Monthly Archives: March 2013

LA: Time to leave the party?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Look Ahead

We made all-time closing highs, but how much is left in this 4.5 month old bull?

MARKET BEHAVIOR

Stocks are trading at the highest levels in history.  As far as the market is concerned, the Great Recession is ancient history and it’s embracing the expected recovery.  Volume remains chronically low since we broke above 1550 three-weeks ago, showing a lack of engagement by both bulls and bears.  Thursday’s all-time closing high was a momentous achievement and  time will tell if this was the start of the end, or just another step in the steady march higher.

The next significant milestone is 1576, the all-time intraday high set in late 2007.  We are seven-points shy of this target and in easy striking distance if buyers support this breakout.  The other noteworthy event is the end of the first quarter.  Big money managers closed their books on Thursday and are starting fresh Monday.  Will they pursue the same strategy from Q1, or shift gears?

MARKET SENTIMENT

The rally that Ben built.  It seems everyone knows the Fed created this invincible market and “don’t fight the Fed” is the rallying cry of bulls.  But as readers of this blog know, only two things move markets, supply and demand.  Stock certificates are like baseball cards and primarily derive their value from what other people are willing to pay for them.   The only real tool the Fed has is indirectly influencing interest rates and they have been successful at driving them to historic lows.  Low interest rates make it less expensive for businesses and individuals to borrow money, but this also make it less attractive to invest in safe, fixed-income instruments.  The pathetic interest rate on Treasuries and savings accounts persuaded many to search for return in riskier assets, and to a large degree this worked as the stock market has been a large beneficiary.

Last year there was concern about diminishing returns and inflation from QE3 and QEfinity, but the market continued rallying and  inflation remains constrained.  Some will point to rising prices at the grocery story as proof of inflation, but to have real inflation we also need wage inflation, and given the employment situation, it seems unlikely we will experience runaway inflation any time soon.  While we might experience a decrease in standard of living as the dollar falls and we compete with an exploding global middle-class for resources and products, that is completely different from out of control inflation.

But back to the markets, easy money has propped up the stocks, but now everyone expects it to keep working, will it?  Going back to the supply and demand argument, where are the next buyers coming from?  Some point to an over-inflated bond market, but most bond holders are not in bonds for profit, but security.  After 2008 ROI has a new meaning, Return OF Investment.  Many investors saw their retirement plans shatter over a period of months and it will take many years to recover from that trauma.  The eventual move out of bonds into equities will happen at a glacial pace and while it will provide lift to the secular bull market, it is not enough to overcome intermediate market weakness.

The current rally is 4.5 months old, fueled by a nearly nonstop wave of buying since the November lows.  The question any bull needs to answer is who is the next buyer?  Everyone trusts Uncle Ben’s safety net and is buying with little regard to the risks, but if everyone is in, who is left to buy?  Its been a long time since the markets felt this safe, making it one of the most dangerous time in years.

TRADING OPPORTUNITIES

Expected Outcome:
The easy money has already been made.  Any profits going forward will be hard fought and involve some gut wrenching volatility.  Every rally leg eventually comes to an end and given the size of the September’s modest selloff and recent rebound, this rally has come a long way.  Given the recent strength, we should be looking for places to lock in profits not initiate or add to positions.

Momentum is clearly higher, and shorting the market here is picking a top, but there is a huge difference in risk/reward between locking in profits and going short.    The market could top on Monday, next week, or next month.  The truth is no one knows exactly when the market will top, but we can identify situations where it is more likely to top.  The key to success in the markets is not selling too soon and not holding too long.  Given we are 4.5 months into this, that doesn’t seem too soon, and holding for more gains is pushing our luck.  If we were to pick the sweet spot between too quick and too long, this seems to be it.

Alternate Outcome:
The market has experienced year-long rallies before, the most recent following 2009’s generational market bottom.  But we have to ask ourselves if the events leading up to March 2009 bottom are materially different from our most recent November 2012 lows?  Is there anything in common between the two?

Markets often act like springs, the harder we push one way, the bigger the reaction in the opposite direction will be.  We see major moves following crashes and euphoric bubbles, but current conditions don’t conform to these extreme scenarios, so more likely this rally will be of the vanilla verity.  6-months is not out of the question, meaning we could have another few weeks of upside left and that is what we have to watch for.  Continued support above 1560 next week shows the market can still find buyers and will likely continue higher.  The thing we need to be most careful of is weakness that doesn’t bounce back.  There are only so many time dip-buyers can prop up the market and we are testing that limit.

Stay safe

WR: We finally did it

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review

All-time highs, but what comes next?  AAPL finished weak and inability to find follow-on buyers after breaking above the 50dma is a concern.

MARKET BEHAVIOR

Stocks gained 0.8% in a week where we finally set the all-time closing high.  While volume was extremely light due to the holiday shortened week, it still fell 8% below average when prorated to account for the missing day.  The 10wma is closing the gap with our sideways market and is just 37-points behind.  The 40wma is also making gains, trailing by 125-points.

Market Cycle:
This rally is 19-weeks old and covered 16.8% since the November low.  This already exceeded the 15-week, 16.4%, June-September 2012 gains, but is short of the 25-week, 32.2%, rally between October 2011 – April 2012.

The most notable difference between these previous rallies was the prior decline.  The 2011 market corrected 20%, the 2012 Spring selloff was 11%, and the most recent pullback leading to our current rally leg was 9%.  The bigger the selloff, the larger the rebound.  The last decline was the smallest and likely means we are living on borrowed time.

If there are any Elliot Wave fans out there, we are in the 5-wave across three-different time-frames.   See the accompanying chart.  Combine this with the potential head-and-shoulder formation, technically this is a good time to tread lightly.

