Monthly Archives: December 2012

Dec 19

PM: Off again

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Markets struggled as the Fiscal Cliff deal is off again.  It wouldn’t be surprising to see the market pullback and consolidate some of the recent gains.

MARKET BEHAVIOR

Stocks retreated to 1435 as collaboration in Washington predictably ground to a halt.  The selloff came with the largest downside volume seen in over a month.  This puts us just above the 1430 level that provided support and resistance dating back to early September.  Inability to hold Monday’s breakout doesn’t bode well for a continuation and we might see more weakness here.  Look for selling to pick up speed if the market cannot hold 1430 and the dip starts taking out automatic stop-losses.

MARKET SENTIMENT

Political negotiations took two-steps forward last week as both sides were making constructive progress toward a deal, but that reversed today and we had a big step-back as the rhetoric picked up again.   The market was rallying in anticipation of an imminent deal over the last few weeks, but today’s bickering threw a wrench in those plans.  But this is standard operating procedures for both DC and the markets and shouldn’t surprise anyone.

As much as we want to put the Fiscal Cliff behind us, if politicians agree too quickly, each party’s base would become upset that their guy gave in too easily and should have fought for more.  If there are not multiple breakdowns and stalemates, then you are clearly doing politics wrong.  The reality is both sides are going to make compromises that will upset their base and the political leaders will put up a good fight so they are not criticized for giving in too easily.

And in the markets sentiment swings up and it swings down.  Chasing the market is one of this country’s the favorite pastimes.  If the market is going up, buy-buy-buy.  If it is going down, sell-sell-sell.  We all knew this market could not go up forever, the only question was when it would pullback.  Maybe today was that day, or maybe this is just another short-squeeze.  Only time will tell for sure.

As we covered in yesterday’s post, Tuesday’s high volume was noteworthy and acted as a potential warning flag of dwindling demand.  Everyone will point to the rhetoric out of DC and say that lead to today’s selloff, but two weeks ago the market rallied strongly in the face of similar bickering.  What made the difference between then and now?   Supply and demand.  Two weeks ago the market was grossly oversold after the emotional post-election slide.  That selling flushed out all available supply and after that dried up there was nowhere to go but higher, regardless of the headlines.  And today we saw similar headlines as two weeks ago, but this time we sold off because all the recent buying created a fresh crop of available sellers.  People claim news drives the markets, but it only seems that way when the buying and selling follows the news.

TRADING OPPORTUNITIES

I wouldn’t buy today’s dip, not yet.  We will most likely see slightly more attractive prices over the coming days.  The political side of this will probably get worse before it get better and that could shake out some of the recent buyers expecting a smoother outcome.  We are approaching the holiday week and many big decision makers will be on vacation, leaving junior traders to man the desks.  These rookies will have clear sell orders if we cross certain levels, but most lack the authority to initiate new positions, limiting buying over the next week.  Short of a surprise Fiscal Cliff deal, expect the market to be flat to slightly lower next week.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL finished at the lower end of the day’s range, but it did not give up nearly as much of the previous two-day rally as the indexes did.  This shows some relative out-performance.  Volume was far below average and the lowest we’ve seen in weeks.  Buyers were taking a break after two days of strong gains, but sellers also failed to show up in numbers and the stock consolidated recent gains.  Monday’s dip undercut the previous low gave a potential double-bottom.  Six-months from now a lot of people will be kicking themselves for not buying AAPL when it is trading above $600.

Stay safe

Dec 19

AM: Digesting gains

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:04 EST

AM Update

MARKET BEHAVIOR

Stocks are churning sideways and digesting yesterday’s breakout.  Buyers are not rushing to buy and sellers are not rushing to sell.  Most peaks after an unsustainable run fail within three days.  If we see constructive action for a few days, the market is poised to continue higher.  Failing to hold these levels over the next couple days means we should expect near-term weakness.

MARKET SENTIMENT

The recent rally has priced in increased expectations of a workable Fiscal Cliff compromise.  But while the market is eagerly anticipating agreement from our politicians, if we weren’t averting a “Fiscal Cliff”, what would the market think if our politicians simply announced “we are going to raise taxes and slash spending”?  How would the market react to that headline?  It is an important question to ask because that is sub-text to averting the Fiscal Cliff.  After the euphoria of a grand bargin settles down, the market will focus on what terms are in the deal and might develop an allergic reaction to European-style austerity.

TRADING OPPORTUNITIES

I’m bullish over the long-term because we are still in the economic recovery phase and there is a ton of money stashed on the sidelines in Treasuries, gold, and  money markets.  That is the fuel to propel the next bull super-cycle, but here in the near-term we should expect some emotional volatility.  Long-term traders ignore these daily, weekly, and monthly swings and profit handsomely from their resolve to stand above the fray.  Swing traders on the other hand take advantage of this emotional volatility.

