Monthly Archives: February 2013

Feb 28

PM: Sequester time

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Stocks held yesterday’s big gains, but late selling on sequester worries is giving traders second thoughts.

MARKET BEHAVIOR

Stocks traded higher through the day but fell apart in the last two-hours, finishing near flat.

MARKET SENTIMENT

The market cracked after the Senate rejected two sequester proposals, but as worrisome as the last hour looked, the market still finished near Wednesday’s highs.  No doubt selling will continue Friday as the automatic sequester cuts kick in, but most of the weak holders already bailed in the recent dip, meaning a large part of that nervous selling already happened.  Everyone knows sequester is coming and most have so little confidence in our politicians that a breakdown in negotiations will surprise few.

Sequester gridlock could weaken the market, but it will come from a lack of willing buyers, not a flood of sellers.  Anyone who can’t stomach volatility sold earlier this week.  Remaining holders are more calm and confident and won’t stampede for the exits at the first signs of trouble.

Sequester cuts or not, the economy will continue improving no matter what happens and the stock market will quickly move past this drama.  Obviously cuts in govt spending won’t help the employment situation and it will delay the recovery, but we will get past it and any dip will be another buying opportunity.  If a financial meltdown, 10% unemployment, and European Contagion couldn’t kill this bull, what are the chances some govt spending cuts will?

TRADING OPPORTUNITIES

Expected Outcome:
It will be interesting to see how weak the market is on Friday if a deal fails to materialize.  Will it be a 15-point dip or a 50-point plunge?  My money is on the former, but that is what stop-losses are for.  Most of the paranoid are already out of the market so I don’t expect a mad rush for the exits.  Between unemployment, money printing, deficit spending, stimulus, Obama’s reelection, the Fiscal Cliff, Debt Ceiling, and now the Sequester, anyone who thinks these things are a big deal is not in this market and their opinion no longer pressures market prices.

If sellers keep their cool, the future of this market rests in buyers’ hands.  Look for initial reluctance, but that hesitation will fade once the world holds together and life goes on.  The key level of support is 1500 and the rally remains intact as long as we hold this level. There are just a few weeks left in this quarter and the pressure will be on for underperforming money managers to catch this market.  Expect their buying to fuel the next leg of this rally.

Alternate Outcome:
If the Sequester negotiations get particularly nasty and entrenched, this could lead to more serious govt funding issues down the road (debt ceiling).  As we saw last week, the herd can panic on seemingly benign news from halfway around the world.  A sequester impasse could trigger another stampede for the exits if everyone starts selling just because everyone else is selling.  I don’t expect this, but we have to be prepared and stick with our stop-losses just incase.

INDIVIDUAL STOCKS

AAPL is barely holding $440 and broad market weakness will send it to a new low.  The stock would have bounced already if it was unsustainably over-sold, meaning it’s not oversold yet.   Stocks often bottom in a ‘V’ and if AAPL is going to do that, it needs to form the left side of the ‘V’.  Most likely there is one last flush lower before this stock will finally demoralize the hopeful and find a bottom.  Any long-term holder needs to be mentally prepared to sit through this kind of volatility.  The worst thing will be riding this stock all the way down, only to bail out just before it finally rebounds.

Stay safe

Feb 28

AM: Digesting gains

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:12 EST

S&P500 daily at 1:12 EST

AM Update

MARKET BEHAVIOR

A quiet and uneventful morning after seven consecutive sessions of heart-pounding volatility.

MARKET SENTIMENT

Neither buyers nor sellers showed up in force and the market is digesting recent gains.  The last week-and-a-half humiliated bulls and bears alike as it duped many into making impulsive and ill-timed trades.  At present everyone is too shell-shocked and hesitant to make a decisive move, but this calm is an important step in regaining composure.

When in doubt, stick with the trend.  The high-volume selling purged all complacency and much of the fat that accumulated since the start of the year.  Technically speaking, the dip under 1500 cleared the minefield of automatic stop-losses, making that area far less dangerous to the market.  But chances are we won’t test this area again since all the sellers under 1500 now need to figure out how to get back in and their buying will prop up any potential dips.

When the market marches ahead, those left behind hope for a pullback.  We had that pullback this week, but how many jumped on the opportunity to get in?  My guess is not many.  In fact many of the holders who were lucky enough to be in the market were spooked out by the dip under 1500.  Now both of these groups need to figure out how to get back in and their chasing is the fuel that will keep this market moving higher.