This late in the rally we would expect the rate of gains to slow.  The best profit opportunities follow the reversal and we are four-months removed from those easy buy-and-hold gains.  The later stages of a rally are typified by volatility and limited progress; exactly what we’ve seen over the last three-week, 15-points gain.  Technicals and history say this market is running on fumes and we closer to the end of this run.

MARKET SENTIMENT

All-time highs typically bring cynics out of the woodwork as they cry unsustainable and point to the secular-bear tripple-top.  While I count myself as a long-term bull, there are enough warning signs to make me cautious here.  It is not uncommon for rally legs to last longer than 4-months, but so far everything is lining up for a near-term top.  Indifference to negative news, lack of short-squeezes, and widespread enthusiasm show market sentiment has changed dramatically from the fear and pessimism that dominated December and January.

TRADING OPPORTUNITIES

Expected Outcome:
This is a place to take profits, not establish new positions.  We are in this to make money and can only do that by selling our winners.  I started growing more cautious three-weeks ago when we first broke 1560.  Anyone selling into that strength missed all the recent volatility and gave up less than 10-points of upside.  Without a doubt there is a break-even between profits and nerves.  In my book a fraction of a percent is not worth being jerked around.  Amateur traders hate selling early, but it is one of the easiest ways to keep our sanity and avoid making dumb mistakes.

Alternate Outcome:
Continued strength shows the market is not ready to breakdown.  Markets typically selloff shortly after making news highs.  If we don’t encounter weakness next week, we will likely see higher prices before topping.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL had a disappointing finish to the week after showing such promise closing above the 50dma for the first time since September.  The stock lost 4% for the week and gave back virtually all the previous week’s gains.  Bulls claim this is just a temporary setback on the way higher, but failing to find new buyers after such a significant technical breakthrough should give anyone pause.  The down-trend was not broken by recent strength and any buying here is catching a falling knife.  There is nothing wrong with playing a game of bottom picking, but make sure to use tight stops and appropriately sized positions.  Until the stock starts making higher-highs and higher lows, expect the trend of lower-highs and lower-lows to continue.  That means we likely have a date with $400 in the near future.  Reclaiming the 50dma this week is bullish and look for a retest of $485.

Stay safe

PM: We did it!

By Jani Ziedins | Intraday Analysis

PM Update

It took a while, but the market final set the all-time closing high.  Is this the end of the run, or are we just getting started?  AAPL missed the party and plunged 2% as is struggles to find buyers.

MARKET BEHAVIOR

Stocks finally did it, they set the all-time closing high Thursday.  Volume was extremely light given the breakout, end of quarter, and option expiration trading activity.  The all-time intraday high is the only record left and is just 7-points away.  It’s amazing how far we’ve come since the 2009 lows.

MARKET SENTIMENT

Friday’s 0.4% breakout is nothing to write home about.  Shorts and momentum buyers are nowhere to be found and Thursday’s move was fairly uninspiring.  Without a doubt the holiday played a role in the light volume and lack of enthusiastic follow-on buying.   We are left to determine if these new levels are here to stay and if buying will keep pace when volume returns to normal.

Sentiment came a long way from the post-election and Fiscal Cliff lows last November.  Even two-months ago the tone was very cynical.  There are still bears abound, but the pessimism doesn’t seem nearly as pervasive and universal.  Without a doubt momentum can carry us a dozen points higher, but are there enough buyers left to continue past 1600 without a material pullback?

The biggest risk the market faces is if bulls bought the breakout ahead of time and swing-traders will use the new high to lock in profits.  Few buyers and lots of sellers is a recipe for declining prices.

TRADING OPPORTUNITIES

Expected Outcome:
This rally deserves a lot of credit.  Its did what no one thought was possible and matched the go-go record highs set long before most knew what a mortgage-backed security or credit default swap was.  The lesson is never doubt our determination to overcome anything thrown in our way.  This rally has long legs and the secular bull will easily pass 2,000 in coming years.  I don’t believe in the tripple-top theories being thrown around.  This market has gone nowhere in thirteen years, how can people possibly claim that is unsustainable and too-far, too-fast?  But that is the long-range view, we are traders and want to know what is around the next corner.

The market continues holding 1550 and every bout of selling is conquered, resulting in yet another higher-high.  Any bear knows how dangerous it is challenging this bull, but every move must come to an end.  As much as I believe in the longer-term trend, I don’t feel comfortable owning stocks on the heels of a four-month rally.  Markets go up and they go down, it is normal, healthy, and expected to run into a little resistance after coming this far.

Alternate Outcome:
The one thing this market does best is prove doubters wrong and it continued doing that on Thursday.  Markets always pullback, but they never do it when people expect it.  When markets top, they tend to roll over fairly quickly.  The last few weeks of support at 1550 is what enabled this breakout to all-time highs.  If this market holds up through Tuesday, look for more gains out of this bull.

INDIVIDUAL STOCKS

AAPL is living in bizarro world.  When the broad market sets all time highs, AAPL plunges 2%.  AAPL clearly has a demand problem and cannot find follow on buyers to keep it above the 50dma.  Even more scary is all the recent momentum buyers are fleeing in droves.  The stock fell short of setting a new high above $485 and the trend of lower-highs continues.  Without buyers, expect the stock to test $400.

Stay safe

AM: Holding for the record

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:02 EDT

AM Update

The market set a new high and is in a position to break the all-time closing highs.  AAPL’s struggles continue as buyers are staying away.

MARKET BEHAVIOR

Stocks finally broke the 1565 barrier, but they need to hold it to set the all-time closing high.

MARKET SENTIMENT

How the market trades above 1565 will be insightful.  Will the market continue higher on breakout buying and short-covering?  Or was the new high already priced in and there are few left to buy the breakout?  How the market goes into the close will tell us a lot about people’s positioning and views.