It is still a little early to short the market, but prudent swing traders are lightening up their long exposure.  Long-term holders, whether you buy here or a few points higher or lower, you will see some nice profits over the next year as a real economic recovery takes hold.

AAPL daily @ 1:09 EST

INDIVIDUAL STOCKS

AAPL is taking its cues from the market and digesting its strong two-day bounce.  Prices are down modestly, but this is still supportive of recent gains.  But unlike the broad market, AAPL is still in the mist of a selloff and struggling with widespread bearish sentiment.  All the sellers who bailed on the stock since September might be willing to buy back in if the stock starts rallying again.  Value investors form the bottom, swing traders start the rebound, and momentum chasers push it higher.  It will be interesting to see where AAPL trades just before its earnings are released in January.  Will the bearish sentiment break before then and price in a decent quarter?  Or will the pessimism remain and the market will wait for confirmation of good news before buying?

Stay safe

Dec 18

PM: Beware of volume

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Stocks closed at the highs of the day and are within 2% of a 52-week high.  We easily cleared former resistance/support between 1430 and 1440 and closed just a hair under 1450.  Volume was the highest we’ve seen since the bounce off of 1400, which signaled the end of that a two-day slide.  The high volume signals a large wave of capitulation by bears and a frenzy of chasing by late bulls.  Looking back over the last few months, volume of the levels we saw today often signaled a change in direction/sentiment for the market.  Something to take note of.

MARKET SENTIMENT

Today’s high volume offers plenty of reason to give pause and assess the situation.  Is this the point where too many people bought into this rally?  Have all the bears been chased out of the market?  Have all the fence-sitters jumped in?  Is this setting up to fall due to a dearth of new buyers?  News doesn’t really matter if everyone is fully invested and no one has money left for buying.

The other day I cautioned about selling something just because it went higher, but this time is feeling different.  As I already mentioned there was huge volume today.  We cleared major resistance and triggered all that automatic buying from bears covering their shorts and fence-sitters afraid of being left behind.  Everyone on TV is talking about 52-week highs and all-time highs after that.  We’re not seeing cautious optimism out of bulls, but beat their chest and shout at the top of their lungs arrogance.  And bears are cowering with their tail between their legs, not telling everyone the market is about to collapse.  Further, it seems by listening to people the Fiscal Cliff deal is all but signed at this point.  What a dramatic change in sentiment from just a few days ago.

And so now we are left asking, where will the next incremental buyer come from?  There is a mountain of money in gold and treasuries, but those traders are very slow to warm to equities and that is the story of the next decade, not the next month.  Over shorter periods of time liquidity is more static and on a daily/weekly basis these fund-flows won’t have a huge impact.  Who can buy the market here?  I’m not sure.

TRADING OPPORTUNITIES

Anyone sitting on nice profits should consider trimming back after such a strong run.  The goal isn’t to make all the money, just the easy stuff.  Leave the top-picking to the gamblers.  The market rallied 100 points in the last month and is expecting an imminent Fiscal Cliff deal given the recent strength.   There is no reason the market can’t go higher, but every up-day brings us one day closer to the step-back.  I’m very bullish over the medium-term, but given everything I am seeing, a pullback to the 50dma wouldn’t be unreasonable.

AAPL daily at end of day

There are three ways to participate in the markets, long, short, and out.  Each position has its own risk/reward profile, so what works for one position might not work for another.  In cases like this, selling stock you own to lock in profits is reasonable and responsible move.  If you are out of the market, stay out of the market because chasing this late in a move is never ends well.  If you find yourself in this situation, just wait for the next high-probability opportunity.  And for shorts, don’t jump in front of this rally by trying to pick a top, but watch closely for a chance at some quick short profits once the cracks start showing up.  A lot of people bought the market over the last 100 points and anything but a home run out of the Fiscal Cliff will probably lead to a let down in the market.

INDIVIDUAL STOCKS

AAPL had another good day.  Funny how dangerous it was to buy at $500, but here at $530 everyone is getting excited again.  Anyway expect some chop in the name over the near term, especially if there is weakness in the broad market.  It is still a good buy for the medium-term, but be prepared for some volatility.

Stay safe

Dec 18

AM: Bounce continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:16 EST

AM Update

MARKET BEHAVIOR

Stocks set a new post-election high in early trade as the bounce off the 50dma continued.  Over the last two months we found decisive bounces off 1350, the 200dma, and now the 50dma.  Anyone standing in the way of this rally had a really bad month.

