Monthly Archives: December 2012

Dec 13

PM: Rally let some air out

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Markets slid through the day as air let out of the recent rally.  We dropped back to 1420, what was overhead resistance up until two days ago.  Volume was average, but lower than the last couple days.  The somewhat restrained volume shows panic hasn’t hit the market and it was more a lack of buying that pushed us lower than a surge of selling. Is old resistance at 1420 going to become new support?  Or is there more downside left?

MARKET SENTIMENT

With seven short-squeezes over the last month, it wouldn’t surprise me if a large number of bears developed an aversion to shorting this market.  Fool me once shame on you, fool me seven times, shame on me.  But the thing about the markets is the more failed attempts there are, the more likely the next one will succeed.  Seven short-squeezes is getting up there and the probability for a real pullback is growing by the day.

It took a lot of buying to push us up 90+ points and  there is little wonder why the market is struggling to find new buyers.  It will probably take more than a one day decline to tempt value buyers with their large war chest to jump in.   A pullback to 1400 and things start looking real interesting again.

We could get hit with a panic driven selloff if the Fiscal Cliff thing blows up, but that is unlikely.  The post-election selloff shook out most of the emotional traders, so there are a lot fewer people left to hit the panic button this time around.  Further, there are a lot of people who already expect us to fall off the cliff and that possibility is so widely discussed it is largely priced in.  And lastly, the Fiscal Cliff is more like a rolling hill than a cliff and most of the effect won’t be realized for moths, so passing the deadline is more symbolic than consequential.  You could have retail investors dump their 401k accounts, but there will be so few of them that the selling will be far more restrained than the post-election selloff.  And honestly I would welcome more irrational selling because that creates great profit opportunities for those that keep their head.

TRADING OPPORTUNITIES

Be prepared for more downside, but don’t be surprised if the market bounces pretty quick.  Shorts need to be real careful here and don’t get greedy.  It shouldn’t be hard to hit 1410,  1400 is a little more of a stretch because we could bounce anytime in that area.  Waiting for 1390 is getting greedy and less likely to happen.  I’m not saying it can’t happen, just less likely.  It is easy to make money in the markets, the hard part is keeping it, so selling a little early is always preferable to waiting too long and letting those profits evaporate.

Fiscal Cliff negotiations will play a role in the next few trading sessions.  We need to pay careful attention to how the market is responding to these developments.  If the market shows increased skittishness, then there might be more room on the downside, but if the market continues its indifference, then we can ignore it and trade the rebound.  Coming up on the holiday break next week, the result will be binary, either negotiations fall apart and everyone goes home, or a deal will be reached.  In coming days we will look at how to trade this.

INDIVIDUAL STOCKS

Predictably AAPL had a bad day, but I think this is a really good sign.  I would be far more concerned if AAPL rallied today because that shows the emotional trade is still in control.  The closer AAPL follows the indexes, the better off the stock will be.  We might see some agressive selling if we break under recent lows, but that autopilot stop-loss selling is expected, normal, and healthy.  It will take months for AAPL to climb out of this hole, but for the long-term investor the risk might be worth the reward.  For the swing-trader, there is still some volatility to play.

Stay safe

Dec 13

AM: Running out of buyers

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:11 EDT

AM Update

MARKET BEHAVIOR

Markets traded lower this morning.  If you read the financial press, they’ll claim some piece of news caused this weakness, but reality is we ran out of new buyers after running up 90+ points in just a few weeks.  As anyone who reads this blog knows, only supply and demand drives market prices.  Fundamentals and technicals are secondary and that is why going against the crowd is often a winning strategy.  You can have the best fundamental or technical analysis in the market, but if supply and demand is not on your side, you’ll lose money.

MARKET SENTIMENT

We’ve seen a lot of buying in the last few weeks at the market gained 90+ points from the November lows.  Most of this move was simply recovering the emotional selling that took place after Obama’s reelection.  But where does that leave us now?  Did we come back to equilibrium, or did we overshoot and are poised for a pullback?

