Monthly Archives: January 2013

PM: Bears can’t push this market down

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

The S&P500 finished lower for the day, but more importantly was able to hold recent support at 1455.  As much as bears want to break this market, they were unable exploit today’s weakness and failed to make much of a dent.  The lack of follow on selling after early weakness is bullish and supportive of these levels.

MARKET SENTIMENT

With as many reasons for the market to selloff, it is holding solid.  Some think we came too-far, too-fast, others are pointing to the Debt Ceiling, and then there are things that fell off the front page like Europe and the economy.  But the market is oblivious to these concerns and rallying in spite of the pessimism.

What is confusing fundamentalists and technicians actually makes a lot of sense when you look at how people are positioned and the effect this has on supply and demand.  All of the negative headlines are recycled stories from months, even years ago.  The market responds to new and unexpected news, not the things everyone including your mother in-law is talking about.

The old news is already priced in  because those that were going to buy or sell based on it have already done so.  Markets respond to new buying and selling, not stuff that happened weeks or months ago.  People can change their mind regarding certain risk factors and that will move markets, but if attitudes stay the same, then there is no new trade and thus no price move. Until people start talking about the Debt Ceiling and Euro Contagion as bullish catalysts, we can assume attitudes toward these situations remains pessimistic and priced in.

Back to today’s trade, everyone knows we are too high and anyone with a fear of heights already sold.  Same goes for the early pessimists fearing the Debt Ceiling.  All the bears have already sold, yet here we are just a fraction off a 52-week high.  That doesn’t bode well for bears because not only do they not have the strength to push the market lower, paradoxically the large number of bears is creating the fuel for the next rally leg.  When pessimists are out of the market, they cannot further pressure prices, but they can buy back in and that pushes prices higher.

TRADING OPPORTUNITIES

Expected Outcome:
Today’s price-action was bullish and supports a continuation higher.  The market had every opportunity to crumble, but it held up because bears are not in a position to pressure the market.  After they sold last week, the only thing they can do is watch (or buy back in and push prices higher).

I’m becoming more bullish on this market and there might be a nice upside trade.  But at the same time there is merit to the too-high, too-fast crowd’s argument, so any upside profits should be locked in fairly quickly.

Alternate Outcome:
Markets can breakdown over the littlest things and that can certainly happen here.  While most of the selling has already taken place, that is only half of what can make a market sink.  Lack of demand can also pressure prices.  And if fear grips the market, formerly bullish holders can turn into sellers.  While the high probability trade is to the upside, the downside risk is still very real and we need to be prepared to deal with it if the lower probability events becomes a reality.

INDIVIDUAL STOCKS

AAPL found support after early weakness.  While the stock finished in the red for the day, today’s price action is supportive and shouldn’t spook and holders out of the stock.  If the broad market makes a move higher, AAPL will follow.

Stay safe

AM: Testing the recent consolidation

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:31 EST

AM Update

MARKET BEHAVIOR

Stocks are selling off this morning, but still within the recent consolidation.  Holding support for a 3rd day in a row would be bullish and signal a continuation of the rally because breakdowns from significantly overbought levels happen fairly quick.  We need a material breach of the 1450-1455 level before confirming a breakdown.  We are close, but it will all depend on how the market closes this afternoon.  Failing to hold support could send us back to the 50dma, but a bounce could signal another round of short-squeezing.

MARKET SENTIMENT

A lot of people want to see this market selloff after last week’s sharp rally, the question is if the market wants to cooperate.  Right now it feels a little too easy to short this weakness and that doesn’t bode well for bears.  The best trades are often the hardest ones to make and right now buying seems to be the hardest thing to do.

Often the best way to determine what the market will do next is figure out what movement will create the greatest pain for the largest number of traders.  A breakout from here would please the bulls.  A breakdown would please the bears.  That’s too easy.  How about a whipsaw to zing both sides and make everyone look stupid?  A breakout above resistance will squeeze out all the shorts and tempt in the breakout buyers, but then reverse lower from the new highs to make everyone look stupid.  That is why I think the high probability trade is one more short squeeze before selling off.

