Monthly Archives: February 2013

AM: Another day of quiet trade

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:15 EST

AM Update

Stocks are holding recent levels in quiet trade.  AAPL is holding support at $460, but technicals still indicate a downtrend.  AMZN is building a trade around its 50dma, we just have to wait and see what that trade is.

MARKET BEHAVIOR

Stocks were up in early trade, but hit their head on 1525 and are down midday.  1525 seems to be resistance and 1515 support.  We will watch to see which of these levels gets taken out first but I wouldn’t buy/sell a break through either level because the probabilities of a head fake are high and these are minor technical levels.

MARKET SENTIMENT

The low volatility drift higher continues.  While the market is bouncing up and down, it is doing so within fractions of a percent and more likely the result of random noise than meaningful trade.  What we know for sure is the market continues creeping higher through these gyrations and the trend remains intact.

TRADING OPPORTUNITIES

Expected Outcome:
While this market is closer to topping, don’t try to short it here because the rally is still alive and has some upside left.  On the other side, longs need to start building a plan to lock in profits.  I find it easier to sell into strength, but trailing stops work too.  If you are sitting out of this market, it is a bit late for anything other than quick day trades.  The market could rally sharply from here, but that will be the end of the run, not the start of the next leg.  If the market consolidates and/or pulls back slightly, that will refresh the market and make a good entry point, but if it races ahead, resist the temptation to chase.

Alternate Outcome:
If the expected outcome is caution, the alternative trade is reckless abandon.  While a several percent move higher seems likely and could be profitable if timed exactly right, it will be part of a topping pattern and not the start of a new leg higher.  If someone needs to trade this market, stay nimble.  The more comfortable people become with this market, the more nervous we should be.

INDIVIDUAL STOCKS

AMZN daily at 1:15 EST

AAPL is down, but still holding above $460.  Volume tapered off the last couple days as both buyers and sellers are taking a break.  Technicals show the downtrend remains intact as the stock continues making lower-lows, and lower-highs and is solidly underneath the 50dma.  Without a doubt this stock will rebound at some point, but when in doubt stick with the trend.  As for a trade, sell a break under $460 and buy a pop above $485.

AMZN is dipping but still has a several dollar cushion above the 50dma.  If someone bought the break above the 50dma, they still have some breathing room, but get out if the stock cannot hold the 50dma.  Holding the 50dma is obviously bullish, but a break under the 50dma could be shorted, but only for a couple of days because it is likely to bounce.  Failing to hold the 50dma for a third time setup a longer short trade.

Stay safe

PM: Another new closing high

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Stocks opened at 1514 and rallied through the day, finishing above 1520.  While we missed a new intra-day high, it did notch a new closing high as the slow grind higher continues.

MARKET SENTIMENT

As the market inches higher, the calls for a pullback get quieter by the day.  I don’t think everyone is sold on this market, but the cynics are not nearly as vocal after getting their nose relentlessly bloodied day after day.  This is all part of the normal progression through the life-cycle of a market move.  With each passing day bears and cynics are throwing in the towel and joining the rally bandwagon.  Their buying is the fuel that is propping up this market, but once the last have changed sides, demand will dry up and the market will finally nose over.

TRADING OPPORTUNITIES

Expected Outcome:
While there are no clear signals to sell yet, we need to be increasingly vigilant.  This market will top in coming weeks and we need to be ready for it.  It might happen as early as next week or it could drag on through the end of the first quarter, but either way the writing is on the walls .  Look for the inability to hold support or the biggest weekly price gains since this rally began.  Those will be the signs to get out.

Fund managers are judged by their quarterly performance and the longer the rally goes, the less time managers have to catch the market before the end of the first quarter.  A pullback will be a huge relief for many professional money managers, but will most likely be the reason it won’t happen.  Managers behind the eight ball are buying every dip in an effort to catch this market, but if you get too many people buying dips, there are no dips to buy.  That behavior explains why the move higher has been so smooth.

Alternate Outcome:

Clearly there is no rule that say rallies can only last 12 to 16 weeks and obviously there are countless examples over the last 100 years that lasted a lot longer.  But trading is a game of probabilities and we need to trade the most likely outcome.  It is entirely possible this rally goes for a couple more months, but the odds are against it.

INDIVIDUAL STOCKS

AAPL is finding support in the lows $460s.  Holding here and using $460 as a stop is a reasonable way to trade the rebound.  But if the market breaks $460, look for a wave of stop-loss selling from a lot of other like-minded traders.  I’m still suspicious of this stock because supply and demand is stacked against it.  If everyone thinks this is a great value and already own the stock, where are the new buyers going to come from?

Stay safe

AM: Cautious optimism

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:22 EST

AM Update

S&P500 bounces off of support at 1515 and AAPL is finding buyers in the $460 range.  AMZN, NFLX, and LNKD continue proving the cynics wrong as they keep gaining.

MARKET BEHAVIOR

The market opened lower, but rallied off of 1514, again finding support near the 1515 level.  What was resistance a couple of weeks ago is providing support here.

MARKET SENTIMENT

Josh commented a couple posts ago that while exchange volume returned on Tuesday, trading volume on the SPY remains suspiciously light.  This is a really interesting observation and it might give us further insight into this market.  The SPY is a trading vehicle for speculation and hedging, not investing.  This can be seen by the SPY’s ridiculously high turnover rate of just 5 days.  Following volume on the SPY provides great insight into what traders are doing, separate from longer-viewed investors.

One possible explanation for the low volume on SPY is traders are afraid to buy this market and just as fearful of shorting it.  Since short squeezes have been a big part of what pushed this market higher, we might not have that same bid above the market going forward.  If that is the case, this market will need to draw in new buyers to keep moving higher.

TRADING OPPORTUNITIES

Expected Outcome:
Without a doubt the market is approaching the end of its run and an intermediate top is weeks and a handful of points away.  The safer this market feels with its steady climb higher, the more nervous it makes me.  I’m not ready to give up yet, but I am less confident and more paranoid than I was a couple of weeks ago.  One of the hardest part of trading is knowing when to take a winner.  We should be giving that more thought here than what positions to add.

Alternate Outcome:
If the expected trade is promoting caution, then the alternate is going all in.  Markets often move further and longer than most expect and undoubtedly this one has already don that, jumping over 120 points in less than two months. But are we seeing skepticism grow or fade the higher this thing goes?  I’m still waiting for that large weekly price gain, but am actively looking for an exit.  It is always better to be out of the market wishing you were in, than in the market wishing you were out.

INDIVIDUAL STOCKS

AAPL is finding support at $460 and trying to regain upward momentum after two days of selling.  $460 is a good line in the sand to use as a stop-loss for a long trade, but if this is an obvious stop-loss, other traders will use it and the stock could trigger another wave of selling if it dips to under it.

LNKD daily at 1:22 EST

After some early weakness, AMZN is fining buyers willing to support the break above the 50dma and recent gains.  This stock is not done humiliating bears and get in its way at your own peril.

LNKD and NFLX continue dining on fresh bear meat as they push to new breakout highs.  Remember, the contrarian trade isn’t going against the price, it is going against the crowd.  If the crowd thinks these are ridiculously overpriced stocks and bound to crash, then the contrarian trade is betting on the continuation.

Stay safe

PM: Is this too easy?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

New highs in an otherwise quiet day.   AAPL continues struggling for direction and high-fliers keep humiliating bears.

MARKET BEHAVIOR

Stocks traded up to 1525, fell to 1515, and finished the day back at 1520.   1525 set another new high and 1515 held recent support.