It seems likely we’ve exhausted the supply of available buyers for the time being.  Momentum traders jumped on the bandwagon and shorts have been blown out.  Regardless of what the news reports, to go higher we need to find new buyers willing to pay even more to continue this rally.  Short-term traders make up most of the daily trading volume, but they have limited buying power and only institutional money can sustain moves higher.  But the thing about institutional money is they hate chasing stocks and prefer buying the dip.  If we’ve exhausted the supply short-term money, we will pullback some before big money will step in and start buying the dip.  Two steps forward, one step back.

TRADING OPPORTUNITIES

Don’t expect a major market correction here.  If you are tempted to trade the short side, take your profits early and often.  If you are a swing trader, now is a good time to lighten up and wait to buy back in at lower prices.  Value investors, hang on and don’t let the noise around you distract you or make your question your resolve.  This will be a modest pullback and look for a rally early next year as a lot of this tax motivated selling and special dividend money is reinvested in the markets.

INDIVIDUAL STOCKS

AAPL is the high-beta trade, down 3x the indexes losses, but this shouldn’t surprise anyone.  One more selloff will purge the stock of the last holding on and set the stage for a consolidation and recovery.  Once all the people who can be scared out are scared out, supply will dry up and the stock start a recovery   The Apple Inc story is not broken and the company is fundamentally sound.  AAPL stock on the other hand was over-owned and that lead to the pullback because it ran out of new buyers.   I’m a loyal Apple Inc fan, but not an AAPL stock bull by any stretch.  I see the stock entering a decade-long sideways trading range as it continues to grow internationally and print money with shockingly high margins, but it will lose market share to lower priced competition and they will not come up with the next disruptive, must-have gadget.    I actually think the Windows 8 family of products are the most promising thing out there, but it will take a couple of years for them to get the hardware and software mix just right to compete with the fit and polish of Apple.

Stay safe

Dec 12

PM: New high, but finish flat

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Stocks notched the highest levels in almost 2 months after the Fed announced it would keep rates near zero until unemployment dropped to 6.5%.  But the enthusiasm was short-lived as the markets gave back all those gains and closed flat for the day.  Volume was higher between short-covering and momentum trading, but those buyers quickly ran out of money and the market couldn’t entice anyone else to jump in at the new highs.

MARKET SENTIMENT

We got another shot-squeeze today, the 7th by my count since the November lows.  I’m surprised bears are still solvent after all that bloodletting.  Chances are many bears have grown tired of shorting the market and conceding defeat.  It is okay to be wrong, it is fatal to stay wrong.  But the ironic thing is as soon as most give up, we will finally get that selloff.  The market is cruel that way.

TRADING OPPORTUNITIES

Stocks are getting a little rich up here and it would be a good time to trim profits.  The market is not setup for a major fall, just a retest of the 50dma or 1400.  The two reasons we won’t have a major correction, 1) the market is pessimistic, not complacent and 2) the market is obsessing about negative news, not oblivious to it.  The fuel for major selloffs is unexpected bad news.  Anything that has been talked about ad nauseam is not going to surprise anyone.

For a trading plan, lighten up on longs and wait for better prices to buy back in.  The extremely aggressive could look to put on a quick short, but don’t stay short more than a couple of days and close your position near the 50dma.  But honestly there isn’t a lot of profit to make a short trade worth the risk.

INDIVIDUAL STOCK

AAPL seems to be firming up around the $540 level.  This isn’t an absolute floor for the stock, but some sideways consolidation here is part of the basing process.  We will probably see one more dip lower due to broad market weakness that flushes out the last of the hopeful, but after that the stock will be better poised to climb out of this hole.

Stay safe

Dec 12

AM: The oblivious rally

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:09 EDT

AM Update

MARKET BEHAVIOR

The market is trading higher after yesterday’s breakout.  We are just above of resistance in the low 1430s after the market popped on the Fed’s announcement.  It’s been one heck of a ride over the last 5 trading days as we bounced off 1400 and had 5 consecutive up-days, now looking at our 6th.  It wouldn’t be surprising to see a down in the near future.  In fact a little consolidation here would be healthy because going too-far, too-fast is unsustainable and leads to larger snap-backs.