MARKET OPPORTUNITIES

Expected Outcome:
In spite of today’s weakness, we are still holding the recent support area and this is bullish for higher prices.  We are so close to new highs that the market will invariably be drawn to breaking them even if the next move is lower.  Look for one more leg higher in the near-term, but then watch out for the pullback.  This setup is hard to trade and most would be better off waiting for a higher probability trade and just sitting this one out.  Longer-viewed traders can continue holding, just expect some near-term volatility and don’t let that shake your confidence.  Headlines are about to get ugly again over the Debt Ceiling, but this creates buying opportunities and is not a reason to sell.

Alternate Outcome:
The market can selloff for any reason and doesn’t always do what it is supposed to do.  A material break of 1450 would signal a lack of willingness form buyers to step in and we could see the slide everyone is expecting due to a lack of demand.  But don’t get short the market until we beak support and take profits quickly because this is just a counter-trend trade, not a material selloff.

AAPL daily @ 1:31 EST

INDIVIDUAL STOCKS

AAPL saw early weakness, but bounced back above $520 by late morning.  It is encouraging to see the stock find some footing after the last couple days of selling.  It looks like the stock wants to chop sideways until we get better clarity from the earnings report in a couple of weeks.  So far the stock has been a safe buy near the $500 level, but that won’t help if earnings disappoint.  I think the stock has seen a lot of selling ahead of this earnings report and most of the pessimism is already priced in, meaning most of the downside risk has already been realized.  On the other side, a positive report will launch the stock higher.  Limited risk on the downside, explosive upside potential, sounds like a great trade.   But there are no guarantees in the market so always practice prudent risk management.

Stay safe

WR & LA: Does this rally have legs?

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Weekly Review & Look Ahead

MARKET BEHAVIOR

The S&P500 was up decisively last week with a 4.5% gain.  Weekly volume was less than average, but the holiday shortened week played a big role in that.   The market is up an impressive 120-points since the post-election bottom in mid-November.  For as bad as the headlines and sentiment have been, we are a fraction from new 52-week highs.  Just another example of the contrarian trade being the right trade.

MARKET SENTIMENT

Obviously the big catalyst was the last-second Fiscal Cliff compromise, but the size of the rally had less to do with the news and primarily driven by the imbalance in trader sentiment and positioning.  Most traders were expecting us to fall off the cliff, sold ahead of time to avoid the near-certain collapse, and the market exploded higher when things turned out less bad than feared.  This was a beautiful asymmetrical trade.  Most of the selling occurring ahead of time, limiting the downside risk, and the oversold condition created a coiled spring to the upside.  A savvy trader prints money with setups like that.

The actual Fiscal Cliff compromise is nothing to get excited about and we will be back on the brink in a matter of weeks as the Federal Govt hits the Debt Ceiling.  Fundamentals are just as bad today as they were last week, but we find ourselves 5% higher because shorts were forced to climb over each other to cover their positions.  Normally this lays the foundation for a pullback, but after the market’s most recent rally, skeptics are a dime a dozen and it is these remaining skeptics that made the market drift higher in the later half of the week.

TRADING OPPORTUNITIES

Expected Outcome:
Overbought markets correct fairly quickly.  We saw two support days on Thursday and Friday, suggesting we are not overbought and have more upside before the inevitable correction.

Monday’s price action will go a long way to let us know what direction this market wants to go.  A breakdown signals a retest of the 50dma.  Anything short of a breakdown shows this market is not ready to selloff and another short-squeeze is on the menu.

Shorting the market here is a bad idea and instead wait for the breakdown before jumping in front of this rally.  You’ll be a little late, but you will reduce your risk exposure dramatically.  Further, a short here is a counter-trend trade, so don’t get greedy and take profits early and often.

For longs, we are closer to the end of this rally than the start and it is too late to chase this winner.  For those on the sidelines, the best trade is to wait for the next opportunity.  Any swing traders start looking for opportunities to lock in profits wait for the next trade.

Alternate Outcome:
The market doesn’t always do what it is supposed to and if we don’t see one of our expected scenarios play out, step aside and wait for the next opportunity.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL finished up for the week, but well off the weekly highs as the stock sold off on market share concerns.  The stock is still comfortably above the $500 level, but technical will become meaningless after earnings are announced this month.

