AM: Waiting on DC

By Jani Ziedins | Intraday Analysis

Dec 28

S&P500 daily at 2:56 EST

AM Update

Churning sideways at 1410, but the asymmetric trade remains to the upside as most traders fearing the Fiscal Cliff already sold and holders are willing to hold in the face of this risk.


Markets are down a half-percent in light trade as everyone awaits developments out of Washington.  We bounced off 1400 yesterday and are holding around 1410 today.  So far 1400 is the line in the sand, break below this and we could see a wave of technical and stop-loss selling hit the markets, but so far bulls have successfully defended this key level.


The Fiscal Cliff continues dominating headlines at the expense of everything else.  Yesterday’s bounce off 1400 started when the House announced it was reconvening on the 30th.  While there is little hope a deal will be reached over the next few days, this development was enough to squeeze bears out of the market.  This hints at the upside potential if good news comes out.  On the other side, most traders are already resigned to falling off the cliff.  Those afraid of headlines already sold ahead of the 31st expiration, leaving few sellers still in the market to actually sell the news.  If anyone was convinced we were headed over the cliff and this would lead to a massive selloff, who wouldn’t sell ahead of it?   These pessimistic expectations and positioning create an asymmetrical trade to the upside since most of the downside has already been realized.  This isn’t to say we cannot see further near-term weakness.  While we won’t see a massive wave of selling, a dearth of buying can also pressure prices, but the upside potential at this juncture is greater than the downside.  Success n the markets it isn’t about predicting the future, but knowing the probabilities of various outcomes and trading those when they are in your favor.


Expected Outcome:
Most of the Fiscal Cliff selling has already happened, meaning we should only see modest weakness after the event, and might even see the market find support in a sell-the-rumor, buy-the-news phenomena.  While dysfunction in Washington is not a good thing,  once all the selling happens, supply dries up and the market has nowhere to go but higher.  Since this is such a well telegraphed event, most of the Fiscal Cliff selling will happen ahead of time and the new crop of buyers are willing to hold through this volatility.  The ironic thing about stock holders expecting volatility is they eliminate volatility.  This is because confident holders don’t sell the headlines and that is all it takes to put a floor under the market.

Alternate Outcome:
Since we are so close to 1400 and all the stop-losses resting just below this technical support level, even modest weakness could drop the market to the point where it sets off a wave of autopilot selling. But while the avalanche might feel scary, it will find a floor not long after because the autopilot selling will climax fairly quickly when it isn’t followed up by real selling.  Many of the holders bought after the election and in the face of Fiscal Cliff headlines, meaning they have a longer-view of the market are harder to shakeout.  Their confidence in the future prospects will keep a bigger wave of selling at bay.

AAPL daily at 2:58 EST


AAPL is holding near $510, giving traders another opportunity to jump in at the $500ish level.  Funny how when the stock is $550 or $600 people wish they bought at $500, but when it retreats back to $500, it is hard to pull the trigger because it looks like it is breaking down.  My experience is the hardest trades to make often work out and the easy trades blow up in my face.  If a stock seems too high, it keeps going higher; if only fools would buy it, it probably bottomed.  On the other side of the coin, if a rising stock is a sure thing, it is probably peaking and if a falling stock looks like a great buy, then it will probably continue lower.  And this isn’t just hyperbole, there is a lot of psychology and supply and demand dynamics that make this a very real phenomena that we can get into at some other time.

Stay safe


About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.