There is some volatility surrounding the Fed announcements with the initial reaction being higher and breaking former resistance at 1434 is triggering some stop-loss/auto-buying.  This is the oblivious rally that just keeps on going no matter how many reasons it shouldn’t

MARKET SENTIMENT

Many traders are suspicious of this rally and unsure what to do.  They joined the crowd and sold stock after Obama’s reelection.  They continue fretting over the Fiscal Cliff headlines and still worry about developments in Europe that everyone has seemingly forgotten about.  Yet the market is oblivious to these concerns.  What is a trader to do?  Most rationalized it as a temporary bounce and it would come back down, but it’s been nearly a month and 85+ S&P points and the market is still going up.

In the markets, price is truth and many cynical traders reconsidering their views.  This is a perfect example of what happens when too many traders opinion’s cluster together.  Efficient markets depend on independent opinions.  Surprisingly it doesn’t matter if individuals in are rational or not, just as long as they are independent.  Even when participants are irrational, if the irrationality is independent, the extremes on one side counteract extreme views on the other side.  In an independent environment the irrationality cancels itself out and we are left we an efficient market.  But what we had in the post-election selloff was a clustering of opinions.  Rational or not, when groupthink hits the market, it skews prices and makes the market inefficient.  But this isn’t bad for trader because this is our bread and butter.  Inefficient markets create profit opportunities and without cracks to exploit, beating the market would not be possible.

The situation we have now is pessimists suffering from doubt and an identity crisis.  These turncoats are the new buyers that are pushing us higher, as both as short-covering and afraid of being left behind chasers.

TRADING OPPORTUNITIES

Up six days in a row might make the market vulnerable to a pullback, so anyone tempted to chase this market might wait a couple of days to find better prices.  As we have seen time and time again, it is ruinous for your trading account’s health to be short this market.  The trend is clearly higher and the easy trade is owning the market.  We should expect a pullback to the 50dma, but that will be a buying opportunity.  The one snag to watch for is an emotional trade surrounding the Fiscal Cliff negotiations.  Much like the Obama reelection, we could see some irrational selling, but that will be short-lived and create a buying opportunity.

INDIVIDUAL STOCKS

AAPL is again following the indexes, albeit with a lot more beta.  The irrational selling seems to have abated.  Most of the pre-tax increase selling has probably already happened too. Anyone contemplating locking in AAPL gains for tax purposes was likely pushed over the edge watching the stock nose over like it did.  Most of the commentary surrounding AAPL is focusing on their weaknesses and what they are doing wrong and no doubt there is truth to these points.  The iPhone finally has real competition from Samsung and is losing market share in the US, but lets not forget AAPL is an international story and how they perform overseas is what will drive the stock.

Stay safe

Dec 11

PM: Can’t hold this bull down

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Markets surged higher and is flaunting strength in the face of widespread pessimism   We make our money off of the market, not fundamentals, so listen to what the market is saying and here is wants to go higher.  We could see some near-term consolidation of the recent gains, but the trend is clearly higher.

MARKET BEHAVIOR

The market surged past resistance at 1420 and burst above 1430 before settling back to 1427.  There was a late selloff after all the short-squeeze buying tapered off, but the market still finished in the top half of the day’s range.  Volume was slightly above average.  The next level of overhead resistance dates from before the election at 1430 and support is now 1420.

MARKET SENTIMENT

The market was caught off guard when word came out of Washington that Fiscal Cliff talks were making progress.  Lately the assumption has been both sides are digging in and unwilling to compromise, but today’s tone was far more conciliatory.

The resulting price-action reveals how bearish the markets were and how many traders were either under-invested or short the market.  A lot of today’s move was a short-squeeze and as we saw this afternoon, the air often lets out of those after reaching the point of maximum pain for bears.  But even with the modest letdown, the market still closed in the top half of the range.