MARKET SENTIMENT

It is impossible to argue with this market, either your are on board, or you are getting killed.  By now now the uptrend is so obvious, former bears and those on the sidelines are changing their tune and buying into this Teflon rally.  If you can’t beat them, join them and buying from all these turncoats is the fuel propelling this market higher.  Bears have argued this market is too optimistic, but it only gets more bullish with each passing day.  The mistake most people make is assuming the contrarian trade is going against a big move.  But contrarian trading has nothing to do with price-action and everything to do with what the market is thinking.  More often than not the contrarian trade is going with the market, not against it.  When too many people say things have gone too far and are primed for a pullback, the contrarian trade is to keep holding.  The Q1 rally earlier this year is a perfect example of this.  For months people were predicting and expecting a pullback, but it never happened and the market kept marching higher until all the sideline-sitters were forced to act or else risk being left behind.  It was the buying by these reluctant buyers that market finally topped because after that we ran out of new buyers and the 2nd quarter selloff started.

TRADING OPPORTUNITIES

What happens after a Fiscal Cliff deal largely depends on what the market does before.  If we keep rallying strongly in anticipation, that increases the likelihood of a sell-the-news event.  The market is also currently obsessing on when a deal is reached, not what is in the deal.  We could pop on the first reports of a deal, but then selloff as the actual details of the deal are dissected.

For short-term traders, start looking to lock in profits soon.  This could run a little more, but expect buying to climax and turn lower.  For longer-term holders, the market is in rally mode and don’t mind pullbacks here an there, they are simply part of the process of heading higher.  The world is getting better not worse and long is the right side to be on over the medium term.  Ignore everything people are worried about and instead fear the things no one is talking about.

AAPL daily @ 1:16 EST

INDIVIDUAL STOCKS

AAPL is continuing its bounce off of $500 and putting more margin of safety between itself and this key psychological level.  A lot of times it is easy to spot a good value opportunity, the harder part is figuring out when to take advantage of the discounts.  A lot of people thought AAPL was a bargain at $650, then it was $600 and $550 after that.  But this gets back to what we were talking about yesterday, if you are tempted to buy something, it is probably still too early.  If you want to buy a stock on the dip, wait a little longer and the price will get even more attractive.  The time to buy the dip is when everyone has given the stock up for dead, when they are convinced it will keep going lower.  And that is AAPL here at $500.  Too many dip buyers were burned by buying higher up, and have since given up trying to pick the bottom.

Stay safe

Dec 17

PM: Markets rally on hints of compromise

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Stocks bounced off the 50dma and regained all the losses accumulated during Thursday and Friday’s selling.  Volume was just a smidgen higher than average.  We are again at 1430 that has proved to be a difficult level to close above.

MARKET SENTIMENT

Stocks took off on half-full developments out of Washington.  We don’t have a Fiscal Cliff deal yet, but talks between Boehner and Obama seem more productive as each side is showing more willingness to compromise.  Today’s price action was a combination of buy-the-rumor and a massive short-squeeze.  In spite of what everyone thinks, the market wants to go higher and you cannot get in the way of that.

TRADING OPPORTUNITIES

Bears were thwarted again as they got squeezed for the umpteenth time.  I often say the best trade is the hardest trade.  Right now the hardest trade is owning this market because there is just so much negativity out there.  Can anyone point to one genuinely positive financial headline?  Even a lowering of the unemployment rate is overshadowed by a shrinking labor participation rate.  And that is what makes genuine contrarian investing so difficult.  To do it right, you have to go against your instinct.  You buy when your gut is telling you to run and you sell when you are patting yourself on the back for being a market genius.

I always found a great cue for what the market is thinking by looking at what I am feeling.  I’m a relatively normal guy and if I am excited, then other people are probably excited too.  If I am fearful, they are probably fearful too.  When I am greedy and cocky, many other people are feeling the same way.  Further, people want data and charts to look at.  They want moving averages and standard deviations.  They want people to tell them when to trade.  They think you need to take emotion out of investing because that is what everyone tells them.  They tell you to turn off gurus and trade mechanical systems.  But my success comes from embracing emotion, not denying it.  It comes from ignoring the same data everyone else is watching.  I don’t want objective market analysis, I want opinion.  I’m not trading other people’s ideas directly, but I am sampling their opinions to see what everyone else is thinking.  Is everyone else greedy?  Are they scared?  Is everyone talking about the same thing?  Is there diversity of opinion or is group-think consuming the market?  I don’t trade fundamentals and I don’t trade technicals, I trade other traders.