Buying is only half the equation and we also need to consider sellers.  Anyone who held through recent volatility is feeling pretty good about themselves right now.  Maybe they held because of discipline, or they failed to sell because they froze under pressure, but either way they are congratulating themselves for sticking it out.  This affirmation and positive reinforcement makes them holders less likely to sell the next dip.  Add to this to all the buyers looking to get in and we have a recipe for higher prices.  At least until we run out of buyers…….

TRADING OPPORTUNITIES

Expected Outcome:
We might see some weakness if sequester negotiations bog down, but most holders expect this and are growing immune to the gridlock in DC.  The more interesting thing will be watching the post-sequester trade.  Will the market spike on a deal?  Is the market already expecting the deal and will selloff on the news?  Can it do both?

An interesting trade would be a surge higher on compromise out of DC, but if the buying comes in too fast, it could build the head of the head-and-shoulders.  A one-way run up to  1550 or 1575 should be looked at with a healthy dose of skepticism.  On the other hand, modest, measured, and earned gains are sustainable and indicate there is more left in this rally.  The recent dip to the 50dma refreshed and renewed the rally meaning we might only be halfway through this move.

Alternate Outcome:
After the Fiscal Cliff and Debt Ceiling scares and last second compromises, the market might be looking past the sequester expecting a deal is all certain.  The risk is if politicians say enough is enough and refuse to compromise any further, using a govt shutdown to prove a point.  Its happened before and the uncertainty will roil the markets.  While certainly a possibility, our politicians care more about their reputation than doing the right thing.  Look for them to be politically expedient and leave the hard work for someone else down the road.

AAPL daily at 1:13 EST

AAPL daily at 1:13 EST

INDIVIDUAL STOCKS

AAPL is finding support around $445 and is resisting a selloff after an uninspiring investor day yesterday.    $450 has been near-term resistance.  Breaking above and holding this level would be supportive of a swing-trade higher.  The stock already missed the opportunity for a quick rebound and any long-term investors should expect a 12 to 18 month.  In the meantime there is still a lot of money to be made swing-trading or selling options.  Just because this isn’t a set-it-and-forget it trade anymore doesn’t mean we should stop paying attention to it.

Stay safe

Feb 27

PM: Game on

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The rally is back on after stocks decisively recaptured 1500 and closed above 1515.  But on one of the biggest days of the year AAPL was MIA as investors were underwhelmed by investor day.

MARKET BEHAVIOR

Stocks had a good day, recovering most of Monday’s plunge.  Volume was average, but lower than the recent down-days.

MARKET SENTIMENT

Amazing the difference a couple of days make.  Monday afternoon markets were collapsing and bulls were on the menu.  Today the rally is back on and bears are in the fryer.  This is a very impulsive market and anyone listening to his gut is getting torn to shreds.  There was a ton of money to be made, but it took a cool head and a plan, something in short supply when the herd is stampeding one way or another.

Bears took solace from today’s light-volume and warn of lack of conviction, but like anything in the markets, there are two ways to look at it.  Stocks move on supply and demand, nothing more, nothing less.  Within supply and demand, we have 4 constituents that move prices; aggressive buyers, aggressive sellers, reluctant buyers, and reluctant sellers.  Most people intuitively understand the first two where people yell “buy, buy, buy” or “sell, sell, sell”.  This excitability is exhibited during high-volume moves.  But the market also moves on low-volume too.  This is when holders are unwilling to part with their stock at present levels, or buyers are unwilling pay current prices.  Today’s low-volume rally showed unwillingness from holder to let go of their shares.  This reluctance to sell limited supply and resulting scarcity drove prices sharply higher.

The last few days of selling flushed out many weak holders and the buyers who stepped in acknowledged the risk and are more comfortable sitting through some volatility.  Because these new holders are less likely to get spooked out of their positions, their resolve takes out supply and puts a floor under the market.  This is exactly what happened Tuesday.  Today’s 20-point surge further reinforced this phenomena as holders were rewarded for sitting through the dip.  Combine these factors and we have a core group of holders that is far less likely to sell into future volatility.  The interesting thing is this reluctance to sell volatility actually eliminates volatility because supply no longer floods the market.

As we’ve been discussing for weeks now, this market is not going to fall apart on news.  We’ve seen quick dips on the Fiscal Cliff, negative GDP, and now turmoil in Europe, but every time it was a buying opportunity.  We have sequester around the corner, but this is widely telegraphed and while it won’t be pretty, no politician wants to go down with the ship and it will get taken care of.  Anything short of a complete breakdown will just be a sideshow and the market has already priced in some delay.