TRADING OPPORTUNITIES

The market is becoming more hopeful a Fiscal Cliff deal will be reached and is rallying in anticipation.  But this early move shows the market is ahead of the news and all the upside will already be priced in by the time something is agreed to.  We might even see a sell the news if the eventual compromise isn’t everything the market is hoping for.

The market clearly wants to rally here as all the bears are helpless to hold down the market.  We might even see under-invested money managers chase into yearend if this strength keeps up.  The important technical levels are 1420 underneath and 1430 above.  We coud easily retest and even dip through 1420 on a routine, healthy, and productive pullback, but anything larger shows major flaws in this rally.  1430 is the new line in the sand for bears and we’ll get another surge of buying if we can break above this level.  Recent price action shows it is time to be long the market.  We will watch for downside weakness tomorrow, but barring a major breakdown, this market wants to go higher and any dips should be used as entry/add-on points.

INDIVIDUAL STOCKS

APPL rallied with the market and finished higher by 2.1%.  As I shared in the AM update, seeing AAPL follow the market’s price moves is a good sign the selloff fever is breaking.  The irrational and emotional selling will need to dry up before any kind of sustainable rebound can happen.  Often this comes after most have given the name up for dead.  The failed bounce off of $500 a couple of weeks ago did a lot of demoralize the hopeful crowd.  A double bottom with a new low would go a long way to completely demoralizing the last holdouts and ironically put a floor under the stock.  Much like the broad market, we need skittish holders to sell to longer-viewed value investors who are comfortable sitting through volatility.  Once there is a critical mass of stable value investors, the volatility will subside and the name will begin its climb higher.  The big catalyst will be earnings in January and with the newly lowered expectations, it will be easier for AAPL to exceed the vastly lowered bar.

Stay safe

Dec 11

AM: New highs

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:09 EST

AM Update

MARKET BEHAVIOR

Markets surged past resistance at 1420 and are now in line with pre-election resistance near 1430.  All of the Obama reelection selloff has been recovered and the market continues flaunting strength in the face of pervasive negativity.

MARKET SENTIMENT

It is a bad time to be short the market and bears are feeling more pain today as the market refuses to acknowledge their view of the world.  But as we know, markets operate on supply and demand, not fundamentals.  Fundamentals and sentiment can influence supply and demand, but price is exclusively driven by supply and demand and all other factors are secondary.

Because the pessimism is fairly widespread, that view is already priced in.  People trade their views and if everyone is telling you how bad the world is, then they have already traded those opinions.   After they sell, these people are simply cheerleaders since they can no longer dump more supply on the market.  But here is the interesting thing, while the current bears are unable to further pressure prices, they can boost prices if they start buying back into the market.  And that is the heart of contrarian trading.  The crowd cannot push the market any further in their direction, but they can move markets if they change their mind and push the prices the other way    And this rally is doing just that.

TRADING OPPORTUNITIES

Don’t expect the market to go straight up and their will be some turbulence, but we should hold above the 1420 going forward.  If there is material a violation of 1420 that likely means the rally is fizzling.  But a test of 1420 and modest penetration will just be part of digesting these new gains.  Today’s pop is largely driven by shorts getting blow out of the water and their frenzied buying will climax soon and we should expect a little retrenchment.

Stocks rallied on encouraging words out of Washington on progress toward averting the Fiscal Cliff.  Maybe they will actually get something done before the deadline, but you have to wonder if this is a buy-the-rumor, sell-the-news setup forming.  But either way I expect this rally will continue into next year as the economy continues growing slowly and headline events turn out better than trader’s worst fears.

INDIVIDUAL STOCKS

AAPL popped along with the broad market today.  It is getting late in the game for AAPL to announce a special dividend, so anyone hoping for that should adjust their expectations accordingly.  Today AAPL’s price-action is mirroring that of the indexes.  That is progress as the stock is weaning the emotion out of its trade.  Emotion is not an on-off switch, so we can expect more wild swings, but this is part of getting back to more normal trade.