A couple of months ago everyone was bullish on AAPL, but the recent pullback brought out the cynics and they’ve become more vocal with every leg lower.  As popular as AAPL is, it has created a lot of passion on both sides and the stock will most likely move strongly one way or the other after earnings are announced.  One side will be decisively victorious and the other will run home with their tail between their legs.

With the lowered expectations, the higher probability trade is to the upside.  Of course there are no guarantees and that is where prudent risk management is essential.  No matter how good a setup looks, always trade so you can live to fight another day.

ET CETERA

I changed web hosts over the weekend and that caused some downtime.  I’m doing my best to ensure a smooth transition, but if you notice something not working, please let me know about it through the contact form above.  Hopefully it will be a seamless transition for everyone.

Stay safe

PM: 52-week closing high

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

The S&P500 closed up 0.5%, setting a new 52-week closing high and is just half of a percent from the absolute high.  Volume was average, but less than the previous two days.  The market is 55-points above the 50dma and just over the 1460 level that last Fall’s rally could not hold.

MARKET SENTIMENT

A lot of people are waiting for the market to pullback because everyone knows a two-day, 65-point rally is too-far, too-fast, but in the markets, the obvious trade rarely works out.  Most of the doubters have already locked in profits and/or sold short, yet we are still inching higher.

If most of the preemptive selling has taken place, supply is on the verge of drying up and we could see a new 52-week high next week.  That would send a lot of shorts running for cover and tempt breakout buyers to jump on board.  As the market continues its march higher, it will suck in the last undecided watching from the sidelines, but these last stragglers will signal the top as this time we run out of buyers and demand dries up.

TRADING OPPORTUNITIES

Expected Outcome:
Much like everyone else I expect a pullback, but I also see higher prices before that pullback happens.  Breaking 1475 would mark a new high and send shorts running for cover.  That last short-squeeze could be the top, or it could kickoff the next rally leg, it all depends on what other market participants think and how they are positioned as we make that new high.  If sentiment turns positive and breakout volume is huge, that would be a signal to fade the move.  But if  volume remains modest and most traders resist the temptation to buy, then the rally will continue.

Alternative Outcome:
This thing has to breakdown at some point and it could do that out of the gate Monday morning.  We need to close around 1460 to show support for the recent rally and if the market cannot do that, then the pullback will happen without a final short-squeeze.  No one knows for certain what will happen next and that is why we need to plan for multiple scenarios so we are better prepared for whatever the market throws at us.  It seems more likely the market will head higher, but that is no guarantee.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL diverged from the broad market and lost 2.8% on concerns over market share.  The stock couldn’t find a bid and finished near the lows of the day.  No doubt this selloff sent a chill of fear and regret through many of the chasers who bought near $550.  Some of them probably even sold impulsively today as they feared the headlines and a bigger selloff.  But if a person bought in the low $500s, then this pullback is no big deal.  A big part of success in the markets is buying right.  If you can buy right, everything else becomes a lot easier.

Stay safe

AM: 20,000 views!!!

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:14 EST

AM Update

This morning I logged my twenty-thousandth view and I want to thank everyone for their enthusiasm and positive feedback over the last few months.  I am glad so many people find value in my analysis and I am always happy to share.  But the real benefit for me is these posts force me to be be thoughtful, analytical, and rational in my approach to the market and it has taken my personal trading to the next level.  Most people with teaching experience know the best way to learn something is to teach it, and I want to thank everyone for being a willing audience and allowing both of us to grow through this experience.

MARKET BEHAVIOR

Stocks continue trading around the 1460 level.  Reversals from extreme overbought conditions tend to happen within a couple of days, so barring a breakdown this afternoon, the market is firming up around these new levels and setting the stage for a continuation.  Monday will be the real test of this level and if we hold, expect higher prices, not lower.

MARKET SENTIMENT

Predicting the market is easy, the hard part is correctly timing those predictions.  Markets always pullback, but all the money is made in figuring out when they will pullback. There are a lot of traders afraid of this market and calling for an imminent pullback,  but we still haven’t seen evidence of that happening.  The longer we hold up in the face of this bearish sentiment, the more bullish it is for stocks.