If this market won’t fall apart on bad news, what’s left?  Running out of buyers.  As more people buy this rally, there are fewer left to buy it.  Once everyone is on the rally bandwagon, we no longer have new people to keep pushing prices higher.  This week’s decisive rebound went a long way to convincing people that the only way to trade this market is from the long side.  And while they are right, they are also late.

TRADING OPPORTUNITIES

Expected Outcome:
Stick with what is working.  The market clearly wants to go higher and look for new highs in coming weeks.  Today’s 20-point rally was huge and a modest pullback to digest these gains should be expected.  But given the decisiveness of this rebound, a dip back under 1500 is a serious failure and most likely signals the end of the rally.

This morning’s break above 1500 was obviously a good entry point, but for those that missed it, it is harder to get in now the market has moved this far.  Look for a dip back to 1510 and use that as an entry point.  No matter where you got it, a stop-loss just under 1500 is a good idea.

The next question is how much further will this go.  Barring a meltdown, 1530 is all but a done deal and 1550 is highly likely.  New all-time highs at 1575 is also on the table, but we need to see the market move ahead sustainably.  If the prices race ahead without taking a break, that will signal exhaustion and the end of this rally as it sucks in the last of the available buyers.  But a more measured and deliberate rally that takes its time is more sustainable and could carry us as high as 1600.  We will revisit the price-action and sentiment at 1550 to determine if we should hang on or take profits.

Alternate Outcome:
The market is an equal opportunity humiliator, zinging both bulls and bears over recent days.  While bulls have the upper hand, this could be one last bull-trap before collapsing on sequester worries.  In markets like these, we have two options, staying on the sidelines, or picking sides.  I’m on the rally side, but recognize that I could be wrong and will use a stop-loss under 1500 to get me out.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL sold off on one of the strongest market days of the year when Cook failed to impress traders at investor day.  There were rumors of stock splits and hopes of giving money to shareholders, but the wishful left empty-handed.  From a sentiment point of view, it is interesting watching the stock respond so strongly to rumors.  A few weeks ago it rallied to $485 before Cook spoke at a conference.  Yesterday it rallied $10 in minutes on rumors of a 10 for 1 stock split.  This reeks of desperation as bulls grasp at straws and jump on any rumor that comes around.  This shows there is still too much hope left in this stock.  When all the faithful already own the company, who is left to buy?

Stay safe

Feb 27

AM: Humble pie

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:11 EST

S&P500 daily at 1:11 EST

AM Update

Bears are humiliated today as the break above 1510 sent shorts running for cover.  AAPL’s investor day is uninspiring and the stock is sagging as another catalyst came and went.

MARKET BEHAVIOR

Stocks broke above 1500 and continued past 1510 in morning trade.  Runaway selling on Monday gave way to binge buying.

MARKET SENTIMENT

Two-days ago the world was ending and now it is saved.  Try as they will, fundamentalists, technicians, and the financial press cannot explain away these recent swings using headlines, data, or charts.  There is only one thing that moves markets, supply and demand.  Herd psychology is taking over as people make trading decisions exclusively based on what other people are doing.  Normal rules do not apply in times like these and is why it is so important to understand what people think, how they are positioned, and why they are doing what they are doing.

Shorts and breakout buyers are chasing this market higher and while their buying is not sustainable, the rally is sending a wave of relief through the market.  Traders who held the dip are feeling better and anyone who sold the dip is suffering a bout of regret.  The obvious short was anything but and bears have humble pie all over their face.

Reclaiming 1500 and 1510 is significant.  While volatility will persist, this rebound shows bears have less sway over the market than most thought.  The recent rebound further diminish their credibility and traders are becoming more comfortable holding this market.  But in one of the most ironic paradoxes of the market, the smaller a group, the more powerful it becomes.  As the bear contingent shrinks we need to become more fearful them.  The more bullish people become, the greater the risk of running out of new buyers becomes.  This is the psychology and structural trade that leads to double-tops and head-and-shoulders patterns.  The first breakdown typically fails and bounces higher because too much cynicism and doubt remains.  With each successful bounce, the rally bandwagon becomes more and more crowded, eventually succumbing to its own success when everyone is bullish.

TRADING OPPORTUNITIES

Expected Outcome:
This market is showing how important it is to trade proactively, not reactively.  There was a lot of money to be made using defined buy-points, stop-losses, and taking worthwhile profits.  Unfortunately for many, this has been a horrible couple days as they bought the rally and sold the dip.