This is the last day of a rough quarter for many money managers.  Anyone who was underweight the market had a bad time, but fortunately for them, most clients simply look at the bottom line to see if they made or lost money, neglecting to compare their expensive money managers against dumb and cheap index funds.  Everyone starts fresh next quarter and has the flexibility to trade their view of the market instead of scrambling to keep up with a strong rally.  Will this change the way big money approaches the markets?  Will they stop buying?  Will they start taking profits?  Or will they double-down on this teflon rally?

TRADING OPPORTUNITIES

Expected Outcome:
A lot of questions will be answered the next couple of weeks.  Can we hold these highs?  Will big money keep chasing?  Are there enough buyers left to continue the rally?  Right now we simply wait for those signs.

I remain reluctant to own the market because we always see step-backs and its been a while.  The February dip was three-percent and while noticeable, we will see much larger pullbacks this year.  No matter what we expect, we need to keep an open mind to what they market is telling us.  If the market doesn’t do what we expect, then our analysis is flawed and we need to adjust it.

Alternate Outcome:
This sideways trade emboldened bears and it is easier to find bearish commentary as compared to a couple of weeks ago.  These whipsaws refreshed the market by flushing out weak holders and reminding traders that the market is a risky place.  If we continue higher, this consolidation is where the new buyers will come from.   Of course we need to remember minor corrections and consolidations lead to minor moves, so even if we continue higher, don’t expect another 100-point, non-stop move without

Recent support is impressive and more suggestive of a continuation than an imminent pullback and that is why we are seeing new highs today.   Moving into next week will put quarter-end shenanigans behind us, giving us a clearer view on what the market is thinking.   Market tops tend to roll over quickly after the cracks develop, continued strength shows we are not there yet.

AAPL daily at 2:02 EDT

INDIVIDUAL STOCKS

AAPL’s bad luck continues as few are willing to buy the dip under the 50dma. All the buying happened in the run-up to the breakout and no one was left to continue the move.  This is a trading stock now and should be treated as such. Any strength is a selling opportunity because until it proves otherwise the trend remains lower.  Buying dips is okay as long as a trader is disciplined and uses hard stops for protection and to lock in gains.  AAPL’s next earnings release is nearly a month away and it seems unlikely Cook will surprise shareholders with good news in the meantime.

There is still a lot of bullishness left in this stock and it is not done humiliating bulls yet.

PM: One way or the other

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Indecision continues as the market remains stuck in its trading range.

MARKET BEHAVIOR

Stocks sold off early, but recovered lost ground and finished practically flat.  Volume remains light as few are trading the holiday shortened week. The struggle with 1565 continues and today was the sixth-day in the last two-weeks where the market traded north of 1560 but failed to capture a record close.

MARKET SENTIMENT

This is a hard post to write.  Over the last three-weeks we have been stuck in a volatile, tight rut.  It is hard to find fresh insight when the market keeps doing the same thing over and over and over.  Without a doubt, doing nothing means something, I’m just less sure of what that is.  I remain cautious of near-term weakness, but holding together is giving me second thoughts.  It’s not that my earlier analysis is flawed, it just seems early.  (in the markets early is the same thing as wrong)

The market has two options Thursday, finally set a record high, or breakdown.  We are so close to an all-time high that if we don’t finally do it, there are structural problems preventing the market from gaining those last few points.  At no point in the rally has two-points been so difficult and this signals a shift in personality.

The sideways trade is creating through churn what normally happens with a pullback.  Even though the market has been flat, a lot of buying and selling continues taking place.  A bullish interpretation is weak hands are selling to the strong.  The bearish view is smart money is selling to dumb.    In a couple of weeks we will have our answer.

TRADING OPPORTUNITIES

Expected Outcome:
When in doubt, sit it out.  There is no reason to always have a trade on.  Some opportunities are better than others and the savvy trader recognizes the difference.  This is about exploiting the best setups and this market is being stingy.  I remain cautious of near-term weakness, but holding 1550 shows a meaningful depth of buyers willing to prop us up.  This has worked through abnormally light volume, but can the market continue finding support when the normal volume of selling resumes next week?

Alternate Outcome:
Stocks are stuck in this tight range between 1550 and 1565.  We will breakout/breakdown soon, the question is which way.  I am reluctant to own this market here, but recognize the next move could be higher.  There is a good chance we finally close above 1565 on Thursday and put this whole “all-time closing high” behind us.  If the last three-weeks of churn flushed out weak holders and seduced bears to short the market, we could see a decent breakout above 1565.

Stay safe

AM: Comeback kid

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:45 EDT

AM Update

Stocks dipped at the open, but are making a comeback.  AAPL gapped under the 50dma and is struggling to find buyers as it remains at the lows of the day.

MARKET BEHAVIOR

Stocks gapped lower at the open on Euro concerns, but rallied through the morning, reclaiming a large chunk of early losses.  The market remains stuck in the 1545/1565 range and without a strong close, it seems unlikely we will reach record levels today.

MARKET SENTIMENT

Early rebound strength looked like dip-buying and short-squeezing was keeping a steady bid under the market and fueling the one way move.  Are there enough buyers remaining to keep this phenomenon going through the close and beyond?

This is potentially the seventh-consecutive alternating up/down day we’ve seen as volatility is picking up.  Over the last four-months it was easy for the market to rally when we were making new highs every few days.  Even the nasty dips bounced back after just a couple of days of weakness.  Our current three-week consolidation is the longest yet and is a shift away from easy buy-and-hold.  This is just another example of the right trade being the hard trade.  The easy money was made in the middle of the Fiscal Cliff hype, now that everything finally looks good, the rally stalled.