Stay safe

Dec 10

PM: A win for the bulls

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Markets traded mostly flat on light volume.  Neither sellers nor buyers showed up in force and while it looks like a draw, holding above the 50dma is a win for bulls.  We are within a couple of points of a post-election high and breaking above that would be a technical accomplishment.  Of course we need to wait for the breakout to stick because it could just as easily turn into a double top, dropping us back to the 200dma.

MARKET BEHAVIOR

The market is holding up well giving further hints owners are not ready to sell shares even with all the counterproductive rhetoric in Washington.  Another support day here and it will be time to take a serous look at going long this market.  The real test will come when we break above Dec 3rd’s high of 1424.  If we don’t selloff in a double top, it will be extremely constructive action and we have to take notice no matter what is going on in the headlines or how light the volume is.  Markets rally in the face of pessimism and that could be what is happening here.  All the pessimists already sold to new holders who are comfortable sitting through the Fiscal Cliff volatility.  This attitude creates a self-defeating prophecy where the holders willingness to ride out volatility actually eliminates the expected volatility.   If everyone is holding, supply dries up and the market heads higher.

TRADING OPPORTUNITIES

Another close above the 50dma and this market will show more strength than most give it credit for.  No doubt there is a lot of pessimism around the Fiscal Cliff, Europe, and China, but the only times I can recall when everything was great was just before a major bear market.  This fear of impending doom is also creating a self-defeating prophecy as it holds prices in check keeps the bear in his cage.

My recent bias was for a modest pullback after the recent 75 point rally, but I am reconsidering that near-term expectation.  There is probably a 50/50 chance we’ll avoid a selloff and instead use this sideways consolidation to reset the clock.  Headlines are always a risk in this market, but everyone is expecting us to go over the fiscal cliff so that is already largely priced in. We could see a couple of days of emotional selling, but nothing like what happened after the election.  There was far more hope of a Romney win than a Fiscal Cliff resolution, so that means any Fiscal Cliff selloff to be more modest.  Hope is the fuel of declines and right now hope is scarce.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL had another down day.  At this point the stock is so emotional it is largely a coin flip if it will be up or down.  It has completely disconnected from the broad market and is marching to the beat of its own drummer.  It has become a trading stock and is completely divorced any market or company fundamentals.  If it feels too risky to buy AAPL here, then it is probably a good buy for anyone willing to hold through more volatility.

Stay safe

Dec 10

AM: Supporting the 50dma

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:12 EDT

AM Update

MARKET BEHAVIOR

The markets rallied modestly in early trade.  There are not many sellers at this level and they are being matched with more than enough willing buyers to support prices.  We are also close to making a new post-election high 1424.  Volume is light, but that is normal for this time of the year.  For as much concern as there is over headlines, the price-action doesn’t reflect this sentiment.

MARKET SENTIMENT

Owners are willing to hold here and the swing-trade is not putting much of a dent in these higher levels.  The recent pullback to 1443 changed the makeup of stock owners as weak-kneed owners sold out to more long-term opportunists willing to buy at a discount and hold through some volatility.  The stability of these new owners is supporting prices so far and we haven’t seen the volatile ups-and-downs that followed past declines in 2010 and 2011 and this summer.

There has not been much progress in Fiscal Cliff talks, but the market seems to be rallying in anticipation of the inevitable deal.  This is pretty standard buy-the-rumor, sell-the-news kind of stuff.  Given the recent rally in the face of stubborn posturing by both sides, it seems the market is okay with us heading off the cliff for a short amount of time.  But even if the majority of smart-money is expecting it, the actual event could spook retail investors and they start selling by the fistful because of media hype.  This could create another profit opportunity like we saw following the election.

TRADING OPPORTUNITIES

Holding above the 50dma is encouraging, but we need to maintain this level for another day to prove there is real buying behind this move and it isn’t just short-term traders propping us up.  Breaking 1424 without selling off will be a strong indication current owners are perfectly content holding and that lack of supply will support of prices.

On the other side, breaking under the 50dma could trigger a wave of selling and that could shake the confidence of many content owners.  Nothing undermines resolve like red splashed across a trading screen.