TRADING OPPORTUNITIES

Expected Outcome:
The longer we hold at these levels, the more supportive it is for a continuation.  Maybe that is just one last short-squeeze, or maybe it is another leg higher.  But either way, this is becoming a dangerous place to be short the market.  We will eventually pullback, but the longer we hold at 1460, the less likely an imminent pullback from this level becomes.

Alternate Outcome
Rock-steady value buyers who purchased shares during the height of Fiscal Cliff pessimism are locking in profits and selling to more emotional traders who chase the market.  This is building a fragile foundation of owners who will panic at the first signs of weakness and negative news.  We might not yet have a critical mass of flighty owners in the markets yet, but their numbers are growing by the days and we shouldn’t expect the rock solid support we found near 1400.

AAPL daily @ 1:14 EST

INDIVIDUAL STOCKS

AAPL is plunging 2% over alleged market share concerns.  But in reality it is just some selling after a big run.  The stock closed the gap and is hopefully building a foundation to continue higher.  As we discussed earlier, AAPL is becoming a trading stock and as expected it hit some resistance at its 50dma.  But so far nothing is wrong with the stock and the only people who have to worry are those that chased it up at $550.  This further reinforces the approach of buying when you don’t want to buy and selling when you don’t want to sell.  It was tough to buy when the stock retreated to $500 and it was tough to let go after it surged to $550.

Stay safe

PM: Rest day

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Stocks closed modestly lower on elevated volume, snapping a monster two-day win streak.  We are resting just below the 1460 level that proved too difficult to break through last Fall.  Will this time be different?

MARKET SENTIMENT

Elevated volume today shows a lot of people were selling the 65-point rally, but declines were modest as new buyers were just as willing to step in at these higher levels.  Is this smart money selling to dumb money?

We squeezed past the Fiscal Cliff, but that wasn’t convincing enough to win over the pessimists who are now fretting about something else.  Attitudes and expectations about the future change slowly and one event doesn’t move the needle much.  The biggest difference between this week and last is the market is 65-points higher.   Rock solid value buyers bought the dip and are now selling to flighty momentum chasers.  This shift in ownership will add to coming volatility.  What was a coiled spring at 1400 is now mostly unsprung.  Anyone buying up here is chasing the market and chances are it will end badly.  We might see a little more upside just because too many people are expecting a pullback, but more often than not these big gains see a step-back before resuming higher.

TRADING OPPORTUNITIES

Expected Outcome
Longer-term holders should sit tight, just expect some near-term volatility as we digest these new gains and the market’s attention shifts to the next impending crisis.  Don’t let this noise shake your resolve.  Day-traders look for one last short-squeeze and hop on.  And swing-traders keep your powder dry until we see a convincing point to jump in.  The reason to remain cautions is we might not see the last short-squeeze, so the odds are not very favorable for swing-trading it.

Over the near-term I expect a pullback to 1425 before value investors feel like they are getting their money’s worth and willing to buy this market.   But expect headlines shouting doom and gloom when we do pullback.  It is never easy to buy the dip and it won’t be any different this time.

Alternate Outcome
There is a good chance my calls for a pullback are premature since this is such a widely held opinion.  This is why I expect one last pop before this rally fizzles, but I could be underestimating the size of the imbalance remaining in the market and the rally could go further and longer than just a short-squeeze.  But if this is the case, we’ll know soon enough when the market isn’t breaking down and we have time to adjust our positions.

AAPL daily at end of day

INDIVIDUAL STOCKS

Broad market weakness weighted heavily on AAPL today as it declined 1.3%.  The silver lining is the light volume shows not many people were selling and it was mor a lack of buying after a big run that lead to the weakness.  It would be perfectly reasonable and healthy for the stock to close the gap, so don’t let additional weakness spook you.  AAPL’s quarterly earnings are coming up in a couple of weeks and no doubt that will be the catalyst for the next move.  The gap between the bull’s opinions and that of the bears is just too wide for the stock to remain unchanged after earnings.  Between the lowered expectations and AAPL’s tendency to surprise the market, we could see a pop.  With as much selling as the stock has seen in recent months, there isn’t a lot of downside left in the name.  Strong upside potential with limited downside seem like a good setup for a trade.  There are no guarantees in the markets, but this one deserves a look.