TRADING OPPORTUNITIES

Expected Outcome:
I still find it hard to be constructive on this market, but the longer it holds these levels, the more likely a continuation is.  If we hold 1550 through next Monday look for an upside breakout and all-time highs.  But a breakdown the next couple days and all bets are off.  I’m still waiting for a dip under 1545 that doesn’t bounce, but so far the market is holding up and I have to respect that.

Even if the market pops next week and sets all time highs, that will be a selling opportunity, not a buying one.  Every rally needs a break and this one came a long way in four-months.  Given the limited upside and large downside, this is a poor place to own stocks.

But don’t get me wrong, I’m not a bear, just an opportunist.  We have plenty of room for a five-percent pullback before resuming the longer-term uptrend.  Two-steps forward, one-back.  I’m still constructive on the economic rebound and believe in the longer-term secular reallocation away from bonds and into equities.

Alternate Outcome:
No only could the rally poke its head above all-time highs, it could continue higher for a few more months.  The market hates being predictable and a summer rally would be unexpected.  Big money trading strategies often change from quarter to quarter, but often is not the same thing as always.  Strong economic improvement could delay the expected step-back, but the higher we go, the harder we fall.

AAPL daily at 1:45 EDT

INDIVIDUAL STOCKS

AAPL ran out of buyers and gapped under the 50dma, a big warning flag for bulls.  This could simply be a step-back on the way higher, but no one is buying the dip this morning as the stock trades at the lows of the day.  Anyone with a profit might look to lock in at least a portion until the stock reclaims the 50dma.

Stay safe

PM: Here we go again

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

The market challenges all-time highs, but comes up short again.  Will tomorrow finally be the day?  AAPL’s pause appears constructive.

MARKET BEHAVIOR

Stocks made a new 52-week closing high and are less than two-points from the all-time closing high.  Today was the sixth-consecutive alternating up-and-down day.  Volume continues declining between the holiday shortened week, spring break, and the last week of the quarter.  It seems like many traders already checked out for the week.

MARKET SENTIMENT

The all-time closing high continues eluding this market, will tomorrow be the day?  It was nearly two-weeks ago the first time we asked that question.  Will if finally happen Wednesday, or will the alternating pattern continue?

Volatility is humiliating both bulls and bears as it sucks in and spits out any reactive and impulsive traders.  The key to surviving periods like this is trading proactively by selling strength and buying weakness.  Often that means going against our gut, but that is precisely why it works.  Evolution wired all of us the same and what we feel is also experienced by most market participants.  To thrive we need to break free from the herd and chart our own course.

Volatility and turmoil is a key sign of market tops, but it also signals consolidation and continuation.  If this were easy everyone would be rich.  It seems some of the bullishness is wearing off as we stall at these levels and the bears coming out of the woodwork again.  By itself that does not signal a continuation because at some point bears will eventually be right.  The question is if there are still too many bears out there?  We will have our answer soon enough.

TRADING OPPORTUNITIES

Expected Outcome:
I keep asking questions because the market is giving us few answers.  The battle between bulls and bears is fairly even here.  My bias is with the bears, but I could easily see bulls pulling this off one more time.  We can talk about this stuff until we are blue in the face, but the truth is we are simply killing time until the market reveals which way it wants to go.  At this point it seems just as likely we finally set the all-time high as break down.  But there are different consequences for each.  Rebuffed by 1565 one more time is far more damaging for bulls than finally closing above this level will be for bears.  Bears have lost this fight for a while and one more setback is not a big deal, but the first bull loss is far more significant and signals a potential change in personality.

Alternate Outcome:
Markets rarely give us this long to sell the top.  Holding these levels thorough Monday clearly shows bulls are still in control.  If the market doesn’t break down over the next couple days, look for the continuation.  Maybe the continuation is one last push through all-time highs at 1576 and only lasts a couple of days, or maybe we rally through the summer before resting.  All we can do is follow the markets lead and pick up the clues it gives us.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL took a break, but is still above the 50dma.  There was a lot of chasing as it finally broke above this widely followed moving average for the first time in five-months.  This is healthy and constructive as long as we continue holding.  The if stock is still finding support, it will hold the 50dma.  A dip so soon after reclaiming this level is a warning flag that it is struggling to find new buyers.

Stay safe

AM: Bouncing back

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:29 EST

AM Update

Stocks bounced back on positive data, but are still shy of all-time closing highs.  AAPL is resting, but this is supportive of the recent bounce.

MARKET BEHAVIOR

Stocks gapped higher at the open following encouraging data, but traded sideways around 1560 all morning.  The extents of the current trading range fall between 1538 and 1565.  Today’s strength brings us closer to the upper end of the range, but the market still struggles to find buyers willing to push it above all-time highs.

MARKET SENTIMENT

Given the rise in homebuilder stocks, strength in home prices shouldn’t surprise anyone and the market saw this coming for a while.  Same goes for gradually improving manufacturing data.  These do discredit bears’ claims the economy is slowing, but given the market’s strength the last few months, this negative opinion is increasingly in the minority.

Sideways trade here is constructive, but it will likely be a quiet week due to the holiday and quarter end.  Big money is largely positioned how they want to end the quarter (window dressing) and are just coasting this last week.  Next week is when they get back to business and look at the market with a clean slate.  Without pressure to chase, will they keep buying?  We’re days away from learning the answer.

If the market is running out of buyers, it should happen pretty quick.  Continued sideways trade shows buyers are stepping up and supporting prices.    1545 is the level to watch.  A dip under here is more worrisome for bulls than a pop above 1565 is for bears.  This far into the rally gains are harder and harder to come by and dips are increasingly more likely.  No one has a crystal ball, but we can trade probabilities.  History tells us we should expect multiple 5% pullbacks each year, each quarter often has a different personality, and every rally must end.  On the other side, it also tells us rallies often go far longer than anyone expects.