The market reclaimed 1500 and has a comfortable cushion above this key support level.  The obvious stop-loss is 1495 and anyone who overcame their fear and bought the  break above 1500 is doing pretty well right now.  There is no reason to become complacent here, but so it looks like higher-highs are in our future.

Alternate Outcome:
Until the market makes a higher-high, the risk of a suckers rally is real.  Markets often bounce on their way lower, sucking in bottom-pickers and flushing out late shorts.  Any bull needs to acknowledge they can be wrong and this is where stop-losses are worth their weight in gold.  Success in the market isn’t about how much we make when we are right, but how little we lose when wrong.

AAPL daily at 1:11 EST

AAPL daily at 1:11 EST

INDIVIDUAL STOCKS

AAPL is down 1.5% halfway through its investor day as the market has been underwhelmed by what it heard.  There is still time to surprise the market in the Q&A, but if there was real meat to this story, Cook would have presented that early.  With another catalyst come and gone, look for the stock to resume its slide lower.  There are still too many hopeful holders in this stock for it to make a meaningful rebound without an insanely cool new product that will reinvent the company.  The iPhone6 or another me-too streaming TV device just isn’t going to do it.

LNKD is squeezing bears again as something that’s gone too-far, too-fast keeps going.

Stay safe

Feb 26

PM: Buy or sell?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The market took a break after yesterday’s major slide and AAPL bounced ahead of Wednesday’s investor day.

MARKET BEHAVIOR

Stocks reclaimed a portion of yesterday’s selloff, but remain under 1500.  Volume was just 1% lower than yesterday’s plunge, showing a fair number of shares changed hands.  The 0.6% bounce was enough to recover the final minutes of Monday’s panic selling, but the market refused to climb above 1500, an obvious technical level for anyone who even casually follows stock charts.

MARKET SENTIMENT

Buyable dip or dead-cat bounce?  That’s the million-dollar question.  The market bounced off 1500 half a dozen times over the last few weeks, does it have one last helping hand for the market, or will former support turn into resistance?

1500 is the line in the sand.  Rallying above this key level will trigger a short-squeeze and send the market higher on a wave of short covering.  Momentum traders will jump on the bandwagon, helping propel the market through 1510.  Recovering the majority of the selloff will put peoples’ minds at ease and the rally continues.  Or the market bumps its head on 1500 and the selloff continues.

TRADING OPPORTUNITIES

Expected Outcome:
I still think the market has new highs in it, but what I think doesn’t matter and we need to follow the market’s lead.  A break above 1500 is buyable and a break below 1475 is shortable.  In the meantime, look for the market to oscillate between these levels.  It‘s entirely possible we see a third-wave of selling take us to 1475 before we finally bottom, reclaim 1500, and make new highs.  The obvious breakout trade is often too easy, so anticipate a head-fake or two along the way.

Take this time to plan your trade.  Will you buy a break above 1500?  What will your stop-loss be?  What profit target are you looking for?  Will you short resistance at 1500?  What stop will you use?  What is your profit target?  What about a break below 1475?  Plan your trade and trade your plan.

Alternate Outcome:

The expected trade is an eventual rebound to new highs, but this market could easily be topping.  The bears have reams of data showing how horrible the world is and they could be right.  We trade with stop-losses because it is impossible to be right every time.  Success isn’t about how much money we make when we are right, but how little we lose when we are wrong.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS

Finally something new to talk about with AAPL.  The stock popped $10 after rumors surfaced that Cook will announce a 10 for 1 stock split at Wednesday’s investor day.  I’m not sure why people are so excited about this; maybe they are just bad at math.  When I was a kid, my dad was teaching my brother and I about money.  He offered to trade my 6-year-old brother’s $1 allowance for three-quarters.  My brother thought more was obviously better and took my dad’s offer.  That’s what I think of when people get excited about stock splits.

People will argue $45 is far more accessible than $450 and it will let little guys buy the stock, adding to demand, and pushing prices higher.  Of course on the other side, $450 is far more prestigious and impressive than $45.  Of all the exciting and innovative tech companies out there, how many have a stock price less than $100?  If AAPL is desperate enough to cater to the 20-year-old investor demographic, that will be a major turning point in a once proud company.

I have little doubt the stock-split crowd will bid up a split, but that is a selling opportunity, not a fundamental catalyst.   Far more interesting will be details of what AAPL plans to do with its cash hoard, but since the company has a history of under delivering in this regard, expect the market to be disappointed yet again.

Investors are waiting for more pioneering innovation out of AAPL.  The stock is lagging because competition is catching up, and in some cases exceeding AAPL.  Stock splits and dividends ignore the real reason AAPL’s stock is lagging.  Without addressing the root cause, expect the lagging to continue.