Stay safe

AM: Modest gains

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:32 EST

AM Update

MARKET BEHAVIOR

Stocks are up modestly after yesterday’s monster rally.  The market is digesting that 65-point gain and neither side is making an aggressive move this morning.  We are just a hair above the 1460 level that was resistance for last Fall’s rally.  A move above 1465 could trigger a wave of breakout buying and another round of short-covering.

MARKET SENTIMENT

Looking back at the charts, there are many examples of large two-day moves, but the one thing to note is most of them gave back the second day’s gain before resuming the trend higher; the proverbial two-steps forward, one-step back.  If this happens again, we should expect to fill the gap and retest ~1425 before continuing higher.

Markets decline for one of two reasons, aggressive selling or lack of buying.  As far as this market came, many buyers are reluctant to buy up here and are waiting for a pullback.  This lack of demand will pressure prices.  Of course this is a double-edged sword because many of these reluctant buyers can also fuel a push higher.  If the market doesn’t pullback like expected, these reluctant buyers will be forced to chase prices even higher or risk being left behind.  And the third outcome is a little bit of both, continue higher to suck the last of the chasers before pulling back.

TRADING OPPORTUNITIES

Expected Outcome:
Yesterday’s gap up wasn’t as painful for bears as a steady rally that demoralizes them by a thousand paper-cuts   With a gap, there is no watching in dread as the market marches relentlessly against their position, eating their account minute by minute until they can’t stand the pain any longer.  Shorts woke up yesterday and were already so far under water the only thing to do is hope and pray for a pullback.  And the flat trade since the gap allowed many shorts to continue hanging on.  Look for a pullback to 1425, but expect another short-squeeze higher first.

Alternate Outcome:
With everyone calling for a pullback, it might not happen.  This bull could continue rallying on a steady diet of bears and pessimists.  Obviously the pace of the rally cannot continue and we will need to digest some of these gains, but if the market holds up for several days without turning lower, expect the market to continue higher.

INDIVIDUAL STOCKS

AAPL is pulling back modestly this morning after the big gains over the last two trading days.  This is constructive and supportive of the recent rally and $500 base.  It won’t be an easy hold, but patience will be rewarded in coming months as AAPL regains the 200dma and pushes toward $650.

Stay safe

PM: Fiscal Cliff rally

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Stocks had the best single-day gain in over a year and we have to go back much further to find a comparable two-day move.  Volume was the highest in a few weeks, as we easily cleared the December highs and are less than 1% off a 52-week high.

MARKET SENTIMENT

Clearly bears fueled this surge because fundamentals were not a factor in this move.  The world is not any better today than it was last week, it just isn’t as bad as some were predicting.  WIth the Fiscal Cliff is behind us, we can start obsessing about the next big catastrophe and right now the leading contender is the Debt Ceiling.  Who knows, maybe at some point earnings will matter again, but probably not in the immediate future.

As we discussed last week, the asymmetric trade was to the upside, but even I didn’t expect something this strong.  This is what happens when too many people think alike and position their portfolio the same way.  Everyone expected the market to crash as we plunged off the Fiscal Cliff and they traded this opinion ahead of time.  But the nature of supply and demand created a unique opportunity with limited downside and a huge 65-point two-day rally as the upside.  The news doesn’t matter nearly as much as understanding how other traders are positioned.  If all the sellers sold last week in anticipation of the Fiscal Cliff selloff, supply dries up and the market heads higher.  Add in a little good news and the market explodes higher.  But remember, the market is a spring, the 65-point rally pushed things pretty far and there is not a lot of upside left in this spring.  Much of the buying has already happened and it will take a new catalysts to bring in a fresh crop of enthusiastic buyers.