MARKET SENTIMENT

While we set another new high, don’t let the dull trade lull us into complacency.  The trend remains higher, but we could see near-term weakness test our resolve.  A pullback to 1505 should be expected and we need to plan on how we will respond.  Proactive traders could lock-in profits on the way up and look to buy after the market finds support.  Traders who like to sit through a little volatility can continue holding, but they have the harder task of  recognizing the difference between healthy pullbacks and topping.  And lastly, buy-and-hold should keep holding because that is what they do.  Of course even buy-and-hold investors benefit from shorter timeframe analysis because it helps them mentally prepare for the emotional dips that could tempt them into selling at the exact wrong time.

At most this rally has six-weeks left in it and we need to come up with an exit plan for taking profits.  So far we’ve resisted the temptation to get shaken out between too-high, too-fast and the volatile dips last week, but it will all be for naught if we stick around too long.  The November bottom was twelve-weeks ago and we have been above the 50dma for six-weeks.  While I’m still waiting for the high volume price gains, I am becoming increasingly suspicious of this market and inching closer to the door.

TRADING OPPORTUNITIES

Expected Outcome:
Stick with what is working, but start working on an exit plan.  We’re in this to make money, not own stocks, and we can only do that by selling and taking profits.  My preference is to sell early because it prepares me mentally to buy the next dip.  Holding past the top is always a head game because there is regret at not selling sooner and hope that prices will bounce back.  All of this clouds judgement and prevents a trader from identifying the next great trade.

Alternate Outcome:
Technically this rally could last forever, but practically speaking three to four months is the most these things go before they run out of new buyers and have a material selloff that refreshes the larger bull rally.  We’ve seen countless selloffs of 100-200 points over the last four-years and this year will be no different.  While the trade is obvious, getting the timing right is where all the money is made.

INDIVIDUAL STOCKS

Much like the market, AAPL rallied, sold off, and finished near flat.  Inability to break above $485 is noteworthy and while most are treating this as a fundamental and event-driven story, it really is still a supply and demand trade.  As long as everyone is promoting the attractive valuation, it means the hopeful have not been flushed out yet.  Why this matters is everyone who likes AAPL already owns it, meaning there are few new buyers left.  If someone isn’t interested at an obscene valuation, they probably won’t be impressed with a doubly-obscene valuation either.

AMZN daily at end of day

AMZN popped today and the cynics were out in force.  That explains why the stock finished at the top of the day’s range.  AMZN is AAPL’s mirror twin.  Everyone loves AAPL and it keeps going lower while everyone hates AMZN and it keeps going higher.  This is totally irrational behavior if you look at it from a fundamental and valuation basis, but bring supply and demand into the picture and now it makes total sense.  AMZN isn’t done humiliating bears and look for the rally to continue.

NFLX and LNKD also rallied through the day and these stocks are trading like they want to go higher.  It will be a wild ride, but $200 is easily within reach for NFLX.  After it hits that milestone we will reevaluate sentiment and see if attitudes in the stock have changed.  $180 is in the cards for LNKD.  If there is one takeaway from these posts, please don’t short explosive stocks.  That is a great way to go broke.  These might or might not be a good buy, but they are definitely not a short.  But some people prefer to learn their lessons the hard way.

FOSL’s strength faded and it is retesting support.  Keep this one on a really short leash and any further weakness means institutional money is not supporting this stock.  Don’t go down with the ship if it cannot hold support.

Stay safe

AM: More constructive trade

By Jani Ziedins | Intraday Analysis

AM Update

The S&P500 continues finding support near recent highs.  AAPL is struggling for direction.  AMZN popped above the 50dma plus a few other individual stock stories below.

S&P500 daily at 1:18 EST

MARKET BEHAVIOR

Stocks gaped up at the open, sold off to break-even by midday, and are attempting a rebound as I write this.  Nothing new or insightful from this price-action and the previous analysis and expectations of a continuation remain intact.

MARKET SENTIMENT

Any selling widely viewed as the start of an expected pullback will not turn into said pullback.  This rally will top, but it will happen when everyone is convinced it is another buy-the-dip opportunity, and we are not there yet.

So far this Q1 is a carbon copy of last year’s Q1.  Last year’s rally kept going and going until everyone gave up fighting it and that is when it finally nosed over.  People will point to some fundamental story that broke last year’s market, but the truth is fundamentals can only break the market when it is already setup to fall.  We have all witnessed when markets reacted counterintuitively to a major story and that is because the underlying supply and demand was setup for a different direction.  When fundamentals and supply and demand disagree, always go with supply and demand.

TRADING OPPORTUNITIES

Expected Outcome:
Some weakness is normal and healthy.  Anyone rushing for the exits or piling on the shorts because the market dipped a few points is going to have a bad time.  Markets top on complacency, not fear, and as long as traders keep predicting the top, it won’t happen.

Alternate Outcome:
The end of this rally is coming and the market doesn’t always follow a set playbook.  There are countless examples of markets topping without a surge of buying that exhausts demand, but we are playing a game of probabilities.  If most rallies top on high volume, that becomes the basis for a high-probability trade.  We could be wrong, but if we trade this way over a long period of time, we will win more often than we lose and that is the key to succeeding in the markets.

INDIVIDUAL STOCKS

Quite a bit of indecision in AAPL as it struggles for direction.  The stock opened low, surged higher, and is now drifting lower.  While the technical rally attempt is still intact, we can probably say the fundamental justification for the rally, an imminent dividend and buyback increase, is dead.  Can this rebound continue without its rally cry   As it stands, I see no fundamental or supply and demand reason for this stock to rebound here and I continue expecting lower prices.

AMZN daily at 1:18 EST

AMZN broke above the 50dma on elevated volume.  Anyone who jumped on the short bandwagon is having a bad day.  Same goes for those that bought unconfirmed 50dma support and were chased out by the recent pullback.  Going forward, anyone looking for a good entry into AMZN, here is your shot.  Put your stop near $260, but this bounce should not fall back under the 50dma.  If it does, consider selling before it reaches $260.

NFLX is recovering from a few days of selling.  Any bears who used this weakness as a shorting opportunity are second guessing that decision and many are buying back their shorts, adding fuel to the rally.  These stories go further and longer than most expect and bears would be better off burning a pile of cash in their driveway than shorting a strong stock.  Maybe NFLX is overvalued here, but that doesn’t mean the market will recognize that any time soon.

LNKD is finding buyers at these higher levels and this is supportive of a continuation.  The market obviously doesn’t care what its P/E is and neither should you.  Anyone shorting this stock because of the P/E should just send their money to me and I promise to put it to better use.  No doubt this stock could crater here, but that doesn’t make shorting LNKD a good trade, just a lucky one.  The difference between luck and a good plan is luck always runs out.

FOSL is having a bad day.  We will see if it respects support at $102.  If a stock falls more than a few percent under the pivot, then the chances of success diminish dramatically.  Success in the market is not about being right all the time, but how a trader responds when wrong.

Stay safe

PM: AAPL sells the news

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

The S&P500 made a new high as volume returned, further supporting recent levels.  AAPL fell after Cook disappointed the hopeful, and FOSL still looks interesting.

MARKET BEHAVIOR

Another new high as stocks broke 1520 on average volume and traders finally returned after two holiday-like volume days on Friday and Monday.  The intraday range was tight and the market is taking a break after last week’s volatility.  All good signs of support for these new levels.

MARKET SENTIMENT

Two things we know about this market, 1) it is not breaking down and 2) it is not taking off.  While fairly basic, these two characteristics are highly insightful.  Each dip last week bounced back decisively after an early flurry of selling.  The market found a bottom and rebounded because most holders are comfortable with their positions and not easily spooked by weakness.  On the other side, the rate of gains is fairly moderate as new buyers are only trickling in at this point.  There is no irrational chasing, simply pessimists joining the rally bandwagon a handful at a time.  This slow erosion of bears is what is pushing the market higher.

If those two characteristics are driving this rally, then we need to be on the lookout for a change in either.  Failing to hold support would be a big flag showing holders are not as confident.  On the other side, if we see a mad dash to buy this market, expect that buying to exhaust itself fairly quickly.