The market continues flexing its muscles and defying all the critics.  The market isn’t rallying because of good news, it is rallying because all the bad news is already baked in and the market ran out of sellers.  The weakness might not be over, but the medium trade is definitely higher and it is foolish to get in the way of this rally.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL rallied off of the $500 level.  Volume was above average, but lower than Friday’s monster selloff.  There was another analyst downgrade this morning, but we already discussed the value of analyst opinions last week.  But even in the face of a second downgrade, the market bounced back.  At this point these events are mostly priced in and a 3rd or 4th analyst downgrade will have diminishing influence on the stock to the point of being non-events.  There is the very real possibility that if the broad market rallies going into next year, today’s price action could be the bottom of AAPL.  If the broad market breaks down, all bets are off, but a strong market will put a floor under AAPL.  Maybe we trade a tad under $500, but this selloff is very close to being done and we are debating 1 or 2% between here and the exact bottom.  If you like the story, buy the stock, if you don’t there are plenty of other things to trade.

Stay safe

Dec 17

AM: Another short-squeeze

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:14 EDT

AM Update

MARKET BEHAVIOR

Markets are higher by nearly one percent as hints of compromise are leaking out of Washington.  This is squeezing all the bears who piled on the shorts last week.  Easy come easy go.

MARKET SENTIMENT

Another tough day to be a bear.  A lot of traders are expecting this market to crack wide-open, but it just isn’t happening.  On November 28th we had a dramatic selloff down to the 200dma, but it reversed and closed higher by the end of the day.  Selling last Thursday and Friday dropped us to the 50dma, but we rebounded decisively off of that level this morning.  People want to say this is a news driven market and that is making it impossible to trade, but that is just an excuse for their losing money.  Markets are indifferent to the news and only respond to traders buying and selling.  If you spend more time watching what other traders are doing and thinking, the market starts behaving a lot more rationally and predictably.

The market was pessimistic after last week’s selloff, but that pessimism is the fuel that powers rallies.  And we are seeing that fuel in action today.  As I shared in recent posts, this is a tough market to short and any short profits should be taken early and often because this market is highly prone to bouncing.  You can make money going against the trend, but you have to be nimble and quick.

The interesting thing about sentiment is I hear a lot of bears claiming the market is far too optimistic and overrun with bulls, but I don’t see any of this wild optimism firsthand.  What I see with my own eyes are uncertain bulls and confident, almost cocky bears.    I suspect this perception by bears that the market is overrun with bulls doesn’t come from conversations with other traders, but from direct observations of the market’s price action.  The market is going up a lot so that automatically equals to too many bulls.  But as we’ve discussed many times on this blog, there are other reasons why markets rally that have nothing to do with excessive bullishness.  And as many bears have found out, shorting a market just because it went up too much is a hazardous pastime.

TRADING OPPORTUNITIES

Today’s strong gains show the rally isn’t dead yet, but this isn’t an all clear signal to rush in and buy stocks with reckless abandon.  The market will probably chop around a little to equally humiliate bears and bulls alike before it resumes the uptrend.  It wouldn’t surprise me to see this bounce fizzle over the next couple days as we retest 1400.  That doesn’t have to happen, but if you own stocks, mentally prepare yourself for this renewed weakness and don’t let it shake your resolve.  For bears, this is yet another reminder to take profits early and often.  Bears are trading against the trend and that is one of the most difficult trades to execute successfully.

AAPL daily @ 1:16 EST

INDIVIDUAL STOCKS

AAPL dipped to $501 in early trade but then jumped on board the broad market rally.  I’d still like to see the stock trade and even close under the psychologically significant $500 level.  This will give the tree one last good hard shake and clear the way for a rebound higher.  Remember the best way to make money in the markets is to buy weakness and sell strength.  But unfortunately the human brain is wired to buy strength and sell weakness.  And no doubt we will see a lot of regret from weak sellers who see this name rebound without them.  The best trading advice I can give someone is sell when you don’t want to sell and buy when you don’t want to buy.  Like everything else in the markets this doesn’t work all the time, but it sure works better than following the crowd.

Stay safe

Dec 16

LA: Looking for support

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Look Ahead

The goal of this post is to look at the coming week for what we can expect and how to trade those opportunities.

MARKET BEHAVIOR

Last week was the first red week since the November 16th bottom.  We closed the week right on the 50dma and under previous resistance at 1420.  Volume has been constrained due to the typically light holiday season.  If we are looking for historical precedence, the recent three-week rally is a spring chicken and it takes far more selling than we saw on Thursday and Friday to kill a normal up-trend.  But that is assuming we are in an up-trend and this three-week rally is not simply a dead-cat bounce on our way lower.