TRADING OPPORTUNITIES

Expected Outcome:
The market finished at the highs as it continued squeezing bears.  This might continue for a couple more days, but it will be hard for serious value investors to buy a 65-point, two-day rally and they will wait for the pullback.  As soon as bears are done covering their shorts, demand will slack off and there will be a modest pullback.  Be careful of chasing the rally at this point since most of the move is already behind us and anyone buying here is late to the party.

Alternate Outcome:
The market could continue driving higher as we set new 52-week highs.  Some bears are desperately holding on, praying for a pullback to let them get back some of the money they lost.  As long as these guys are hanging on, we can keep heading higher as they continue getting squeezed out.  But holding out for top dollar is a fools game and traders should be willing to lock in profits early and start looking for the next high-probability trade.

INDIVIDUAL STOCKS

AAPL joined the market’s rally, but it simply matched the market’s gain and didn’t have a big beta move.  But any AAPL bull should appreciate this restraint because the faster they rise, the harder they fall.  A measured rally is a sustainable rally.  AAPL is approaching the 50dma and this could provide some upside resistance that will eventually turn into support.

Stay safe

AM: We’re saved!!!

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:03 EST

AM Update

MARKET BEHAVIOR

Two percent gap-up at the open as we averted the Fiscal Cliff.  Huge short-squeeze as the last bears were sent for cover.  We easily eclipsed December’s high and continue putting in higher-highs and higher-lows.  It goes without saying this is a bad time to be a bear as we covered 60-points in two-days and 120 in two-months.  Regardless of headlines, the trend is higher.

MARKET SENTIMENT

Lets celebrate our politicians saving us from the very disaster they created!  Cynicism aside, the market is popping on avoiding some arbitrary and artificially created event.  If we didn’t have a “Fiscal Cliff” to be saved from and instead politicians sprang a surprise tax-hike and spending cuts on the markets, they would have tanked big-time.  This shows the news doesn’t matter as the exact same change spun two different ways creates dramatically different results.  Successful traders don’t trade the news, but the people’s reaction to the news.  This isn’t a game of fundamentals or technicals, but human psychology.

In two-days the bipolar market rallied 60 points from certain Fiscal Cliff apocalypse to unbridled euphoria.  But as we’ve seen, extremes in sentiment rarely last.  By the time the Fiscal Cliff confetti hits the ground, the market will already be fearing something new.   Right now the new rallying cry of the pessimists is the Debt Ceiling.  And to be honest, default is a far bigger deal than some politically conceived Fiscal Cliff.  But expect the halo and fuzzy feeling from the Fiscal Cliff compromise to continue for a bit as the market expect this collaboration in Washington to continue.  Only after we see a return to stubbornness and partisanship will it start weighing on equity prices.

TRADING OPPORTUNITIES

Expected Outcome:
A lot of the rally was driven by short-covering and we should expect the pace to slow, even pullback, as the market forgets about the Fiscal Cliff and focuses on what comes next.  The recently passed bill did not address the Debt Ceiling and we should expect this to weigh on investor’s minds in coming days and weeks.

This morning’s short-squeeze is a good time for swing-traders to lock-in profits.  We might see some additional short-squeezing over the next day or two, but it is a fools folly to hold out for top dollar.  For others looking at new buys, it is a little late in the game to chase the rally and we could see some selling of the news in coming days.  For longer-term traders, I remain bullish but expect some near-term volatility, wait for those dips to initiate new positions.

Alternate Outcome:
It is possible stocks will continue racing higher in a repeat of 2012’s record-setting first-quarter rally, but if this is the case, there will be plenty of time to jump back on the bandwagon since market rallies take time.

AAPL daily at 2:04 EST

INDIVIDUAL STOCKS

AAPL opened at $555 this morning, up 10% from its recent lows.  People are jumping all over each other to buy a stock that just a couple of days ago was left for dead.  Swing-traders should look to lock-in profits as the stock could run into overhead resistance at the 50dmda.  Wait for the inevitable dip to buy back in.  For longer-term investors, hopefully you bought earlier and have a nice profit cushion to ride out near-term volatility.  If you missed the rally, try to resist the temptation to chase and wait to buy near-term weakness.  And hopefully any shorts learned their lesson about being greedy and holding too long or chasing the obvious short too late in the game.

Stay safe