TRADING OPPORTUNITIES

Expected Outcome:
This is turning into a broken record, but keep doing what is working.  Often the market adopts a consistent personality for an entire quarter as fund managers fall into the same pattern.  This quarter is driven by big money chasing the market higher.  Next quarter could be volatile sideways trade and the quarter after that is the expected selloff.  This quarterly behavior isn’t the rule, but it happens often enough to be noteworthy and it potentially means we have 6-weeks left in this rally.

Alternate Outcome:
The days in this rally are numbered and we are on day and a few points closer to the end of this run.  Look for a change in character between not holding support, increased volatility, or a surge higher.

I surprised a few people when I said I am 300% long S&P500 index funds.  While that sounds like a lot of risk, we cannot make a valid risk assessment based on leverage alone.  A huge move in the S&P500 is 2%, while a big move in AAPL is 10%.  When factoring in volatility, the risk in a 300% index position is not all that different from a 50% stake in AAPL.

But having said that, I trade what works well for me and that is swing-trading the indexes using leverage to spice up the returns.  I follow the S&P500 close enough that I often know when a trade is not going to work out even before it hits my stops.  This is the level of risk I am comfortable with, but it took years to work up to this level.  I always suggest people trade what they are most comfortable with.

INDIVIDUAL STOCKS

AAPL daily at end of day

AAPL hit its head on $485 yesterday and sold off ever since.  We will see what the stock has in store for us tomorrow, but this is shaping up as a boiler plate sell-the-news trade.  Tim Cook seemed openly hostile to accusations of cash hoarding and it doesn’t look like the company’s stance will change in the near-term.  If this was the catalyst traders used to justify bidding up the stock, they need to close out once their original thesis proves invalid.  The stock can rally for any number of reasons, but an increased dividend seems less likely.  If the stock doesn’t come back to life on Wednesday, look for a retest of recent lows.

FOSL closed at the lows of the day’s trading range and almost closed the opening gap.  Even with the intraday selloff the stock still looks interesting as long as it finds support.  Often the more cynical traders are to a story, the more likely it is to work.  Just look at NFLX, AMZN, and LNKD for recent examples.  Look for support at $106 and the trade will clearly be broken if the stock dips under $102.

Stay safe

AM: Adding to recent gains

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:02 EST

AM Update

The market is holding recent gains in quiet trade while AAPL is dipping in active trade.  FOSL is breaking out and setting up an interesting trade.  AMZN bounced back and is just under the 50dma and NFLX is holding recent gains.

MARKET BEHAVIOR

Stocks are up modestly this morning and continue supporting the recent break above 1515.

MARKET SENTIMENT

Things that are “expensive” usually get more expensive.  This is because people shy away from them and that means there is a larger pool of available buyers.  Contrast this with something that is “cheap” and a “good buy”.  That means everyone is already in the stock/market and there is a large pool of available sellers.  We are seeing both cases play out in this market.  The S&P500 continues higher no matter how “overbought” people claim it is and AAPL keeps going down no matter how “cheap” people think it is.  Trading isn’t about what people think, but how they are positioned.   When everyone loves something there is little demand left, when everyone is suspicious there are few sellers left.

TRADING OPPORTUNITIES

Expected Outcome:
Stick with the trend because what is overbought is about to get even more overbought.  The tight trade over the last couple days is a nice change from last week’s volatility.  Calm and stead trade bodes well for a sustainable continuation.

Alternate Outcome:
This rally will end at some point and with each passing day we are one day closer to that end.  We’ve come almost 180 points since the November lows and without a doubt most of this leg’s gains are behind us.  At most we have another 50 points left in the tank before we see some kind of larger consolidation/pullback.  Look for a material break of support at 1500 or an unsustainable surge higher to signal this rally is dying, but until then stick with the steady climb higher.

INDIVIDUAL STOCKS

AAPL is suffering a bout of sell-the-news as Tim Cook failed to deliver what speculators were hoping for.  If the justification for the recent bounce is invalid, then the trade is also invalid and traders need to get out.  Look for the stock to trade back down to recent lows if it cannot find a floor and bounce back this afternoon.

FOSL daily at 1:02 EST

FOSL popped nicely and looks buyable for the aggressive trader.  The stock could dip and close the gap, but the trend is clearly higher.  Use a stop-loss near $103.

AMZN is bouncing back from yesterday’s selloff, but is still under the 50dma.  If it cannot regain this moving average on decisive volume, there could be a quick short trade here.  Either way look for a decisive break from this area and ride it for some quick profits.  Don’t get greedy and take profits early.

NFLX opened higher, but sold off by midday and is in the red for the 4th day.  But more bullish is holding support above $175.  Selling is a normal and a health part of moving ahead so don’t pay too much attention to the recent volatility as long as the stock keeps holding recent gains.

Stay safe

PM: Finding support

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Resistance at 1515 is acting as support and look for the “overbought” market to get even more overbought.  AAPL closed the post-earnings gap, but where the stock goes depends entirely on what Tim Cook has to say.  Continue watching AMZN and LNKD from the sidelines, but FOSL is interesting.

MARKET BEHAVIOR

Stocks traded near Friday’s high on light volume as recent resistance at 1515 became support.  The market is at 5-year highs and there is no meaningful overhead resistance from regretful holders looking to get out at break-even because everyone holding a diversified portfolio is sitting on profits.  Last week saw an uptick in volatility, but today’s tight trade brought some calm back to the market.

MARKET SENTIMENT

While the market was in the red for most of the day, the losses were modest and volume light.  If anything this was more due to buyers holding back than any material selling.  This reluctance is bullish because it shows  a lot of traders have not bought the rally yet.  Often these things top in a big, high-volume surge and today’s quiet action was anything but that.

Today’s low-volume dip fits well with what we have talked about recently.  Holders are increasingly confident with each new high and less likely to sell while pessimists remain reluctant to buy.  Low-volume over the last two days was the result of no one selling and no one buying.  When holders are confident and sideline-watchers fearful of falling even further behind, there is only one direction to go and that is up.

Too-far, too-fast will eventually catch up with this market, but only after reluctant traders pile in.  The rally is fueled by investor pain and a continued rally will hurt the largest number of people the most.  The bull’s turn is coming, just not yet.

TRADING OPPORTUNITIES

Expected Outcome:
Keep doing what is working because there is no reason to sell this market.  These things go further and longer than anyone expects and that is exactly what we have here.  As long as the chorus is singing overbought and unsustainable, stay long.  Only after all the cynics have given up and joined the bandwagon will we be ready to pullback.  Supply and demand 101.

Alternate Outcome:
This market will top one of these days and I am 100% certain I will either be early or late.  There is a huge difference between trading probabilities and picking tops.  I’m good at probabilities, not so good at tops.  But that is why we build a plan and stick to it.  I know I can’t pick the top and I prefer getting out early.  I don’t know how much longer I will stay in this trade, but as long as things continue following my plan, I’ll stick around.

For those that are curious, I’m 300% long the S&P500 through a combination of leveraged ETFs and margin.  I find the indexes easier to trade because they don’t have the same event-risk found in individual stocks and it is a more pure sentiment trade.

INDIVIDUAL STOCKS

AAPL touched $485 but turned back and closed just under $480.  Tim Cook is speaking on Tuesday and AAPL traders will hang on every word, looking for a reason to buy the stock.  I’m in the sell-the-news camp because AAPL’s is historically stingy with details and its cash.  If I had to guess if Cook will exceed investor expectations or leave them wanting more, I’d bet on the wanting.  If the stock sells off,  get out and even look to short.  If investors love what Cook has to say, look for a test of $500, but expect major resistance at this level.  $500 was support for three months and it wouldn’t surprise me to see it act as resistance for a while before the stock finally breaks above it for good.