Stay safe

Feb 26

AM: Buy the dip?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:57 EST

S&P500 daily at 12:57 EST

AM Update

Selling abated and buyers are waiting for better prices.  AAPL is within a whisker of setting a new low as its underperformance continues.

MARKET BEHAVIOR

Selling took a break this morning and the market is vacillating between gains and losses.  While it is good the market broke the fever of impulsive selling, a material dip under Monday’s lows could set off another wave of reactive selling, pushing the market to the 50dma/1475 level.

MARKET SENTIMENT

While the market is still on edge, holders are no longer rushing for the exit and everyone is waiting to see what happens next.  Selling dried up but prices remain flat because opportunistic buyers are waiting for even more attractive prices before jumping in.  Over the near-term the most likely buyers are late shorts forced to cover on any strength.  While this is not sustainable buying, it will be enough to seduce dip-buyers to jump on the bandwagon.

TRADING OPPORTUNITIES

Expected Outcome:
Recent selling does not prove this market will not top in a more traditional double-top, head-and-shoulders, or exhaustion surge.  This dip is potentially forming the left-shoulder of the H&S or the middle pullback of a double-top.  Further, this might simply be an intra-rally check back to the 50dma, something common in extended rallies. Either way, expect new highs in the near-term.  Look for the market to bounce somewhere above 1475.  A lot of selling has already occurred and we are closer to the end of this dip.  While we might have a little further to go, shorts should lock-in profits before a short-squeeze wipes them out.

The most aggressive traders can buy this pause and use 1475 as a stop, but the safer move is waiting for the market to reclaim 1500.  The size and volatility of this dip did a good job of refreshing the rally and if we continue higher, look for 1550 or even all-time highs at 1575.

Alternate Outcome:
This really could be the selloff everyone’s been waiting for and talking about.  While I am suspicious of anything widely believed, sometimes the crowd is right.  There are countless reasons for this market to implode and yesterday’s Italian election added to the list.  Every rally ends and this could be the early stages of a massive correction.  While I don’t buy this story, stop-losses are the best way to protect my portfolio from hubris.  I’m okay with calculated 10-point losses when a trade doesn’t work, but that is a far different risk profile than holding through a 200-point collapse because I refused to admit defeat.

No matter which side of this trade you are on, plan your trade and trade your plan.  Identify buy/short points, stop-losses, and levels to take profits; then stick to these.  If the market reaches your buy point, buy.  If it reaches a sell point, sell.

AAPL daily at 12:58 EST

AAPL daily at 12:58 EST

INDIVIDUAL STOCKS

AAPL was within a dollar of making a new low.  In a day where the market is practically flat, AAPL fell nearly 1% in early trade.  Breaking $435 will trigger another wave of stop-loss selling and shorting by bears.  At this point even a broad market rebound cannot save this stock.  While it might initially bounce on market strength, look for the stair stepping lower to continue.  $400 is a major psychological level and expect the market to test it.  That is another 10% dip from here.  Current holders need to ask themselves how much further they are willing to ride this down.

Stay safe

Feb 25

PM: The Plunge

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The biggest down day since early November sent a chill through investors.  Was this simply a technical selloff that will recover quickly, or the start of something more sinister?

MARKET BEHAVIOR

Dramatic selloff in the markets with an intraday range exceeding 2.25%.  This was the biggest drop since the Wednesday following the election.  Volume was 15% above average, but lower than the selling volume last Wednesday and Thursday.

The market clearly sliced through support at 1500 and is now just 10-points above the 50dma and the 1475 high from last fall.

MARKET SENTIMENT

There was no legitimate fundamental reason for the selloff today.  The financial press is pointing to polling out of Italy, but everyone knows Euro Contagion is the Boy Who Called Wolf.  It’s been three-years without a collapse and we will still be talking about an ‘imminent’ collapse next year too.

The real story is sellers selling because everyone else was selling.  Herd psychology triggering this stamped plain and simple.  The market opened innocently enough, gapping up 0.5%, but quickly ran out of buyers after short-squeeze buying dried up.  By late morning it was stair-stepping lower on Euro concerns and the last hour was a mad rush for the exits as prices cratered when buyers failed to show up.

Much of the selling was technically based, especially in the last hour as the market broke substantial support near 1500 and automatic stop-losses triggered a cascading wave of selling.  Potential buyers were just as spooked by the selling and chose to wait and see.  Without buyers the market fell through a trapdoor.