MARKET SENTIMENT

There are a lot of people on both sides of this half-full or half-empty debate.  In fact the market price always seeks the perfect balance point between these two warring factions.  If the slightest imbalance develops, prices move a few pennies one way or the other to regain this perfect balance.  Repeat this process thousands of times a day and now you know what makes intra-day prices go up and down.  What appears like random noise to the untrained eye is really tiny movements the market makes to maintain this perfect balance between half-full and half-empty.

Why this matters is if we don’t have a tactical edge on other market participants and are simply trading the same information and techniques everyone else is using, it is impossible to do any better than random luck.  This is a tough idea for most traders to swallow, but the truth is you have to do things differently than everyone else to make money at this game.  If your typical yearly performance is close to what the indexes do, that shows you don’t have an edge on the market and your trades are simply winning and losing due to random luck.  You win some, you lose some, and at the end of the day are not that far off from the market averages.  It took years of studying the market and analyzing my performance for this to dawn on me and almost every trader I share this idea with resists it initially.  Maybe that is because we all came to the markets because we think we can beat them.  But the truth is, to win at this game we need a unique advantage.   We need to exploit a market crack.  There are several cracks in the efficient market hypothesis to choose from; structural, information, emotion, and non-profit motivated.  At some other point I’ll dig more into these areas, but the main focus of this blog is exploiting the human aspect of markets and profiting from crowd psychology.

The reason I bring this up is a lot of people are expecting the market to implode.  They cite the Fed’s money printing, US federal deficits and debt, the Fiscal Cliff, Euro Contagion, and a slowing China.  But the reason I don’t pay much attention to these ideas is because everyone knows about them.  Every bear on the street will cite the same reasons, ones that have been dissected ad nauseam in the media for years.  The only thing that scares me are the ideas no one is talking about, and so far I have yet to come across a bear with a unique and unexpected reason for the market to fall apart.

Lets use the 2008 financial meltdown as an example since that is the most recent major market crash.  In the fall of 2008 most pros on Wall Street didn’t know what a Mortgage Backed Security or Credit Default Swap were.  Even the bankers in the middle of this mess didn’t have a clue what was going on.  It wasn’t until the global financial system was brought to its knees and stock prices were cut in half did main street even get a whiff if what was going on.  Now lets contrast that with the situation we are in now.  When a barista at Starbucks is worried about something you know you can safely discount it because it is already accounted for and priced in the market.

Anyone remember all those planes falling out of the sky because of Y2K?  While it is a joking matter now as we ridicule the paranoid people who stockpiled a year’s worth of food and water in their basement, that doesn’t diminish the seriousness of the threat.  Y2K was a very real problem, but what ultimately made it a nonissue was everyone talking about it.  Knowledge is power and when we recognize a problem before it happens, we are really good at mitigating it.  Everyone and their grandmother knows about the Fiscal Cliff, Debt Ceiling, Slowing China, prolific US Deficit Spending, Global Money Printing, Euro Contagion, Greece, Italy, Spain, Ireland, Portugal, and the rest.  But the great thing is we recognized these problems early and the smartest minds in the world are hard at work solving them.  For example Europe has teetered on the edge of collapse for three years, yet somehow they keep chugging along.  That is because they recognize the problem and working to fix it.  Going back to 2008, no one had the slightest clue what was going on including the most savvy people on Wall Street.  Bear Sterns was a $62 stock just days before JPM offered to buy them out for $2 a share   NFLX and GMCR have had spectacular declines recently but very few blue-chip stocks can drop 97% in one week!

And so where does this leave us with our current predicament?  While it doesn’t feel right and it is a bit scary, we can safely ignore all the reasons bears are using to justify their bearish predictions of doom and gloom.  Now don’t get me wrong, the market can selloff and it can crash hard at any time, but I know it won’t be for any of the reasons people are currently talking about.   Ignore what everyone is talking about and fear what is unseen.

TRADING OPPORTUNITIES

Going into this week we can do one of three things; up, down, or sideways.  While not particularly helpful when looked at that way, when we break those scenarios down in greater detail we can formulate a plan.

We can bounce near the 1400 level that has provided reliable support going back to August.  This would represent a minor reset of an otherwise bullish rebound.  There is still a lot of fear in the markets and it is often said markets climb a wall of worry.  This pessimism will continue the fueling the next rally.  Look back to Saturday’s post for an explanation on why this happens time and time again.

We can trade sideways for a while as we digest the recent 90 point rally from 1350.  Sideways trade is usually bullish because selloffs are typically quick and dramatic.  The thing many bears often overlook is the world is getting better, not worse.  The recovery is not happening fast, but no recovery is as fast as everyone would like.  These things take time

And lastly we can selloff aggressively to the 200dma.  If we can’t find support at 1400, expect the market to push on through to 1390 and even a little under before finding support.  This is about as low as I expect a selloff to get unless something new and unexpected develops.  Potentially we could retest 1350 if the market panics over a Fiscal Cliff breakdown, but that emotional selling creates buying opportunities because the fiscal cliff is a well understood event and the market rarely plunges on what it can quantify.  Markets fear the unknown, not the known.  A great  example of this was this summer’s big rally on the heels of the SCOTUS ruling upholding Obamacare.