LNKD added to yesterday’s gains, putting even more hurt on the shorts that tried to stick it out.  The stock will consolidate, but look for the rally to continue from there.  NFLX’s recent price-action is an example of what LNKD could do.  As for a trade, I wouldn’t buy the stock here and I certainty wouldn’t short it either.

FOSL daily at end of day

AMZN failed to hold the 50dma.  The stock isn’t dead yet, but it shows why the smart move is to wait for the bounce before jumping in.

FOSL looks like it is under accumulation after last week’s bounce off of the 50dma and it is still within buy range.  The stock gapped down last spring, but there is clean air up through $125.  This is a speculative play so anyone trading this should use an appropriately sized position and any broad market weakness will pummel a high beta stock like this.

Stay safe

AM: Looking good

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:28 EST

AM Update

Stocks are consolidating near recent highs and signaling a continuation   AAPL is testing $485, AMZN can’t hold the 50dma, and NFLX is pulling back.

MARKET BEHAVIOR

Stocks are trading flat and supporting Friday’s breakout to new highs even if we are slightly in the red.  Consolidation is an important part of moving ahead in a sustainable way and this is more bullish than had the market jumped 15-points this morning.

MARKET SENTIMENT

The “obvious” pullback following the Fiscal Cliff pop has not materialized and we find ourselves another 65-points higher.  This is yet another example where the contrarian trade is sticking with the trend, not going against it.  There is no fundamental or technical reason for the market to rally, but that is exactly why it did.  Traders who focus on these aspects of the market are often confused by the market’s irrational behavior.  Prices are not determined by fundamentals or technicals, but by people buying and selling stocks with each other.  Understand what people are thinking and how they are positioned and all of a sudden the market starts behaving a lot more rationally.

We are rallying because most traders are afraid of the fundamentals and technicals.  Everyone who fears the future already sold and is in cash.  Once all the pessimists were out, supply dried up and there was nowhere to go but higher.  Further adding fuel to the fire, all of the pessimists in cash can only do one thing, buy the market.  Tight supply and a huge pool of potential buyers is the exact recipe for a 200 point move and that is what we are seeing.  Don’t follow the data or charts, instead look at the markets as a collection of people and understand what they are thinking, how they are positioned, and how they can trade the market going forward.

TRADING OPPORTUNITIES

Expected Outcome:
Keep doing what is working.  This pause after Friday’s breakout is healthy.  It shows traders are not selling the new highs, but the breakout is also not surging unsustainably.  Keep holding as long as the market stays above 1505 and doesn’t race ahead 20 or 30 over a couple of days.

Alternate Outcome:
This market will pullback because all rallies eventually end, but in the market early is the same thing as wrong. It is okay to expect a pullback, but it is wrong to jump in front of this market.  We need to wait for clear signs this market is topping before trying to short it.  Last week’s three-dips to 1500 flushed out a lot of weak hands and largely exhausted selling at these levels.  If we fall back down there, that means buying is also running low and we should anticipate further weakness.  A few pullbacks to support is healthy and signals a sustainable continuation, but more than that and it becomes topping.

We also need to be wary of the market racing ahead because this signals the last of the emotional and formerly reluctant buyers are chasing this market.  Once they are in, there is no one left to buy and we head lower on lack of demand.  Successive strong up-days shows the dam burst and anyone sitting on their hands has plunged in.  That will be our signal to get out.  I don’t know how far this rally will go or when it will end, but I do have a good idea of what the end looks like, so we just keep watching for those signals.

INDIVIDUAL STOCKS

AAPL daily at 1:28 EST

AAPL continues its rebound and touched $485, a technically significant level because that was the low prior to earnings.  The market expects the dividend and buyback will be boosted by ~30% in coming days and that is the justification for this rally.  Is that enough to get the stock back on track or is this a buy-the-rumor, sell-the-news event?  Only time will tell.

NFLX is selling off and testing support at $175.  It will be interesting to see how the stock responds.  The trend is still higher, but this is a volatile stock and there will be some wild swings no matter which way it eventually goes.  I’m not in this stock, but if I had to choose sides, I’d buy it here.  When in doubt, stick with the trend.

AMZN failed to hold the 50dma and is selling off.  This shows why we wait for a confirmation before jumping in.  We were looking for a high volume-bounce off the 50dma and it never happened, keeping the disciplined trader out of this stock.  We could see a rebound in coming days so don’t stop following this stock, but watch from the outside and wait for the right entry.  If the 50dma starts acting as overhead resistance, this could make for a quick and nimble short, but don’t get greedy because a stock like this will bounce after any weakness.

Stay safe

LA: Rally continues

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review and Look Ahead

Another modest weekly gain, but volatility picks up.  AAPL is rallying on rumors and hope, but will Tim Cook deliver?

MARKET BEHAVIOR

The market finished fractionally higher in a week that provided the largest volatility we’ve seen since the Fiscal Cliff pop.  These swings show there is still indecision in the markets, but for all the attempted selloffs, the market held firm at 1500 and finished at a new high.

The market is 56-points above the 10-week moving average and 112-points above the 40-week moving average.  The faster 10wma turned up and is keeping pace with the market, trailing the index by only 3.6%.

MARKET SENTIMENT

Bears continue trying to take down this “overbought” market, but are helpless to stop it.  We saw three legitimate attempts to break this rally, but each one failed because the wider group of holders was unwilling to join the selling.  From a supply and demand viewpoint, each selloff shook out weaker holders, meaning those left holding stocks are confident in their positions and their resolve is keeping supply tight.

The new highs are also intensifying the pressure on money managers underweight this market.  “Smart money” had a horrible 2012 and 2013 is starting with a case of deja vu.  It is hard to predict how long these guys can sit out, but it looks really bad when dumb index funds are outperforming smart money by multiple percentage points.

TRADING OPPORTUNITIES

Expected Outcome:
While we saw some of the widest swings in over a month, the weekly gain was modest.  Often directional rallies top on one of the largest weekly gains of the move, and by that measure this rally still has room to go.  The high probability trade remains to the upside.

Alternate Outcome:
Every rally ends and this one will be no different, but the challenge is figuring out when.  Money is made knowing the difference between what is real and what is just noise.  Keep a close eye on 1505.  If we cannot escape 1500, that will indicate this market is running out of new buyers and we should prepare for an imminent pullback.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL climbed into the post-earnings gap on rumors and hope.  Tim Cook is speaking this week and traders are looking for hints at a more generous plan to return money to shareholders.  If Cook doesn’t say what investors want to hear, look for AAPL to selloff sharply.  And even if they get what they want, look for significant resistance at $500 as many regretful owners try to get out at break-even.

Stay safe

PM: Low volume breakout is bullish

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

New highs from the S&P500 and the trend is clearly higher no matter how extended the experts say the market is.  AAPL is testing the gap, but is this a buy the rumor, sell the news trade?  LNKD is crushing bears and that will likely continue.

MARKET BEHAVIOR

Stocks broke to new highs on constrained volume.  The market finally cleared 1515, a level that has been overhead resistance since the start of the month.

MARKET SENTIMENT

Cynics will point to the low volume and say there was no follow through, but like everything in the markets, there are two valid explanations, one bullish and one bearish.  Conventional wisdom says low volume signals unsustainability, but it can also signal restraint.  Under current circumstances I see the low volume move as bullish because it demonstrates buying is still being held back and much like a dam bursting at the seams, we haven’t seen the big surge of buying when all restraint finally breaks down.

As we saw today, those on the outside are still reluctant to buy this market, but holders are getting more and more comfortable holding.  These holders are becoming less likely to sell and that takes supply out of the market.  On the other side of the equation, demand will pick up the higher we go as big money is forced to chase or risk being left even further behind.  Decreasing supply and increasing demand is a recipe for bigger gains ahead.  Today was only a preview of what is in store as more and more cynics jump on the rally bandwagon.