Where does today’s selloff leave market sentiment and how are people positioned?

The interesting thing is today’s massive move came on relatively light-volume and was the lowest volume of the last three down-days.   While the drop was dramatic, the actual level of selling is decreasing and suggests fewer people are bailing out.  Today’s big drop had more to do with reluctant buyers than a mad rush of sellers.  If selling continues slowing down, that will create a near-term bottom and short covering will bounce the market higher.

This massive plunge from record highs and swelling volatility replaced complacency with fear. Any weak holders likely sold in today’s bloodbath.  But if the nervous are running for cover who is buying?  Buyers acknowledge the risk of further downside, but think the selling is overdone.  These new buyers are far more comfortable holding volatility and their resolve will give us more stability going forward.  Of course ‘more’ is a relative term and while volatility will continue, don’t expect another selloff of today’s magnitude in the near future.

TRADING OPPORTUNITIES

Expected Outcome:
Clearly my call to buy the 1500 dip last week was premature and as I often say, early is the same thing as wrong. Further, I might not even be early if the market continues selling off, but that is what stop-losses are for.  We identified 1505 as a valid entry and 1495 as the bailout.  While the trade worked beautifully until 10am this morning, the stop-loss got us out for a modest loss this afternoon.  As we discussed last week, a dip under 1500 was a realistic outcome and that made 1475 the next logical level for support.

There is no reason for the average investor to be playing these dips because it is too easy to get run over by the herd.  But if someone wants to trade the expected rebound, wait for the market to regain 1500 and use 1495 as a stop-loss.  The upside is a new high above 1530 and will most likely continuing past 1540.  5-points of risk for a 30-point gain is a very favorable risk/reward.  Waiting for the market to recover a key technical level avoids the risk of catching a falling knife and leaves a trader on the sidelines if the market continues breaking down.

Alternate Outcome:
If the expected outcome is a buyable dip, the alternative is a crash through 1475, breaking 1450, then 14245, and finally 1400. Expect a technical bounce at 1475, but if the market cannot regain 1500, look for more downside and that is where the short should be put on.  Don’t short this market here, wait for the bounce.

INDIVIDUAL STOCKS

NFLX held up surprisingly well relative to the rest of the market.  Its 0.3% loss is practically an up day when the indexes lose 1.8%.

AAPL actually didn’t do too bad, simply mirroring the indexes 1.8% loss.  The thing to watch is if it recovers when the market recovers or if it continues ratcheting lower.

AMZN failed to hold the 50dma.  High beta-stocks like AMZN rarely work when the market is falling apart and is why understanding what the broad market is key part of trading individual stocks. If the market bounces back, look for AMZN to follow.

Stay safe

 

Feb 25

AM: Bounce or breakdown?

By Jani Ziedins | Intraday Analysis

AM Update

Volatility is chewing up impulsive traders, but the rebound remains in tact as long as we hold 1500.  AAPL is holding $450, but what happens if the market takes a dive?

S&P500 daily at 1:15 EST

S&P500 daily at 1:15 EST

MARKET BEHAVIOR

Stocks gapped higher at the open, but slid through the morning, giving back all those gains and then some.  The intraday range already exceeded 1% and continues the recent trend of volatility and indecision.

MARKET SENTIMENT

The market is in a sucker’s phase where it throws in all kinds of fake signals to dupe impulsive traders.  In periods like this it is best to act proactively, not reactively.  Take profits into strength and buy dips.  Anyone buying strength and selling dips is having a bad time.  The safest trade is letting the gamblers sort this out while watching from the sidelines.

Early weakness is blamed on election polling out of Italy, but if the market is ignoring sequestration and negative GDP, why will it crash on European politics?  The ‘bad’ guys won in Greece a couple of years ago and we see what happened there.  Nothing.  Why will Italy be any different?

Of course this is the market we are dealing with and it doesn’t always act rationally.  We could implode in a cascade of irrational selling, but since that is what people expect, I have my doubts.  No one believes this rally and that is why it keeps working.

People trade their opinion and anyone suspicious of this market is already defensive and underweight.  There are far more available buyers than sellers here.  Recent support at 1500 shows most holders are comfortable holding through weakness.  This limits supply and puts a floor under the market.  On the other side, shorts and money managers feeling pressure to catch this market will be forced to buy any strength.  Limited supply and lots of demand is a recipe for higher prices.

This rally leg is getting a bit old and anyone calling for a pullback is right, just early and in the markets early is the same thing as wrong.  We will pullback, just not yet.