So how do we trade these?  Expect some near term weakness, but we should find a bottom not too far from here.  There isn’t a lot of downside left to short, so if you have short profits, look to cash them in when we push down to the 1400 level.  While we might drop to 1385, holding out for those last few points of downside is just greedy and foolish.  It is easy to make money in the markets, the hard part is keeping it.  Don’t be tempted to hold too long and give back all those hard-earned profits.

On the long side, don’t try to pick a bottom and let the market find support in the 1400ish range before buying in. And of course I reserve the right to be completely wrong and change my mind in a moment’s notice. Always be on the lookout for behavior that doesn’t confirm to what you expect because it means something has changed and you need to change with it.  It is okay to be wrong, it is suicidal to stay wrong.

AAPL weekly at end of week

INDIVIDUAL STOCKS

A lot of the above analysis applies equally to AAPL.  It is way late in the game to be short and if you are lucky enough to be sitting on short profits, lock those in quick.  We might see a dip under $500 on tremendous volume, but that will likely be the capitulation point if we didn’t already see that with Friday’s huge selloff.  But either way there is very limited downside remaining in AAPL and it is time to reel in those short profits.

For the bold with a long-term view, you might consider accumulating shares here if you are willing to sit through some near-term volatility.  AAPL could shoot itself in the foot with its 4th quarter earnings, but the thing about the nearly 30% selloff is most of that downside has already been realized.  There is plenty of chatter about suppliers being told to slow production because of slow iPhone5 sales, but I’ll be honest here, if I heard that, then everyone knows it and it is already factored into AAPL’s price.  AAPL wil eventually succumb to competition like every other tech company has, but the reports of AAPL’s death are greatly exaggerated.

Stay safe

Dec 15

WR: Taking a step back

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Weekly Review

MARKET BEHAVIOR

This was the first negative week since the November low.  The market peaked on Wednesday after taking out the pre-election highs, but gave back all of those gains by Friday’s close.  Weekly volume was slightly under average, but we cannot read a lot into that since we are in a traditionally low-volume period between Thanks Giving and Christmas.

MARKET SENTIMENT

The market has only ended negative on 5 of the last 21 trading sessions.  That is a pretty impressive run and explains how we gained nearly 90 points.  As impressive as that run has been, every run eventually comes to an end.  Are we at the end of this run with two-consecutive down days on Thursday and Friday?  And what does the end of a run mean?  Is it just the end of the straight up phase of the rally?  Or does the end mean falling off a cliff?

If you look back at what has been done, our three-week rally is peanuts.  The most impressive rally was early this year where over an eleven week period we had just one week ending in the red.  By that yardstick we can’t even come close to claiming a three-week rally is grossly over-bought.  But if this market isn’t over bought, what is it?  Maybe it is just resting.  Maybe it had a few too many chasers as we broke above 1435 on Wednesday.  Maybe Thursday and Friday are just another bear-trap on our way higher.

As far as sentiment, bulls are more confident and comfortable than they’ve been in months.  A bounce off of a low will do that as it reassures holders that this was the right decision.    But it would be a huge stretch to call this market complacent.  Bullish headlines are few and far between as even non-investors cannot escape all the Fiscal Cliff chatter.  The most bullish headline of the week was a report that our politicians were fighting a little less.  Talk about a half-full reason to rally.  Further, many market participants expect us to fly off the Fiscal Cliff.  Of course politicians on both sides saying they are willing to take the plunge doesn’t help foster an optimistic environment.

Many times I’ve said markets rally in the face of pessimism and decline on the back of complacency.  This is boiler plate contrarian investing.  People trade their opinions and anyone expecting doom-and-gloom is already out of the market.  If a person is 100% in cash, the only thing they can do is buy stocks.  If the majority of market participants are pessimistic over all the economic risks in front of us, then they are already mostly in cash and the only thing they can do is buy this market.  This is exactly why the Obama selloff bottomed and rallied so strongly.  When the only option left to most people is buying, the market can’t help but rally no matter what the headlines are.