TRADING OPPORTUNITIES

Expected Outcome:
The challenge for a savvy trader is not selling too early, and at the same time not holding on too long.  We aim for the sweet spot between these two common made mistakes.  Hold when everyone is talking profits and sell when everyone is holding for larger gains.  This sweet spot is a region, not a point and we need to decide what is good enough.  We cannot sell the top, so either we are late or we are early.  Many retail investors try to sell late because the logic goes holding past the top lets a trader continue riding prolonged rallies higher.  And it makes a lot of sense, but I’ve never seen an interview with a successful trader who uses this strategy and almost all say they sell on the way up.  Do we want to model ourselves after the average retail investor, or the elite trader?

Either way, the market is looking for direction here.  We cannot trade between 1550 and 1560 indefinitely and a resolution is imminent.  The trend is higher and it is often smart to stick with what is working.  Of course every rally ends and this one has been around the block a few times, putting it closer to the eventual pullback.  If a trader doesn’t have conviction here, the best trade is no trade.  Simply sit this one out and wait for a better setup.

Alternate Outcome:
Everyone continues holding on for new highs.  This limits supply and is propping up the market.  As long as supply remains tight, the market can continue higher.  The bigger question is how much higher.  20-points on a 200-point rally is fairly trivial.  100-points is a major continuation.  Between the changing quarter and lack of short-squeezes, sentiment is changing.  Bearish expectations over the last three-months enabled this rally, but if people come into the second quarter with a different outlook and portfolio, should we still expect the market to keep acting the same way?  The alternate outcome is a continued rally, but it has to prove itself.  Making and holding all-time highs through next week will do a lot to prove the sustainability of this rally.

AAPL daily at 2:29 EST

INDIVIDUAL STOCKS

AAPL is taking a break after a strong performance early Monday morning where the stock traded up to $470.  There was a lot of momentum and short-covering in that move, but that demand quickly evaporated and the stock retreated back to the low $460s.  Finding support at $460 suggests this near-term up-trend will likely continue for a little while longer.  $485 remains the level to watch, but the $500 is even more significant since that provided rock solid support for three-months.  The stronger a support level, the more challenging resistance it poses.  This is because many traders had the opportunity to “buy the dip” around $500 and most of these traders are simply looking to get out at break-even when the stock returns to their purchase price.  Traders selling to get their money back will keep a lid on prices once the stock challenges previous levels of congestion

Stay safe

PM: Running out of buyers

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Stocks ran up  at the open on encouraging developments out of Europe, rising to the increasingly important 1565, but quickly lost steam and slid nearly 20-points by late morning.  Volume was again below average and continues the recent pattern of restrained trade.

MARKET SENTIMENT

Today’s selloff was reminiscent of a market disappointed by bad news, not on the receiving end of good news.  We had a Cyprus resolution and over the weekend and many predicted all-time highs were a done deal.  After the first few minutes of trade, it looked like they were right, but then buying completely dried up and stocks tumbled.  The news will try to explain it as this or that, but the truth is we simply ran out of new buyers.

So far Cyprus is setting up a sell the news trade.  We didn’t get a short-squeeze or momentum buying on the heels of early strength and encouraging news.  The market simply stalled and rolled over.  This is a big flag for bulls.  The market bounced countless times over the last three-months, each rebound consuming a chunk of available buyers.  After a certain point, no matter how great the news, the market will top when it runs out of buyers  I can’t say for certain this is what happened, but it seems more likely than not.

TRADING OPPORTUNITIES

Expected Outcome:
There is a lot of risk in this market.  Without a doubt we could continue higher, but before placing a trade we have to understand the risk/reward.  The market might have another 25-points of upside here, clearing all-time highs at 1576, but we could also be on the verge of a very typical, normal, and healthy 5 to 10% dip.  Typically we will see three 5% dips and one 10% pullback in any given year.  (20% dips are less common, occurring once every 3.5 years on average)  Even if this is a garden variety 5% dip, that is 75-points.  Making trades with 75-point risk for 25-points profit will send a trader to the poor house pretty quick.

Alternate Outcome:
No matter what the signals say, we are still within 1% of the highs and the up-trend remains in tact.  Predicting anything but a continuation is going against the trend and is often the low-probability trade.  Picking tops is risky, and not many people do it well.  But there is a difference between picking a top and taking the chips off the table.  It is very aggressive to short this market, but taking profits after such a nice run is extremely conservative and is what successful traders do with worthwhile profits.  We are in this to make money and the only way we can do that is selling our winners.

Stay safe

AM: New highs, but……..

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:53 EDT

AM Update

Stocks still struggle with all-time highs even on good news out of Europe.  AAPL is holing up as momentum traders buy the break above the 50dma.  How much further can this go?

MARKET BEHAVIOR

Stocks set a new high, but turned back just shy of 1565 and fell nearly 20-points from the high to the low.

MARKET SENTIMENT

So much for the pop and all-time highs on Cyprus.  It’s lunchtime and the market already moved on.  More interesting is the struggle with 1550.  The last few dips to this level have been buying opportunities, but are there enough buyers left to do it one more time?

Markets only move when people buy or sell.  Anyone already positioned for a move can do nothing but watch.  If everyone bought in  anticipation of a Cyprus resolution, when that resolution becomes reality, the market stalls because no one is left to buy the news.  The same goes for all-time highs.  If everyone bought early, anticipating an all-time high breakout, the market stalls because no one is buying the breakout.