TRADING OPPORTUNITIES

Expected Outcome:
Stay with what is working.  The trend is clearly higher; the only question is how quickly the market moves.  A big jump over successive days will likely signal the end of this run.  Sideways trade means cynics are still holding out and that will extend the duration of this rally.

Alternate Outcome:
There are no guarantees in the market and no matter how good things look, we need to be prepared for the unexpected.  Every market tops and this one is no different.  Keep any eye out for topping behavior or signs of a breakdown so we can take our profits and look for shorting opportunities.

INDIVIDUAL STOCKS

AAPL is venturing into the gap on speculation regarding its cash hoard.  The question is if this is the rebound everyone is expecting or just another bounce before making new lows.  $485 is a widely followed level since this was the previous low.  How the stock responds to this level will tell us a lot about where it is headed.

LNDK daily at end of day

I don’t see investors bidding the stock up on an increased dividend if they are still unsure of the fundamental story and suspicious of margins and earnings going forward, but this is just one man’s opinion.  Tim Cook is speaking next week and how the stock trades afterward will say a lot about the stock’s prospects.  A decisive move higher will support the rebound, but if the market doesn’t hear what it is hoping for and sells off, get out quick because it will likely make new lows.

LNKD hit a homerun today and its ridiculous valuation got even more ridiculous.  It is tough to recommend anyone buy this stock here, but I sure hope no one is foolish enough to try to short this thing.  Much like NFLX and AMZN, I expect this stock will continue higher.  What seems too high often goes higher and what seems too low often goes lower.

Stay safe

AM: New highs

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:19 EST

AM Update

The S&P500 breakouts out to new multi-year high, defying all the naysayers.  AAPL is coming back to life but is this a sell the news trade?  AMZN and NFLX are flat, but that is supportive given how many people are gunning for these stocks.

MARKET BEHAVIOR

Stocks popped above 1515 in early trade and are holding these levels midday.  New highs are forcing shorts to cover, but we have not decisively broken this level and no doubt some shorts are still holding on and hoping for a fade into the close.  These reluctant buyers could trigger a second leg higher this afternoon if strength continues.

MARKET SENTIMENT

The financial press is attributing this breakout to recent data, but the truth is people are under-invested and this pop clearly shows that.  I can’t get away from all the “experts” claiming this market is too bullish, but they are letting their own views bias their analysis.  The failed breakdowns and successful breakouts shows this market is anything but overly bullish.  Each dip fails because all the cynics are already out of the market and the selling pressure dries up quickly.  Each breakout succeeds because all the cynics are scrambling to cover their shorts and the strength is turning bears into buyers.  Simple supply and demand.

It isn’t all that difficult to figure out what the market is going to do next, the biggest challenge is looking at the market objectively.  People see what they want to see, not what is really there.  I don’t pay much attention to what I think the market should do, but instead focus on what other people think it should do.  The market is not driven by fundamentals or technicals, but by other traders.  Figure out what they are thinking and how they are positioned and everything starts making sense.

TRADING OPPORTUNITIES

Expected Outcome:
The market wants to go higher and is still buyable for a quick swing-trade.  We should hit 1525 next week, but maybe we selloff a little first or we jump right there, it really depends on how stubborn the bears are.  Will they stick with their shorts or will they admit defeat and cover?  Either way the trend is still higher.

How much higher depends on the pace of gains.  If this market takes off with some of the largest weekly gains we’ve seen, that is a signal to get out.  If the market continues trading modestly, look for the rally to continue.  The interesting thing to watch is if volatility continues or calms down next week. Volatility is a warning sign of indecision and a changing personality, often preceding a change in direction.

Alternate Outcome:
The market has put some distance between itself and 1500.  The next time we test this level, the market probably won’t hold.  Any dip below 1505 should be met with a high level of skepticism.  Current price action indicates a continuation, but the market can surprise us at any moment so be ready for it.

INDIVIDUAL STOCKS

AAPL daily at 11:19 EST

AAPL is adding to yesterday’s gains on optimism  it will do something with its mountain of cash.  That is a potential catalyst for the stock, but is it big enough to reverse its downtrend?  I expect the best trade is buy the rumor and sell the news.  Anyone buying the stock needs to ask themselves, is AAPL more likely to blow investor expectations away with some amazing plan to return cash to shareholders, or will it be pathetic and disappointing?  Given AAPL’s track-record,  I wouldn’t expect a lot out of AAPL, if it does anything at all.  Plus this is not a reinvention of the product line that will drive huge sales growth, profit margins, and earnings.  Most income investors buy a stock for dividends, not capital appreciation, so while an increased payout would be nice, don’t expect the stock to return to old highs on distributing cash to shareholders.

AMZN tried to breakaway from the 50dma but is retesting it by midday.  With so many doubters, holding support is a win and as long as AMZN remains above the 50dma, look for a continuation.

NFLX is trading sideways and resting at $180, also strength given how far its come.  I still wouldn’t short this stock and there is probably more upside remaining.

Everyone loves AAPL and is suspicious of AMZN and NFLX.  Fear what is safe and embrace what is feared.  Often the contrarian trade is going with the trend and that is the case with these three stocks.

Stay safe

PM: 1500 is rock solid

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Bears cannot break this rally and look for higher prices in coming days.  AAPL surged on hopes of money being distributed to shareholders, but use this strength to get out.  AMZN looks interesting here and NFLX is chewing up bulls and bears alike.

MARKET BEHAVIOR

Stocks stumbled in early trade but recovered most of those losses by the close.  The market is finding support near 1500 and continues bouncing back from any dips to this key level.

MARKET SENTIMENT

No matter what the “experts” say, this market does not want to selloff.  For the umpteenth time it had the perfect opportunity to selloff, yet found support and rebounded.  If this market was as over-bought and overly-bullish as many are claiming, it would have fallen apart at the first signs of weakness.  Clearly that is not happening.  This market will top because every market tops, but it isn’t ready yet.  Look for the cynics to turn into chasers the higher this market goes.  Since many of these cynics are big money managers, there is still a lot of fuel left in the tank.

TRADING OPPORTUNITIES

Expected Outcome:
The reluctance to selloff after so many tempting opportunities shows this market is far more resilient than most give it credit for.  I can’t say how much higher this will go, but high-probability trade remains to the upside.  Today’s rebound made for a nice entry point and if you missed that, look to buy any dips.  We have probably seen the last 1500 dip and look for the market to surge past 1515 as shorts scramble to cover on Friday.  The next target is 1525 and depending on how the market trades there, 1550 is a real possibility in coming weeks.

Alternate Outcome:
With so many failed breakdowns it is hard to see the market implode, but we still need to prepare for the unexpected.  A material break of 1500 that doesn’t find support and bounce is a change in character and we will need to reevaluate our bullish thesis.

INDIVIDUAL STOCKS

AAPL daily at end of day

AAPL spiked in anticipation of a policy shift regarding its cash hoard.  Clearly investors favor getting their hands on some of that money, but this is not a fundamental shift in the business model and the enthusiasm will be short-lived.  The primary reason for AAPL’s selloff has been concern over competitiveness and margins.  Increasing dividends, buybacks, or preferred stock plans does nothing to help the company make more money.  Everyone has long assumed AAPL would do something with that mountain of cash, so most of this is already baked into the price.  This is still a trading stock and a move up to $485 should be used as a selling opportunity.  The best trade for the next few months is selling strength and buying weakness.  Give this story a few days to play out, but don’t get sucked up into the hype.

NFLX pulled back modestly after making a new high. This stock is chewing up momentum chasers and shorts at the same time, so be careful with this one.  The trend is higher and $200 is within easy reach, but it might experience a few dramatic dips along the way.