TRADING OPPORTUNTIES

Some of the commentary in this post conflicts with what I’ve written about in daily posts, but this is where timeframe makes a big difference.  Daily posts look at what will happen over the next few days.  These weekly posts look at what will happen over the next few weeks.  And in cases like this, I expect some near-term weakness, but remain long-term bullish.  That is why it is important to take a step back and look at the big picture.  The market tries to seduce and trick us with its misleading daily fluctuations, but it is far harder for the market manipulate weekly charts.  It is always better to trade with trend.  This is sailing with the wind at your back and it takes very little effort to succeed.  Compare this to the trader fighting the larger trend and he has to work very hard tacking into the wind.  Trading the counter-trend moves can be done successfully, but it is exhausting and leaves little room for error.  When contemplating shorting this market here, a person should ask themselves what is the bigger trend?  If the trend is lower, grab on and make easy money.  But if the trend is higher, shorting a modest dip is an aggressive and risky play.  It can be done successfully, but it is far more difficult.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL’s been giving people heartburn again. An analyst downgrade sent AAPL to its lowest close in nearly a year.  It is hard to find someone who is jumping up and down, screaming what a buy AAPL is at these levels.  The stock is 28% off its 52-wk high and that is scaring away a lot of potential buyers.  But that is one of the most odd things about the stock market, people only want to buy expensive merchandise.  Put something on sale and they turn their nose up at it because it is too ‘risky’.  But the truth is AAPL was a far more risky at $700 when everyone was excited to own it than it is here at $500.  Why do people fight each other to pay $700 for a stock and won’t touch the same stock with a ten-foot pole at $500?  It all comes down to how the mind works and what people are looking to get out of the markets.

The human mind is great at seeing patterns (even when they don’t exist) and a trend is an easily recognizable pattern.  Stock investors are in this to make money and they want to buy something that will go up in price.  Obviously a stock making all-time highs has been going up and the natural assumption is this pattern will continue.  At $700, buyers see this obvious pattern and expect prices to continue going up.  And when you flip that around, after a 28% decline people won’t get near a stock because the pattern tells them it will continue going lower.  But to be successful in the markets we have to fight our natural instinct and trade with reason and logic, not emotion and intuition.  Maybe AAPL has more downside left, but without a doubt it is far less risky to own AAPL at $500 than it was at $700.

ET CETERA

I want to thank everyone for all the positive feedback regarding this blog.  I enjoy writing these posts and am happy to hear people are finding them useful.  And for those tweeting and re-tweeting these posts, I am extremely flattered and appreciate you helping spread the word.  I don’t make any money from this blog, but sharing ideas with fellow traders has been invaluable in improving my trading and I’m glad to be able to give back to the community.

Stay safe

Dec 14

PM: More low volume selling

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Markets declined on light volume.  We are just a hair above the 50dma and clearly under previous resistance at 1420.  Volatility is modest as the last few days of weakness failed to trigger a large wave of selling.  Is the market growing complacent after a 90-point, straight up rally?

MARKET BEHAVIOR

Everyone knows where the market came from, but very few can tell you where it is going.  The clues are there, we just need to learn how to spot and interpret them.

Supply and demand moves stocks in  four different ways; 1) over-abundance of willing buyers, 2) over-abundance of willing sellers, 3) lack of willing buyers, and 4) lack of willing sellers.  Today’s decline on low volume was a victim of insufficient willing buyers.  The low volume selling over the last couple days reveals not many people are concerned about this selloff as they continue to holding.  Is this the result of complacency taking over?

Typically it takes large volume selling to set the stage for a rebound.  This is because on the way down, weak holders sell to more confident value investors who are willing to sit through some volatility.  After a high volume purge, you end up with fewer weak holders and more confident investors.  That is the tipping point that tightens supply and turns a decline around.  (Looking at AAPL’s chart shows some of this high-volume selling taking place and is part of the reason I think there is hope for the stock.)

We had several of these high-volume down-days in early November and that was part of what turned the market around on Nov 16th.   Since then we have seen a lot of buying push the market to new post-election highs, much of it on higher volume.  But like on the way down, high volume buying on the way up also shows the makeup of the market is evolving as conservative investors sell to the more bold who are happy to chase the market higher.  These new owners are the impulsive investors that follow the crowd, but they are also the first to panic when the market turns against them.  And so here we are, two days into a modest correction with very few people worried about the slide so far.  This might suggest there is more selling ahead.

Many discount these ideas because they think we are stuck in a news driven market and next week’s price moves are simply an unpredictable result of what the headlines are.  I see their point, but I also know news does not drive markets, only supply and demand can do that.  The news might be random, but the market’s reaction to it is not, and that is the source of our advantage.  If we know what traders think and how they are positioned, we can figure out how they will respond to different pieces of news.

TRADING OPPORTUNITIES

So where are we?  Great question.  First I want to remind everyone I do not have a crystal ball and cannot see the future.  There are no guarantees in the market, but in the market we don’t need to be right all the time to make money.  Like card counting, we look for different clues to move the odds ever so slightly in our favor and over time we will come out ahead.