The only thing that matters is what people think and how they are positioned.  Technicals, fundamentals, and news only play a supporting role in moving markets.  They only matter when they cause people to change their outlook and adjust their portfolio. If the greatest and most loved company in the world comes out with a cure for cancer, its price will surge when people buy more shares.  The problem arises when everyone loves it so much they already own all they can hold.  Then the life saving news goes unnoticed in the stock because it doesn’t trigger new buying.  This is why understanding how people are positioned is far more important than knowing what is in tomorrow’s newspaper.  We cannot predict the news, but we can predict people’s reaction to it.

TRADING OPPORTUNITIES

Expected Outcome:
This dip is a buying opportunity only if there are more buyers left to keep pushing prices higher.  This is what happened a couple of months ago.  The widespread cynicism provided plenty of fuel for a sustained move higher.  But here we are, another 100-points higher and it took a lot of buying to get here.  Do we still have gas in the tank, or are we running on fumes?

Today’s reversal from all-time highs is concerning.  There was zero short-squeeze from breakout buyers as we set new highs and cynical bears did not cover on a constructive news out of Europe.  The most likely explanation is people are no longer short this invincible market.  Bears and shorts are often the last on board the rally bandwagon, so we need to be extra careful here.  There will be more zigzagging as the fight between bulls and bears is evening up.  That in of itself is a warning sign as the formerly dominant bull is losing strength and the beaten down bear is fighting back.

I see nothing in today’s price action that is bullish and we could be on the verge of more selling if dip-buyers fail to show up in meaningful numbers.  While the market could continue higher, this is finally time to start thinking about shorting the market.

Alternate Outcome:
The bull isn’t dead yet and we are only a fraction off of 52-week and all-time highs.  .  If this market holds 1550 for a couple more days, it shows buyers are still willing to get in at these levels.  That bodes well for a continuation.  With today’s failure to break above 1565, that is quickly turning into a psychological barrier.  We need to close above it to put this whole all-time high thing behind us and start focusing on something else.

AAPL daily at 2:53 EDT

INDIVIDUAL STOCKS

AAPL is holding up nicely on a day when the market is in the red.  With the 50dma behind us, the biggest technical milestone is $485.  This will be a far larger hurdle to clear than the 50dma.  The moving average is simply a line on a chart that people follow.  Support and resistance are areas where people bought and sold stock and are far more meaningful for influencing individual investors.  These are levels that represent profits and losses.  This is where people can get their money back.  This is where people promised they would sell if the market would only give them a second chance.  That has real meaning and it will be a challenge to overcome.  Swing and momentum trading can get us to$485, but only follow on buying from a wider pool of investors can move us beyond it.  The nimble trader should consider locking in along side all the other short-term traders.

Stay safe

LA: New highs, or not

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Look Ahead

MARKET BEHAVIOR

Stocks dipped modestly last week as they struggle to capture those last few points needed to push through all-time highs.  Either this pause is building support for a sustained move higher, or it signals exhaustion just before the market rolls over.

MARKET SENTIMENT

A big part of why it is so difficult to predict the market is any setup ALWAYS gives contradictory signals.  If the answer was obvious, everyone would make the easy trade and this one-way buying/selling brings the market back into perfect contradiction.  Balance is the law of free markets and always makes sure both bull and bear views are equally represented.

To figure out where we are going, we need to search beyond widely followed technicals and fundamentals and uncover what the market is thinking and how it is positioned.  This gives us the best insight into what comes next.  Markets only move when people buy or sell, so obviously we need to figure out what will induce them to buy or sell.

In late-January/early-February we saw a similar consolidation and volatility around 1500, but the mood was completely different.  Traders were still afraid and the popular expectation was an imminent pullback from over-bought conditions.  That was six-weeks and 50-points ago.  Now we see the same technical setup, but sentiment changed.  Everyone feels good about the market’s strength and is looking forward to new all-time highs. This means most chasers are already in the market and few are left on the sidelines.  Value investors sold to these momentum traders as prices climbed, but after the chaser, it is hard to figure out who is the next in line to buy.

Obviously markets can coast higher on momentum alone, but just because there is more upside doesn’t make it a good trade.  This far into the rally there is limited profit potential and lots of downside risk, making a poor risk/reward.  Day-traders can grab those last few dollars, but overnight traders need to be more cautious.

TRADING OPPORTUNITIES

Expected Outcome:
There is little concern left in the market.  Cyprus dominated the headlines, but we are trading within 3-points of the pre-Cyprus close, demonstrating apathy from the market over these headlines.  But it shouldn’t surprise anyone when a market that didn’t flinch on a negative GDP report last month, effortlessly ignores the struggles of a tiny Mediterranean island.

This upcoming week will be a key one for the markets.  Holding level for a week is supportive, holding level for a few weeks becomes stalling and shows the market cannot get the job done.  This is also the last week of the quarter and most quarter-end buying is behind us.  For the time being, the chase is taking a break as money managers have a clean slate starting in April.  Chasing could continue, but managers feel far less pressure to buy reactively when the finish line is three-months away.

The market needs to continue higher after this pause to prove it still has an ample supply of buyers.  It doesn’t need to be a lot, but a healthy rally would finally reach 1565 and hold it this week.  If a modest gain is constructive, then anything else is destructive.  A dip under 1550 will likely continue because most of the dip-buyers came in last week and used up all their capital.  A strong surge higher signals a potential climax and exhaustion of remaining buyers.

As of this writing, there is some kind of resolution regarding Cyprus that avoids a disorganized bankruptcy.  This doesn’t do anything to save wealthy account holders, but it does protect the integrity of the banking system by upholding the guaranteed 100k safeguard.  The market could rally on this, but Cyprus never posed much of a risk to the wider banking sector and the market never sold off on the news, so any relief rally will be short-lived and this story forgotten before lunchtime.