TRADING OPPORTUNITIES

Expected Outcome:
The market is still well above support at 1500 and until we violate this level, the rebound is alive and well.  No doubt I could be wrong and that is what stop-losses are for.  Markets like this are best suited for decisive traders who are willing to act early.  Anyone who bought the market in the low 1500s is still okay.  Those that waited for a confirmation of the bounce before buying are being flushed out for a loss.

To succeed in volatile markets like these, identify ahead of time levels that show support and resistance.  Plan trades around these levels and then stick to that plan.  Last Thursday breaking 1500 but quickly recovering showed strength and was a legitimate buy signal.  For those traders, stick with the trade until the market breaks under 1500 and don’t get sucked into the emotional selling today.  Chances are good we will not fall back to 1500 and it will be an easy hold.

Alternate Outcome:
Markets often reverses on seemingly benign news.  If reversals were obvious, everyone would be rich and we know that is not the case.  We make the high-probability trade, but use stop-losses to protect against flawed and incomplete analysis.  Without a doubt Italy could be the straw that breaks the camel’s back, but we need to stick with the high-probability trade and that remains higher.  But we cannot ignore the other side of the trade and that is a bigger market selloff.  The market can slice through 1500 but will likely find support at 1475.  Failing support at 1475 means this rally is done and we need to wait for the next high-probability opportunity.

AAPL daily at 1:16 EST

AAPL daily at 1:16 EST

INDIVIDUAL STOCKS

AAPL is mirroring the indexes, gapping at the open, but pulling back in midday trade.  So far there is nothing new from today’s trade and the trend is more likely to continue than reverse.  The bigger challenge for AAPL will be holding up through a 10% dip in the broad market.  Since AAPL is a high beta name, it can fall more than 2x the indexes.  A 20% drop in AAPL means there is potentially another $90 of downside risk left in the name if the broad market hits a rough patch.  Are long-term AAPL investors willing to hold through that kind of volatility?

Stay safe

Feb 24

LA: Buy the dip?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

S&P500 weekly at end of week

Weekly Review and Look Ahead

Look for a quick bounce from last week’s dip as holders grow more comfortable holding.  This market will top, just not yet.  AAPL continues its 6-month trend of lower-highs and lower-lows.  Don’t bottom pick in this stock and wait for strength to come back before buying.

MARKET BEHAVIOR

Stocks recorded their first negative week of the year and shook out a pile of nervous holders in the process.  Weekly volume was light due to the holiday, but each day was near or above average, meaning it was not a quiet trading week.  The 10wma is catching the market and only 33-points behind.   The slower moving 40wma is still 100-points, but closing the gap.

While the market finished down just 4-points, the weekly range of 34-points was the widest we’ve seen in a while, setting a new high and temporarily dipping under support at 1500.  Obviously things didn’t workout as planned for anyone buying the breakout or shorting the breakdown and everyone will be watching anxiously for the market’s next move.

MARKET SENTIMENT

There are two kinds of pullbacks, those that go further than expected and those that bounce quicker than expected.  While there are no hard rules in the market, extended pullbacks are usually rooted in emotion.  Obama winning reelection and the Fiscal Cliff debate lead to a wave of emotional selling as traders left reason at the door and predicted an imminent collapse of the American way of life.  The subsequent rebound was equally impressive because the selling was unjustified.  Now compare this to the dips that were more structurally based and arose from buyers taking a break.  Selloffs caused by normal supply and demand imbalances are short-lived because the market is simply regaining its footing.

Many traders expect last week’s selling to continue, but it really doesn’t need to and in fact the high-probability trade is a quick bounce.  Of course quick is a relative term and can mean anything from 1 to 3 weeks, but the sheer number of people thinking this selling will continue leads me to believe it is likely done.  I could be wrong, but that’s what stop-losses are for.

TRADING OPPORTUNITIES

Expected Outcome:
The harder trade is buying the dip after only two-day, but the dramatic shift in sentiment and surge in the VIX suggests we already shook complacency from the market.  It is encouraging selling dried up on Thursday as holders kept holding after a dip under 1500.  And more than that, anyone who held the dip is feeling pretty smart and  even more committed to this rally.  That growing confidence among holders is why this market will not top on bad news.  No doubt the rally’s days are numbered, but the correction will happen from running out of buyers.  In the near-term continued strength will force bears to cover shorts and those trailing the market will keep chasing, meaning there is more buying left in this move.