It seems like the market is full of traders expecting a Fiscal Cliff resolution, or alternately assume going off the Fiscal Cliff is not as bad as most fear.  These are the traders who were comfortable buying stocks during the dip to 1350, but now that the market has rallied 90 points from the November low, we are running short of new confident buyers willing to step in front of the Fiscal Cliff.  And that is why prices have declined on light volume.

I think there is some further weakness ahead based on the above, but we are still in a bull market and counter-trend trades don’t last long.  We will probably bounce somewhere around 1400.  Maybe it is 1405, or maybe it is 1390.  Look for the high volume purge that shakes out most of the weak holders and replaces them with confident and patient buyers willing to buy shares at a discount.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL was pounded today, see my AM post for more thoughts about this particular selloff, but more broadly we are getting a lot of shares changing hands here in the lower $500 range.  Opportunistic value investors are buying shares at a steep discount from fearful and emotional traders who can’t handle seeing the losses mount.  The market has run short of AAPL bulls and most everyone is bashing the stock here.  The selling might not be done yet, but more selling just creates a better base for the stock.  Seeing the stock break under $500 on the highest volume in months would be a great buying opportunity because that could be the last shake-out.  Of course there are no guarantees in the market and catching falling knives is a hazardous way to make a living.  The far more conservative approach would be to let the stock bounce from that low before buying in.

Stay safe

Dec 14

AM: Stuck in no-man’s land

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:23 EST

AM Update

MARKET BEHAVIOR

Markets traded slightly lower, staying within a tight rage.  We are resting between 1420 the 50dma.  This is no-man’s land with a potential rebound on one side and a selloff on the other.  Neither camp is making an agressive move here and instead waiting to see what other traders do first.

MARKET SENTIMENT

Between the conflicting negative sentiment, strong price gains, and relentless short-squeezes, most traders are uncertain where this  market is headed and are just sitting on their hands.  We might break this log jam leading into the close as traders with more conviction start piling in on one side or the other.  Breaking above 1420 or under the 50dm could trigger a larger wave of activity from those waiting for the market to make a move.

Trading so close to the 50dma makes us vulnerable to a dip under it and the inevitable avalanche of automated orders that get executed when we break well followed technical levels.  Market markers pay their alimony and kid’s private school tuition through trading volume.  They know all these stop-losses are just a couple of points away and will do their best to push us into that area to trigger all that activity.  The bigger question is what happens after all those automatic orders are executed.  Does it trigger a larger slide as selling begets more selling?  Or will the market run out of sellers and bounce?

TRADING OPPORTUNITIES

It is getting late in the game to put on a new short.  At this point we could easily bounce back above 1430 on yet another short-squeeze.  And if we selloff, we probably won’t fall much further then 1400.  That doesn’t set up for a good risk/reward.  If you have some short profits from yesterday, keep them on a tight leash and start eyeing the exit.  You don’t have to sell today, but the probabilities and rewards are less in your favor than they were yesterday.

Anyone out of this market should start looking for stock they like and look for an opportunity to buy on this pullback.  We might see prices get a little more attractive, but don’t get greedy and wait too long.  For long-term holders, don’t let this modest selloff spook you out of your holdings no matter how scary the headlines become.  Remember, our profit comes from the market not the medida, so don’t take your eye off the ball.  We could see prices dip to 1390 and maybe even a little bit lower, but that is where selling should climax and find support.

Of course the emotional trade is the wild card and we need to watch for signs the market is cracking if traders become spooked by developments out of Washington.  But given this market’s strength in the face of recent bickering and rhetoric, current participants are not all that sensitive to what is coming out of DC and I don’t expect a panic driven rush for the exits even if talks breakdown.  But I reserve the right to change my mind on a moment’s notice as the story develops and the market reacts to it.

INDIVIDUAL STOCKS

AAPL was flattened by a downgrade from a UBS analyst.  He lowered his price target from $1,000 to $700, and that caused the stock to drop to $510.  But let’s not forget these analysts are really glorified accountants and if they could trade, they would be traders not lowly analysts.  The other thing is this UBS analyst is still very positive on the fundamental story, he is just playing stock market by trying to guess what the market will do next.  And in most instances analyst driven moves rarely stick because they are not related to the fundamental story, they are simply one person’s opinion.  Fundamental news out of the company is what triggers directional moves in a stock.

Trading wise we might see the stock break $500 on gigantic volume, forming the second dip in a double-bottom before returning to more normal levels.  A lot of people are selling AAPL by the dump truck load between the weak price action, impending tax increases, and sentiment change, but look all of those to reverse next year.

Stay safe