Alternate Outcome:

This is the rally that just won’t quit.  When everything else is equal, stick with the rally because a rally can continue countless times, but it only reverses once.  Every call for a market top the last three months has been premature and I have no doubt I am early here too, the biggest question is if that is 10 or 100-points early.  Time will tell and we will continue watching the market for signs of strength and sustainability

Stay safe

WR: Stuck on 1550

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review

Stocks are holding near recent highs, but how much buying is left in this rally?  AAPL’s selloff turned 6-months old this week.  Is it finally a buy again?

MARKET BEHAVIOR

Stocks dipped a modest quarter percent this week, but fell as far as 1538 following a three-day losing streak before recovering.  Volume was a tad below average and we closed the week 31-points above the 10wma, while the 40wma is 118-points behind. Both moving averages are headed higher and closing the gap as we consolidate recent gains.

MARKET SENTIMENT

The market is attracted to 1550 and recovered this level three-different times after dipping under it.  The big dip under 1540 triggered all the technical stop-losses in the area, relieving potential selling pressure on a subsequent dip.  Think of it like avalanche control.  This week’s dip set off a slide, making conditions less risky next week.  But this only protects us from selling and there is more than one way for a market to top.

Tops also occur from lack of buying.  No matter how confident holders are, they can do nothing to defend against an absence of demand. Traders most often fear a catastrophic headline that takes the legs out from under the market, but they also need to fear an overly bullish one too because that is the stealth top that sneaks up on us.  At least with horrible news, it is obvious and we are only left guessing how low will it go.  Bullish tops creep up on us because the outlook is great and everyone is confidently buying the dip.

Bullish tops are harder to trade because sentiment and demand are such squishy things.  Rallies typically go further than anyone expects, so holding longer than we are comfortable is usually the right trade.  But there also comes a point where holding is easy and we don’t want to sell because everyone knows the market is headed higher.  To me it feels like we are in the fuzzy area between these two.  I cannot say with any conviction the market already put in its top, but I can say its gone far enough for me and I’m ready for the next trade.

The thing about dip buyers is there is a fixed number of them and they will run out at some point.  We had a couple dips under 1550 this week and buyers came in and propped up the market, but how much new money is still out there if we dip under a 3rd time?  There is a reason double-bottoms are a popular reversal pattern, but tripple-bottoms not so much.  The third test of support is far less likely to bounce because dip buyers already spent most of their money on the first two dips.  Without dip buyers, who is left to prop up the market?  Value buyers eventually step in but they usually wait until prices are so attractive they cannot resist any longer.

Again, this is all just speculation on my part, but in spite of what all the gurus say about predicting the market, we are in the business of prediction.  Trading by its very nature is making predictions about future prices because lets be honest, there is no reason to buy most stocks unless we confidently predict they will be higher in the future.  At this juncture, I cannot predict the market going higher with any confidence, so I’ll wait this one out.  And more than wait it out, I’m looking to short this market because it just looks like its time.

TRADING OPPORTUNITIES

Expected Outcome:
We came a long way and there are only so many consolidations and dips that can occur before we come to the one that doesn’t bounce.  Holding on for more bounces here is getting a tad greedy.  I’m happy to sit on the sidelines, watching the market rally higher without me here because I know the odds are not in my favor.  One of the most difficult things for me to learn as a trader was being okay with leaving profits on the table.  It is never easy, but over the long-term it works out better this way.

Alternate Outcome:
Most of the time I get out too early.  I don’t mind missing another 20-ponts of upside, but I don’t want to miss the next 50 or 100-points, so I will continue watching for signs of sustainable strength.  Minor dips that find support and consolidate for 4+ days shows buying at those levels and signals a likely resumption of the rally.   We will keep looking for signs of strength and are always ready to jump back in.  The greatest advantage of the individual trader is the ease with which we can move around the market.  Of course this is a double-edged sword and many fall into the trap of over-trading every bump in the market.

INDIVIDUAL STOCKS

AAPL weekly at end of week

AAPL finally did it, it closed above the 50dma for the first time in over 5-months.  I actually find it surprising the selloff just celebrated its 6-month birthday this week.  AAPL’s weakness feels like a new thing, no doubt due to the fact no one realized it was a material selloff until several months into it.

The stock is almost 10% higher than the recent lows.  Is this enough to conclusively say the bottom is in?    Many bulls are hoping so, but the pervasive bullishness in AAPL gives the natural cynic in me something argue with.  No one is saying the stock is going to zero.  No is saying the company is failing.  No one says the products cannot compete.  Everyone believes it is a great company whose stock simply fell on tough times.  If it was a good buy at $700, then it is a steal at $450.

But what’s the other side of the argument?  What would the contrarian point out?  Some people say AAPL is a software company.  Well if that’t the case, it’s a pretty lousy software company.  The current user interface is identical to the iPhone1 that debuted five years ago.  When compared to the dynamic app icons and lock screen widgets on Android, iOS looks prehistoric.  As someone who checks my iPhone5 for stock quotes every 30 minutes, it sure would be nice if it wasn’t a six-step process.  (wake, swipe, lock-code, home button to exit last app, swipe to second icon page, click on stock app)  But since Steve Jobs didn’t check the stock market from his phone on a regular basis, AAPL sees no reason to make it easy for those of us that do.  That is the typical AAPL hubris.

Without a doubt AAPL has some of the sexiest and most desirable hardware out there, but they are miles behind the competition on the software side.  As an iPhone user, I only hope firing the head of iOS and promoting the guy in charge of hardware design means new things are coming down the pipe and we will finally have a modern OS to match our sleek hardware.

Stay safe

PM: Down-Up-Down-Up

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Markets bounced back, but will it last?  AAPL finally broke above the 50dma for the first time in nearly 6-months, does this mean the worst is behind us?

