; discovering, tweeting, and retweeting interesting content is the best way to build a following.  Thanks, Jani

Breaking the logjam

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Nice rally in the market today, finally breaking us from the 1410 logjam.  But be careful of the bull trap and wait for further confirmation before plunging in.

MARKET BEHAVIOR

Nice upside breakout from the 1410 consolidation.  Who would have thought we simply needed a hurricane to flatten a quarter of this country in order to get the market rolling.  But the market is notorious for doing the least expected thing, and that is exactly what it did here.

Technically we are just under previous support at 1430 and we will know by tomorrow if this level has become resistance.  If not, we could smash through it and vault above the 50dma.

MARKET SENTIMENT

No doubt a lot of shorts got caught up in this rally and had to run for cover.  But that leaves us asking if there was real buying behind this pop or if it was mostly a short-squeeze?  What we need to see is follow on buying Friday to prove this is the real deal.

The jobs report will be the excuse for the market to move one-way or the other.  And honestly, regardless of the number, the market could run in either direction.  Obviously a big number means the economy is gaining strength and the market could rally.  A weak number demonstrates the opposite and could send the markets lower.  But a strong number could also tank the markets because it might mean an easy reelection for Obama and it gives an excuse for Bernanke to tighten the purse strings.  On the other side, a poor result could cause the market to rally because it improves Romney’s chances and will keep the spigot of easy money wide-open.

This means the market has a blank check Friday move in whatever direction it is most inclined.  If people want to buy, they will find the excuse to buy.  If they want to sell, they’ll have a reason to sell.  To get ahead, we need to figure out what the market’s mood is.  Do people want to own stocks here, or would they feel more comfortable watching from the sidelines?  Are they going to buy the jobs report, or sell it?

TRADING OPPORTUNITIES

Last week I mentioned the best way to humiliate everyone would be to trigger a short-squeeze before turning lower and falling under 1400.  We are halfway there with today’s short-squeeze.  The question remains if the market will turn around and head lower tomorrow.  It largely depends on if it will hurt more people to continue rallying or to reverse lower?  Since we are in the middle of a range, it is less clear.  The trend is lower, but the market is not selling off on bad news, which is bullish.

There are only a couple of trading days left before the election and no doubt the outcome will play a big role in the market’s psyche.  That easily could be the catalyst that leads to the next directional market move.

As I’ve shared before, I remain bullish over the medium term, but we could see some weakness over the next few days.  But either way, be on the lookout for the right point to buy stocks, not short them.  While I don’t have a lot of confidence in today’s rally, a couple more supportive days will be enough to win me over.  Even more attractive, a drop under 1400 makes for an easy buy point.  But please don’t short this market.  If we do turn lower, it will be just a dip before rebounding.  If you absolutely must lean into the market, be nimble and take your profits quickly.

Stay safe

If you found this post interesting, consider retweeting it on StockTwits.  You’d be amazed at how many additional people find this from each retweet.  And if you don’t have a lot of followers; discovering, tweeting, and retweeting interesting content is the best way to build a following.  Thanks, Jani

Remarkably stable trade

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets traded flat for another day.  The stability was encouraging after the prolonged market shutdown and the devastation caused by Sandy.   But we can’t stay at this level forever and we are bound to breakout one way or the other.

MARKET BEHAVIOR

Remarkably stable trade following Sandy and the extended market closure; we were up a little, down a little, and then the S&P500 closed unchanged.  The question we have to ask ourselves is if the market last Friday so perfectly anticipated the hurricane and news out of Europe it didn’t need to adjust prices today?  Seems a far-fetched notion and no doubt the market still needs to fully account for these events in coming days.  Of course while the market was flat overall, there were some dramatic moves in individual stocks.  AAPL and the tech sector tanked, and hurricane recovery related companies popped like a cork.

Technically the market continued trading around 1410 and closed just above it at 1412.  While we’ve seen 1% intraday ranges recently, we continue closing at practically the same level for the last week.  This tight trade is coiling up the spring for a more dramatic move once we breakout of this range.  The longer we stay here, the bigger the move out of here.

MARKET SENTIMENT

It felt like a patriotic day in the markets, as no one wanted to short after all the devastation and suffering from Sandy.  But at the same time no one wanted to jump in and start buying either.  So we traded around for a bit before finishing flat.  No doubt this stalemate between bulls and bears will resolve itself one way or the other.  On Friday is the jobs report and who can forget about the election on Tuesday given the visual and auditory pounding many of us are taking from the relentless stream of campaign commercials.

It will be telling to see how the market acts leading up to the election.  Can we continue holding this range until the outcome is announced, or will the market anticipate a winner and make it’s move late this week or early next?  Romney is making the race more competitive than it’s been, but the electoral map still favors Obama.  If Romney continues gaining strength, we could even find ourselves with Romney winning the popular vote, but Obama taking the Electoral College.  But no matter who wins, the markets and economy will march on.  It always has and it always will regardless of what the partisans claim.

TRADING OPPORTUNITIES

The market is setting up for a bounce, the only question is when.  Will we bounce right out of this consolidation?  Or will we see a drop that flushes out weak holders and we rebound only after breaking 1400?  In no way will we see a massive selloff given any of the headlines people are currently talking about, whether that is Europe or an Obama reelection.  If the average Joe is discussing the economic impact of these events, the savvy trader can safely assume it is already priced in the markets.

Our job as opportunistic traders is anticipating what isn’t priced in.  Right now my best guess is the world won’t disintegrate when Obama is reelected and trading that relief rally is probably the next high probability trade in front of is.  We might see an initial drop ahead of or after the election, but that weakness is giving us an even better price to get in at and creating more profit opportunity for the savvy trader.

Trade the market and other market participants, not what you think the market should do.  Too often is does the exact opposite of what most people expect and that is what makes contrarian investing so successful.

Stay safe