AAPL daily @ 1:12 EST

INDIVIDUAL STOCKS

AAPL is showing its divergence from the rest of the market with it down while the broad market is higher.  It is now trading in a world of its own as everyone is trying to guess the next move.  This stock has completely separated from the fundamentals and is just a dice game at this point.  Everyone is in the markets for their own reasons, some want to make money and support their families with others are looking for a gambling-like thrill.  All the gamblers are flocking to AAPL and if that is your thing, there is no better place to be.

The supportive thing for the market is while AAPL carried the market on it’s back in the early part of this year, the collapse of AAPL has not weighted on the broader markets as much as expected.  At the time it seems to be a single stock story that is not spreading.

Stay safe

Dec 09

LA: Look for 50dma support

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Look Ahead

Here is what we can look forward to this week and strategies to trade it.

MARKET BEHAVIOR

The market regained the 50dma late Friday.  Finding new buyers to support prices above the 50dma will be a key component of continuing the current rally.  We are in the middle of the holiday lul and should expect volume to continue slacking off.  Lower volume means more volatility since it is easier for smaller traders to move the market, so expect head-fakes to continue.

MARKET SENTIMENT

The 50dma and 200dma are a key psychological levels for no other reason than so many people follow them.  Congestion around a price level creates more powerful support and resistance because this is where a lot traders actually bought and sold shares.  Emotions of fear and regret will cluster here because this is the point where many traders accounts will move between profit and loss.  Moving averages and round numbers make for noteworthy mile markers but don’t generate the same levels of pain and pleasure for traders who didn’t enter or exit trades at these levels    But the secondary indicators can affect the market’s mood and influence exceptions about what lies ahead.  In many ways these secondary technical levels are self-fulfilling prophecies.

A lot of traders are going to watch how we trade around the 50dma.  If we hold above it, they will buy the market.  If we fall under it they will sell and short.  And if that is what people are going to do, then we want to get out in front of this so we profit from the crowds buying and selling.  We don’t want to be the first one on the bandwagon, but we want to jump on before it is obvious to everyone else.

The market is currently ignoring the Fiscal Cliff debate and is not showing concern about the growing political deadlock.  Both Republican and Democratic leadership have thrown out ultimatums  and I wouldn’t expect either side to back down any time soon.  And the market knows this too, but it doesn’t seem concerned.  While this might be perplexing to the fundamental trader, we trade the market, not the news.

The thing we have to decide is if traders are buying for non-fundamental reasons here and that is creating this support here.  Are shorts buying this market because they cannot stomach further losses?  Are bandwagon traders buying because everyone else is?  If either of those traders are leading the charge higher, we will head lower quickly after their limited buying power dries up.  But if big money vale investors are attracted to these prices, then we will likely continue higher.

TRADING OPPORTUNITIES

The big difference between short-squeezes and momentum traders and value investors is the size of their trading accounts.  Short-term traders drive a lot of the daily volatility we see, but only the large mutual funds can sustain major market moves.  And so the most obvious way to tell who is leading this market is to wait a few days.  If big money is in charge, we’ll hold these levels going forward.  But if the short-term traders are propping up the market without the support of larger traders, this rebound will fizzle and collapse under its own weight.

If the market choses to ignore the Fiscal Cliff and thinks a pullback to 1400 is the only rest it needs, we have to respect that because the market is larger than we are.  It isn’t about what the market should do, but what the market does that puts profits in our accounts.

AAPL weekly at end of week

INDIVIDUAL STOCKS

How can we not talk about AAPL?  Not only is it one of the most widely held stocks, but it also makes up the largest portion of the indexes.  AAPL’s $50 decline wiped out more market cap than most of the companies in the S&P500.