Alternate Outcome:
Two-days of selling might not be enough and we could see another week or two of weakness before the market makes new highs again.  The deeper the selling, the more sustainable this rally becomes.  Shaking weak hands is what refreshes the market and clears the way for a move higher. If we resume the rally after just two-days of selling, the rally will be fragile and close to topping.  A deeper dip will let this market more thoroughly refresh, potentially extending into the 2nd quarter.

As for a trade, stay long the market as long as it holds above 1495 and look for a new high stretching past 1540 over the next few weeks.  A dip under 1495 means the market will test support at 1475.  No one knows for sure what the market will do next week and we will revise our outlook as the market gives us new information.

AAPL weekly at end of week

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL fell 2% for the week and is resting at $450.  Upside resistance remains at $485 and the low of the move is $432.  Dropping under $432 will extend the pattern of lower-lows and a close above $485 gives the stock its first higher-high in 6-months.  It took rumors of an increased dividend to push the stock up to $485 two-weeks ago and it will most likely take another fundamental catalyst to get it back up there.  Without some great news, expect the stock to continue drifting lower.  The stock could rally on broad market strength, but use that as a selling opportunity and resist the temptation to buy strength until the stock regains $485.

Stay safe

Feb 22

PM: Bulls fight back

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The market ended the selling and found support at 1500, bouncing back to resistance/support at 1515.  AAPL stopped the losing streak, but is just leading on hopeful holders and NFLX is taking a much-needed break.

MARKET BEHAVIOR

Stocks recovered all of Thursday’s losses and finished at the highs of the day.  Volume was fairly average, but quite a bit less than the elevated selling over the previous two-days.

The last few days of trade brought volatility back to the market and most tops involve elevated volatility leading up to the reversal point.  That doesn’t mean the market is about to collapse, we just need to be aware we are approaching that point.

Today shows 1500 continues to be a point where buyers are willing to step in.  The market finished at 1515, a level that provided both resistance and support going back to the beginning of the month.

MARKET BEHAVIOR

Today’s rally ended the selling streak and rewarded holders that sat through the weakness.  Low-volume show few were excited to buy, but more noteworthy is fewer were willing to sell as supply dried up and the market bounced hard.

All the hype that said this was the start of a big selloff spooked out most weak holders.  Once the paranoid finished selling, longer-viewed investors that already sat through the Fiscal Cliff and a negative GDP report were not spooked by some meeting minutes.  That bodes well for the continuation and supports the thesis that this market will top due to running out of buyers (optimism), not negative headlines (fear).

TRADING OPPORTUNITIES

Expected Outcome:
I still expect the market will make new highs before the end of the quarter, meaning we have at least another 15-20 points of upside left.  In reality the market will likely blow past the old high of 1531 as it triggers a new wave of short-covering and breakout buying.

Don’t get me wrong, I am not a raging bull and think the market is in the process of topping, I just don’t think the top is in yet.  For various psychological reasons markets most often reverse in double-tops, head-and-shoulders, and exhaustion surges.  So far I don’t see any reason this time will be different.  That means Tuesday’s high is not the top and the high-probability trade remains buying the dip.

Alternate Outcome:
Today’s rally could be a head-fake to suck in bottom-pickers before steamrolling them with another crushing down-day on Monday.  I don’t dispute the real possibility of another horrible week.  There are no grantees in the market and every trade involves risk, the difference is the savvy trader uses probabilities to move the odds in his favor.  I could be wrong about buying this dip, but that doesn’t make it a bad trade.  Savvy traders manage risk by looking for the high-probability trade and using stop-losses to protect against unexpected losses.

If weakness continues next week, look for a dip to 1475, but that will be another potential rebound point.  Failing support at 1500 doesn’t kill this rally, but dropping through 1475 does.

NFLX daily at end of day

NFLX daily at end of day

INDIVIDUAL STOCKS

AAPL finally saw its first up-day since Cook crushed investor’s hopes for an increased dividend/buyback.   If people are buying this bottom, I have a bridge to sell them.  I shouldn’t be so flippant because so many people are stuck in this trade, but I’ve warned about this for weeks now.  I was sucked into the AAPL earnings story just like everyone else.  The difference is I took my lumps after earnings came out, realized my investment thesis was flawed, sold out, and moved on.  We are in this to make money, not own stocks.  If something isn’t working, stop doing it and find something that is.

NFLX ran into some selling the last couple days.  Holding out for more than a 100% gain is just plain greedy.  It was obvious the stock would continue higher after earnings, just like it is obvious it will pullback after hitting ~$200.  That doesn’t mean the story is dead, the stock simply needs to catch its breath.  Look for a pullback to at least $160 before resuming the rally higher.

Stay safe

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