AMZN slipped under the 50dma, but quickly recovered this level.  Finding buyers and not triggering a larger avalanche of selling is suggestive of a move higher.  If the broad market breaks out to new highs, look for it to take AMZN with it.

Stay safe

AM: Volatility continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:21 EST

AM Update

The S&P500 fell under 1500 this morning, but has since found support.  While nerve-wracking  this volatility is building support for the continuation.  AAPL is finding strength, but I remain suspicious and would be a seller if the stock breaks into the gap.  NFLX is holding its own and FB is at an interesting place.

MARKET BEHAVIOR

Volatility continues as stocks dipped under 1500, but the market found a floor in late morning trade and is back above this key level.

MARKET SENTIMENT

This sideways churn is changing the ownership base as nervous holders are selling to confident ones.  Is this smart money selling to dumb money, or the other way around?  Only time can tell for sure.

Maybe this is just selective hearing, but it sure seems like the only opinion I regularly hear  is “everyone is too bullish”.  I’m sure there are a lot of bulls are out there, but the cynics seem even more numerous, or at the very least more vocal.  But I could be mistaken too.  We tend to notice things more once we are a member of a certain group.  For example when a person buys a car, suddenly they notice that same model all over the place.  When we take a bearish or bullish position, we have to be careful we don’t selectively filter our view of the world to confirm this bias.  A bull often sees nothing but bearishness and a bear sees nothing but bullishness.

It seems the widely held belief is dumb money is long this market and smart money is waiting for the pullback.  Through the lens of supply and demand, smart and dumb lose their meaning and the only thing that matters is size of each constituent.  Professional money managers are typically labeled smart money, but they are also the largest players.  I’m far more nervous when all the smart money is doing the same thing because they hold all the chips.  If this rally continues and “smart” money is forced to chase, it will lead to a fairly spectacular, and profitable, rally.

TRADING OPPORTUNITIES

Expected Outcome:
The market is retesting support at 1500.  Another bounce here will make the market even stronger because each dip flushes out weak hands.  While it has been a wild ride, the last few weeks have been constructive and suggest a sustainable continuation.  If the market holds 1500, today’s dip is buyable.

Alternate Outcome:
The market could be on the verge of running out of dumb money and this entire thing is about to collapse.  Obviously I don’t buy into this widespread view, but I also recognize I can be wrong and that is why we always trade with defense in mind.  1500 is clearly the line in the sand and any dip under it will cause me to reevaluate my bullish thesis.  Without a doubt this market will pullback, it is simply a matter of when.  This constructive price-action combined with the widespread cynicism  is telling me this is not that time.

INDIVIDUAL STOCKS

AAPL continues the whipsaw between $465 and $455.  In my mind this is the exact opposite trade we are seeing in the S&P500.  The indexes are consolidating for a continuation higher and  AAPL is consolidating for a continuation lower.  This sideways trade is calming nervous holders and giving them hope they will get some of their money back.  It wouldn’t surprise me to see AAPL jump back into the $465-$485 gap, but any strength should be sold.

FB daily at 1:21 EST

NFLX made a fresh high this morning, but gave it up and is trading back under yesterday’s close.  The stock found support at $178 by mid-morning and buyers are willing to step in here.  It will be a wild ride, but the stock still wants to go higher.

FB is finding support at the 50dma, a high-volume bounce off this level would be an interesting entry.  Most of the bullishness from the IPO has worn off and the stock is up over 50% from recent lows.  I’m not sold on the long-term prospects for FB, but it makes an interesting trade if it finds support here.  Wait for the bounce confirming support and don’t jump in early because this could just as easily fall through a trapdoor.

Stay safe

PM: Holding near recent highs

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

The S&P500 continues holding 1500 and the uptrend remains intact.  AAPL is whipping traders around, NFLX is crushing shorts, and AMZN looks interesting.

MARKET BEHAVIOR

Stocks rebounded from early weakness and ended the day flat.  Volume was lower than Tuesday but still achieved respectable levels.  This was the 10th day the market traded at or above 1500 and it is creating solid, albeit volatile support around this level.

MARKET SENTIMENT

Bears and swing-traders tried to break this market after Tuesday’s strong rebound, but selling never picked up speed and the market finished where it started.  Bears inability to tempt holders into selling bodes well for a continuation.  Every attempted pullback shakes out weaker hands and this churn is what builds a foundation for the next move higher.

As much as people believe markets respond to fundamentals and technicals, prices only move because of actual buying and selling, also referred to as supply and demand.  Bears and bulls can talk until they are blue in the face, but it isn’t going to make a difference.  Only traders actually buying and selling move the market.  No matter how dire the headlines or substantial the bear’s case is, these last few selloffs failed to bring new supply to market, meaning current owners are fairly confident in their positions.  If current holders cannot be spooked out of the market, supply will tighten and prices head higher.

TRADING OPPORTUNITIES

Expected Outcome:
The ceiling at 1515 is the next hurdle for the market.  The market bumped its head on this level the last four days and no doubt bears have positioned their stop-losses just above this level.  If we break through, expect a short-squeeze to propel stocks higher.

The near-term trend is clearly higher and support at 1500 indicates the high-probability trade remains to the upside.  The bigger question is how much further this can go.  1525 is easily within reach.  1550 is also on the table.  We will be pushing toward all time highs as we move up to 1575.

Maybe we will hit resistance at 1550 and experience a brief pullback before making an assault on all time highs, I can’t really say.  We will take this one-day at a time and adjust our expectations with each new data point.  Going forward from here, sideways trade is supportive of a sustainable rally.  If the rate of gains picks up, look for a blow off top before pulling back.

Alternate Outcome:
Bears calling for a pullback will eventually be right and most likely it will happen when we least expect it.  Most often this is long after people have given up calling for a pullback and the last of the bears concede defeat and jump on the rally bandwagon.  But ironically the last bears buying signals exhaustion and the market rolls over.  While this is most often how things play out, we could also see fear of this market dry up supply in a self-fulfilling prophecy.  When too many traders are afraid of a pullback, they stop buying, and that triggers the pullback.

The big difference between those two scenarios is how deep and long the resulting pullback is.  A blow off top leads to a sharper, deeper, and longer pullback.  Buyers shying away from the market creates a modest dip that bounces back in days.

INDIVIDUAL STOCKS

AAPL had another roller coaster day.  Rumors of a dividend/buyback sent the stock up to $465, but it couldn’t hold those gains and closed down fractionally and the recent trading range of $435 to $465 remains intact.  The market will breakout one of these days, but in the meantime the best trade remains selling strength and buying weakness.  Anyone unwilling to sell their AAPL shares should consider selling options and take advantage of elevated premiums due to recent volatility.  Sell covered calls at the upper end of the range and puts at the lower end.  There is a lot of risk when selling options so this is best suited for experienced traders.

NFLX daily at end of day

NFLX popped above recent resistance and added to its monster move, up 80% in just a few weeks.  Anyone lucky enough to be in this should consider taking some profits off the table.  The bigger concern is for anyone reckless enough to short this stock.  Momentum is clearly to the upside and while the stock could crash any moment, it could also jump above $200 tomorrow.  Someone not in this stock should resist the temptation to chase and instead wait for more stable support to form.  While this could continue higher, it could also come back $30 in the blink of an eye.

AMZN traded lower on light volume, but it is still above the 50dma.  Look for support and buy the bounce off the moving average.  The stock is getting extended, so don’t get greedy and take profits early and often.  For the bears, this stock’s day is coming, just not yet.  Remember early is the same thing as wrong, so wait for the right entry.

Stay safe

AM: Modest selling

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:21 EST

AM Update

The S&P500 is trying to recover from early weakness, but selling is modest given the size of yesterday’s rebound.  AAPL popped, but is struggling to hold those gains.  NFLX is humiliating bears again AMZN is finding support.