The first thing we need to recognize that AAPL the stock is a lot different from Apple Inc.  Apple Inc. is one of the most profitable companies in the world and growing like gangbusters.  There is nothing wrong with Apple Inc., but AAPL the stock on the other hand has run into significant headwinds.  Call it unrealistic expectations or over-owned,  but whatever it is, the stock is off 25% from its $700 high just a couple of months ago.  Is this stock done selling off?  Is it headed to $400?  Honestly I have no idea.  Has sentiment peaked, or is this just a shakeout?  I think AAPL is getting hit by all these people trading for tax reasons and the stock might liven up closer to the new year when this artificial pressure goes away.  But there are no guarantees because emotional trades go further and longer than most expect.  And lets be honest, at this point AAPL has turned into an emotional trade because it what everyone is talking about.  If you are a gambler, try to pick a bottom.  But if you are in this to make money, wait for the stock to find a bottom before buying in.  Most often we will see a couple false bottoms before the real rebound starts.  One false bottom down, one more to go.

Stay safe.

Dec 08

WR: Recovered early losses

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Weekly Review

It is important to periodically take a step back and look at the bigger picture because too often the daily noise can be confusing and misleading.  That is the intent of these weekly reviews.

MARKET BEHAVIOR

The market sold off early in the week as Monday and Tuesday finished in the red, but the market rebounded Wednesday, recovering all of those losses.  Interestingly enough, we opened the week by gapping above the 50dma, couldn’t hold that level and traded down to 1398 before bouncing back, ending the week above the 50dma.  Wednesday was the low point in the week and had the highest daily volume in quite some time.  Was this the capitulation point of a modest pullback?    Certainly could be looked at that way.

MARKET SENTIMENT

How a week closes is similar in importance to how a day closes.  Often big money makes their trades later in the week after they had a chance to evaluate market conditions and new fundamental data.  Pros throw their weight around near the end of week and it is important to keep tabs on what they are up to because they have all the money.

The most bullish thing from last week is buyers were willing buy Wednesday’s dip under 1400 and kept pushing the market all the way back above the 50dma.  On the other side we should be asking if this was the last short-squeeze before correcting lower.

The single the most challenging aspects of trading the market is both sides always have extremely compelling arguments for their positions.  The market price is the exact balance point between these two opposing viewpoints and you end up with exactly half the money on each side of the trade.  One side is buying because they think it will go higher, the other side is selling because they think it is time to get out before prices decline.  (there are other reasons to sell, but lets keep this simple)  To be successful, we need to spot group think and exploit opportunities where the crowd is getting it wrong.  For the near-term trade that is hard to do here because it seems both sides are equally matched.  A bad headline could trigger an emotional selloff, or the pervasive pessimism could continue fueling a rally that discounts every piece of bad news thrown at it.

TRADING OPPORTUNITIES

Right now it is hard to get ahead of this market because there is no obvious group-think skewing the crowd one way or the other.  From here the best play is waiting for the market to reveal its hand and then jumping along for the ride.  Holding above the 50dma for a couple more days makes this a buyable rally.  Dipping under the 50dma shows buyers are unwilling to support these prices.

And of course lets remember we don’t always have to be in the markets.  Don’t trade just for the sake of trading.  If you don’t have an edge on the market, take some time off and come back when there are better profit opportunities.  Volume for the rest of the year will trend lower and volatility will pick up as smaller players will be able to push the market around.  That could be enough of an excuse to take a break and come back in January with a rested mind.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL had its worst week in a years.  Resistance at the 200dma turned the stock back down and most of the traders who piled in on the recent rebound from $500 are now under water.  Funny how the market manages to turn the easy trade into the wrong trade.  There are a dozen psychological and economic reasons this happens, but it boils down to if it is easy to buy, it is probably a bad idea.  AAPL’s bounce off $500 sucked in a lot of people and this second pullback barbecued them.  AAPL is quickly going from a buy-and-hold stock to one that should be sold any time you have a profit because two days later it will reverse hard and you’ll be in the red.  The shocking thing is how volatile such a large company is when there is no real news to speak of.  There is no scandal at the top, no PR disaster, no major accident, strike, or disruption, AAPL is making these dramatic swings just because.  You’ll get a dozen reasons out of the financial press and analysts, but the truth is the stock was over-owned and ran out of buyers.  Without buyers, fundamentals don’t matter.

Sunday we’ll look forward to what we might happen next week.

Stay safe