MARKET BEHAVIOR

Stocks started weak, but bounced back by late morning.  Earlier in the up-trend the market opened weak and finished strong.  We will watch afternoon trade to see if this pattern is making a comeback.

MARKET SENTIMENT

Bull markets often experience early weakness followed by strength.  Many participants are still suspicious of the rally and sell new highs in anticipation of the “inevitable” pullback.  This view is widespread enough that it gains some initial momentum, but selling tapers off because most cynics are already out of the market. Once supply dries up, prices rebound and make new highs.  This pattern repeats until most cynics have given up and jumped on the bull bandwagon.

This pattern is not exclusive to intraday periods and is seen across days and weeks too.  All through January early weakness was overcome and the market strung together countless up-days, but more recently the market closed on the day’s lows only to see it snap-back the next day.

This market will eventually top because every market does, the challenge is figuring out when.  Markets rally on the back of pessimism and as long as cynics are holding out, look for the rally to continue.

TRADING OPPORTUNITIES

Expected Outcome:
Most traders should take their money and run from this volatile market because it is too easy to buy high and sell low when the market is whipping around.  There is upside left, but it is really hard to tell the difference between a bear-trap and a real breakdown.  This market will be buyable if we see more sideways trade around 1500 or a retest of recent support at 1475.  This is the refresh the market needs to continue sustainably.  Without this, be suspicious of any strong advance.

If someone has to trade this market, go against the crowd by selling strength and buying weakness.

Alternate Outcome:
It is hard to escape the opinions of people who don’t believe in this rally.  They quote all kinds of fundamental information and while their logic is sound, the market is not worried about it.  There are two possible explanations, one is the market already discounted those risks and it is included in the price.  The other is the market is choosing to ignore it and that can last for only so long.  I’m firmly in the bull camp, but I don’t intend on going down with the ship if this market starts sinking.  Finding support at 1470 is healthy, breaking this level means I need to reevaluate my bullish thesis.

AAPL daily at 1:22 EST

INDIVIDUAL STOCKS

AAPL surged $14 over a few minutes this morning, but the rally ran into a wall at $465 and is drifting lower.  This is a trading stock now and most moves should be met with suspicion.  An interesting trade for an AAPL owner at $465 would have been selling the Feb 15 $470 call for $5.  As I’ve shared, I’m not in AAPL, but for those who cannot bring themselves to sell, covered calls and selling puts could be one way to squeeze some money out of a stock stuck in a trading range.  Obligatory warning: selling options is dangerous and make sure you understand the risks before trying this.

NFLX is up another 5% as more bears are getting skinned.  The stock broke above recent resistance near $175 and the ironic thing is bears are the ones pushing this stock higher with their short covering.  Bears might eventually be proven right in this stock, but we must remember early is the same thing as wrong.

AMZN has some volatility following earnings, but it is finding support at the 50dma.  A high-volume bounce off of this moving average can be bought for a shot trade, but watch out if the market lets this stock dip under this key level and technical support at $260.

Stay safe

PM: Bears cannot dent this rally

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

The market had every excuse to collapse in an avalanche of selling, but it bounced back instead.  The trend is clearly higher.  AAPL could break into the gap on broad market strength, but don’t fall for that bull trap.  NFLX’s gains might not be sustainable over the long-term, but look for the stock to continue chewing up bears.

MARKET BEHAVIOR

Stocks bounced back and recovered virtually all of Monday’s losses.  Volume was above average and higher than yesterday’s selloff.  After a month of mostly steady and calm trade, the market has given us dramatic back-to-back-to-back reversals.  The market is still finding support at 1500 and the uptrend remains intact.  When in doubt, stick with the trend and that has been the right trade so far.

MARKET SENTIMENT

The market steamrolled bears that  jumped on the short bandwagon during Monday’s selloff in another example of the easy trade being the wrong trade.  A lot of people are rooting for this market to pullback, even collapse, but ironically they are the ones holding it up.  Bears and reluctant buyers create the demand needed to keep pushing prices higher.  As long as people don’t believe this rally, it will have an ample supply of buyers ready to chase or cover short positions.

Often people mistakenly think the contrarian trade is going against the trend, but it is really going against the crowd.  This is a small but important distinction because often they are different things.  Consensus is this market is overbought and prime for a selloff, meaning the contrarian trade is betting on a continuation, and that has been the smart position to date.

TRADING OPPORTUNITIES

Expected Outcome::
Bears gave it everything they had on Monday, but they couldn’t trigger wider selling.  Holders had every excuse to sell as the market broke under recent highs on a volatile down day, but bears were unable to shakeout many owners and supply dried up quickly.

The uptrend is clearly intact, the only question is for how much longer.  If we string together a couple more strong up days,  that will signal time to bailout and start looking for a shorting opportunity.  If the market calms down and consolidates in a sustainable way, look for a longer continuation.

Alternate Outcome:
This volatile trade could be the final gasps of the rally and we won’t see one last surge higher before buying dries up.  Watch support at 1500 and breaking this level over the next couple days will show bulls don’t have the support or follow-on buying to continue moving this market ahead.  A break of 1500 so soon after finding support will likely lead to a pullback to 1470 and possibly the 50dma.  How low a pullback goes largely depends on how quickly sentiment changes once the market starts selling off.  If the market stays stubbornly bullish, the dip will be deeper, but if panic follows any selling, look for a quick and sharp bounce.

NFLX daily at end of day

INDIVIDUAL STOCKS

AAPL followed the market’s lead and bounced back from yesterday’s weakness.  The stock is forming a trading range between $460 and $435.  If the broad market surges in coming days, look for AAPL to break into the gap, but this is be a selling opportunity, not a buying one.

NFLX is holding recent gains nicely and this pattern is more conducive to a continuation than a top.  This trade looks like 2011 all over again with shorts betting against the stock and getting killed for it.  We might not see a new $300 high out of this move, but don’t short this thing because the trend is clearly higher and any strength will turn into another powerful short-squeeze.

Stay safe

AM: Market finds support

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:06 EST

AM Update:

AAPL and the S&P500 are giving traders whiplash.  In both cases look for the trend to continue, but take profits early and often.

MARKET BEHAVIOR

Stocks bounced back from yesterday’s sharp selloff and the whipsaws are chewing up impulsive traders.  The market usually gets more volatile near turning points as power transfers from one side to the other, but look for one a final push higher before trading against the rally.

MARKET SENTIMENT

The market is filled with regret after the last few days of volatile trade.  Anyone reacting to the market’s moves is having a bad time because breakouts and breakdowns are failing left and right.  Clearly the best trade is selling strength and buying weakness, but often that is the hardest trade to make.

Last week started with three out of four days in the red.  Many thought that was the obvious top they were waiting for and felt save safe going short.  Then Friday’s market blew out all the bears and seduced plenty of breakout buyers to jump on the bandwagon.  Yesterday’s pullback made those breakout buyers look foolish and this time the breakdown was for real because it broke recent support.  And here we are today with yet another whipsaw day back to the upside.  The lesson is don’t get in the way of this meat-grinder.  Trade proactively not reactively.  Take profits early and often because they are going to disappear in a matter of days or even hours.

TRADING OPPORTUNITIES

Expected Outcome:
There is no reason to ride this roller coaster and if it is playing games with your emotions, step to the sidelines and wait for more stable trade.  The mistake many traders make is felling compelled to trade every market.  Most can make money, but they shoot themselves in the foot by sticking around too long and giving back all their profits.  For those ambitious enough to trade this market, when in doubt, stick with the trend.  We haven’t seen a blow-off top so continue going with the rally, but in this more volatile period sell strength and buy weakness.

Alternate Outcome:
While the market often exhibits patterns, there are no absolute rules in trading.  This volatile trade could be the top and we won’t see a final push higher.  Markets exhaust themselves when buying dries up.  Typically this happens on a final surge higher as the last of the shorts are runoff and momentum chasers buy in  but this is not the only reason buying dries up, especially with intermediate pullbacks.  The high probability trade remains to the upside, but cover your backside with stop-losses if the market fails to hold support and downside selling accelerates.

AAPL daily at 1:07 EST

INDIVIDUAL STOCKS

AAPL is also jerking traders around as it regains $450 this morning.  The sharp directional trade has arrested itself and we should no longer fear a huge rebound or selloff in the near term.  The stock is consolidating around $450, but look for a drift lower to demoralize the remaining hopeful holders.  While it will start slowly, the selling will pick up as regret builds in the stock.  Only after it becomes the most hated stock on Wall Street will it finally be a safe buy.  But at the same time, the big gains in AAPL are behind it without a new revolutionary product or strategy shift.  AAPL is transitioning into the typical stagnant mega-cap trading range and we could see AAPL trade sideways between $450 and $550 over the next 10 years.

If buy-and-hold is dead in AAPL, look for other strategies, such as swing-trading and selling options to make money going forward.    If you want to buy more if the stock on dips, consider selling puts under recent lows when the stock dips.  If you have stock you don’t want to sell, try selling covered calls above recent highs when the stock goes up.  These are expert strategies so make sure you understand all the risks before trying them.

Stay safe

PM: Biggest selloff of the year

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Biggest selloff of the year and AAPL is flirting with recent lows.

MARKET BEHAVIOR

Stocks had their biggest down day of the year, but volume was surprisingly absent for such a large move.  This shows this was the product of too little buying instead of widespread selling.  The last few weeks of gentle updrafts have spoiled investors and any losses catch people by surprise, but selling is part of any rally and a few red days here and there are not fatal.

MARKET SENTIMENT

There are two ways to look at today’s restrained selling volume.  One view says the selling was limited and will dry up soon.  The other is we need a high-volume flush to revitalize this market and today’s low-volume doesn’t qualify.  We are left deciding which scenario is more relevant to this market.

It largely comes down to how spooked traders were by this reversal from Friday’s breakout.  If complacency rules and most traders are holding on and waiting for the expected rebound, then more selling is in store.  But if the dip spooked weak hands out and brought in agressive bears, we could see selling exhaust itself quickly as another short-squeeze propels us higher.

TRADING OPPORTUNITIES

Expected Outcome:
Selling is part of every advance.  While we are not at a major top, some selling here is normal and healthy.  I don’t know if we are in the middle of a test of 1500, 1470, or 1450, but I would bet on a rebound, not a crash.  The best thing to do is let the market tell us what it wants to do.  Finding support by midday on Tuesday is suggestive of a quick bounce.  If selling  picks up as we fail to hold 1496 and technical stop-losses are triggered,  look for support near 1480 or 1470.  A high-volume dip and reversal would be ideal for a longer continuation but not necessary for a modest bounce.

Alternative Outcome:
Could this be the big top everyone’s fearing?  We have budget talks, deficit spending, money printing, high unemployment,  and a weak global economy.  It is possible, but unlikely one of these will crash this market.  Things that everyone is watching and talking about rarely become dangerous because there is so much awareness and time to solve the problem.  This is the exact reason Europe has been able to hang on for 3+ years.  But at the same time we cannot totally ignore the possibility if a black swan and that is why we trade with stop-losses.  Violating support at 1450 will invalidate the continuation thesis and we will reevaluate the market’s health if that happens.  Of course there is no reason a nimble swing-trader needs to wait for 1450 before getting out of the market.

AAPL at end of day

INDIVIDUAL STOCKS

AAPL is trading just above $440 and a few dollars from the recent low of $435.  A lot of buy-the-dip traders put their stop-losses under $435, so expect selling to accelerate if the market breaks this key technical level.  Since everyone who is attracted to AAPL already owns it, I’m not sure how quickly AAPL will find support from new buyers if it triggers a larger wave of stop-loss selling.  The silver lining  is another wave of high-volume selling brings this stock one step closer to finding a bottom.  All the fearful and hopeful holders need to be driven off so AAPL can build a solid foundation of confident and steady holders that will not flinch in the face of further selling.  It is their steadiness that will finally allow AAPL to rebound.

Stay safe

AM: Bear trap?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:21 EST

AM Update

Bears have the perfect opportunity to break the market here and if they fail, look for higher prices.  AAPL is going the wrong way as buyers fail to show up and prop the stock up.

MARKET BEHAVIOR

Stocks opened weak after Friday’s big bounce, giving back all of those gains.  Early weakness is not a surprise since many people still doubt the sustainability of these record highs.  What is important is how the market responds to this dip.  Finding support and bouncing back in afternoon or Tuesday’s trade will signal a continuation.  This selloff is the perfect slow-ball pitch for bears and if they can’t this this one out of the park, look for the rally to continue, but if selling accelerates, this is the start of a pullback and look for a retest of 1470

More often than not, these rallies surge into their top and we have not see that type of nonstop buying yet.  (see Saturday’s weekly review post for more on this)  Often the final stages of a rally are volatile and the market frequently bounces back from what most assume is the expected breakdown.  In situations like this, the best trade is buying weakness and selling strength, not jumping on the breakout/breakdown.

S&P500 weekly at end of week

MARKET SENTIMENT

No one believes in this rally.  Even the most bullish expect a near-term pullback to digest recent gains, but markets are a function of supply and demand so we need to understand how these expectations affect the way people are positioned.

Chasing pushed this market to new highs, but these same holders are also very skittish and everyone is rushing for the exits on any weakness.  These mad dashes of selling are what refreshes a rally, clearing the way for new buying.

Today’s dip under 1500 is the selloff everyone’s been waiting for and they are selling into it, but the easy trade is rarely the right trade.  Once all the nervous are out and the aggressive short, selling will abate and that lack of further supply will send the market higher.  We need to fear markets where longs stubbornly hold on, not rush for the exit.

TRADING OPPORTUNITIES

Expected Outcome:
If tops were easy to spot, every trader would be fabulously rich.  Following this logic, if most people get tops wrong, then we should be extremely suspicious when everyone, including bulls, are expecting a top.

To get ahead of this market we need to be proactive instead of reactive.  Sell strength and buy weakness.  Sell when you don’t want to sell and buy when you don’t want to buy.  As we are seeing today, Friday’s breakout was a great time to sell and it seems today’s weakness is an interesting time to consider buying.  We don’t need to rush in and buy on the way down, but look for convincing support over the next couple days that shows the selling has exhausted itself.  We are entering a more volatile period of the market cycle, but the trend is still intact.  And most importantly, don’t lets these intraday swings make you buy high and sell low.

Alternate Outcome:
Sometimes the crowd gets it right, especially when it comes to lack of demand.  If buyers fail to show up, prices will decline and that weakness could trigger a follow-on wave of stop-loss selling.  As I write these words, the market is breaking through 1500 and no doubt triggering some stop-loss selling with even more stops lined up under the recent lows of 1496.  The market can peak and rollover at any time, but more often than not it surges before rolling over and weekly charts show this market is not at that point yet.

There is no reason to trade the last stages of a move since it is often more volatile and harder to get right.  For many traders the smart move is taking their profits and waiting for the next high probability trade.  But for the aggressive, this recent weakness is interesting buying opportunity and I sure as heck wouldn’t be piling on the short bandwagon here.

INDIVIDUAL STOCKS

AAPL failed to hold $450 and is testing $440.  Dipping under $435 and making a new low is clearly in the cards.  If anyone watching AAPL from the outside isn’t convinced of the value at $460, then it is highly unlikely they will come to the rescue at $425.   The question AAPL bulls need to answer is who is going to buy the stock and push prices higher?  The stock’s inability to bounce back from the post-earnings gap shows everyone who believes in this story already own all the AAPL they can hold.  Without new buyers, this thing will continue floundering.

Stay safe