MARKET BEHAVIOR

Stocks bounced back on Friday, completing a four-day pattern of down-up-down-up.  We finished nearly where we started and this volatility did nothing but humiliate bulls and bears who reacted to these gyrations.  Volume was the lightest in over a month and 17% below normal.

MARKET SENTIMENT

The market is within ten-points of all-time closing highs and many pundits predict a Cyprus resolution will finally push us over the top.  They will only be right if that is the unexpected outcome.  If it is widely expected, it is already be priced in and the market will quickly move on to the next obsession.

The frustrating thing about meeting expectations is it doesn’t move the market.  People position their portfolio based on their expectations of the future.  If everyone expected Cyprus will be a non-issue, they already looked past Cyprus when positioning their portfolio this week.  When the Cyprus issue is resolved, since it was widely expected, no one will adjust their holdings based on this news, and without new buying and selling, the market will not react.  This single concept is the bane of fundamental and news traders because they expect news or data will cause the market to move one direction, but it often moves another simply because that news and data was already priced in.

If we take Cyprus out of the picture, what are we left with?  A fairly bullish market.  No one is talking about Sequester, Debt Ceiling, or slowing growth anymore.  Even these Euro fears are isolated to an island of 800,000 people and the PIIGS hardly get a mention (Portugal, Ireland, Italy  Greece, and Spain).  If you followed the news the last few weeks, you wouldn’t even know Asia exists because they don’t get any coverage.  Where did all the worrywarts go?  If everyone is positive, should the contrarian be worried?

TRADING OPPORTUNITIES

Expected Outcome
I have a hard time coming up with a good reason to own this market other than momentum.  Without a doubt trends are more likely to continue than reverse, but at the same time, every rally must top.  I embrace cynicism with open arms and have been bullish this entire rally from the November lows.  Here is a quote from my November 15th post, the last down-day before the market bounced for good:

“The selloff has coiled the spring for an upside move pretty darn tight and the smallest bit of good news is bound to set of a gigantic bear trap.  On the other side, a huge number of skittish sellers have already sold, meaning the  potential supply is dwindling by the day.  This is setting up for a fairly asymmetrical trade where the upside potential is larger than the downside risk.  There is no reason to jump out in front of this meat grinder, but wait patiently for the right opportunity to snap up heavily discounted shares from emotional sellers and their pain will be your gain.”

I am not a bear, I am not a bull, I’m an opportunist.  I am not perfect, but I am pretty good at this stuff, and right now I am nervous.  That doesn’t mean this market cannot go higher, and in fact my I was fairly constructive of the market on November 14th, just before we had one last selloff, but hopefully no one is going to nit-pick missing the bottom by a couple of days.

I don’t have a crystal ball and many of my earlier calls have been aided by a healthy dose of luck, but this market just makes me nervous.  Maybe I am early here, but I’m okay with that.  I would rather be out of the market wishing I was in, than in the market wishing I was out.

Alternate Outcome:
The conservative trade is always to get out early and that is what I did.  I pulled the plug over a week ago at 1555 and the market rallied higher after I sold, but I also missed out on the last week of volatile swings and have been looking for my next trade ever since.  My goal is to get out early and I clearly did that here, the question is just how early.  Did we already put in the top on the 14th?  Will we set a new all-time closing high?  How about the all-time intraday high?  What about 1600?  All of those are possible and I sacrificed profit by selling too early, but it is impossible to get the top, so either we sell too early or we sell too late.  I like selling too early because I am in a better position to identify the next high-probability trade when I am sitting on cash instead of worrying if I should sell or hold weakness.  Obviously the alternate outcome is a continuation from here and I am watching closely for signals that I should get back in.

AAPL daily at end of day

INDIVIDUAL STOCK

AAPL finally did it, it traded above the 50dam for the first time since October 5th.  For such a momentous occasion, volume was suspiciously light.  Without a doubt low-volume could be a positive signal because it shows a huge pool of cynical buyers waiting in the wings to buy this stock.  But that ignores the fact it is downright difficult to find an AAPL bear among the throngs of AAPL defenders.  If I am reading sentiment correctly, the bullish attitude in the stock indicates the low-volume breakout is already running short of buyers before it even makes its first breakout.  Clearly I am biased here, but I have serious doubts about the sustainability of the rebound and view the next $20 as an opportunity to sell strength.

How to trade this, the momentum is clearly higher and a nimble speculator could ride this higher for another $20.  But if buying is coming from short-term traders buying the breakout, expect the move to be short-term as they quickly lock in profits.   A bigger concern is failing to hold the 50dma shows a lack of follow on buying and likely means we are headed lower.

Stay safe

AM: Tug-of-war

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:18 EDT

AM Update

Markets are higher as the back and forth continues.  AAPL is challenging the 50dma and is presenting a trading opportunity.

MARKET BEHAVIOR

Stocks are higher as the tug-of-war continues.

MARKET SENTIMENT

The battle between bears and bulls is heating up.  We saw a similar back-and-forth in early February.  That time the bulls prevailed, can the pull off another victory here too?

Complacency is the norm as every dip is just another buying opportunity.  All the fear from early in the year is long forgotten.  If the market will continue higher, who will be next buyer?  That is a tough question.  Shorts are avoiding this market, making it unlikely a short-squeeze will propel us higher.  If shorts are away, it probably also signals many former cynics have changed sides and joined the bandwagon.  There is money flowing out of bonds and into equities, but this is just a trickle and not enough to affect short-term volatility.  With the quarter end just days away, most money managers have already adjusted their portfolios and are ready to start fresh in April.

The news is obsessing over Cyprus, but it is an isolated event unless you live on the island or are a crooked Russian hiding your money there.  Other than those two groups, there is little exposure for the rest of the world and the risk of contagion is nil.  The worst is it could highlight weakness in the European banking system, but someone had to be living under a rock the last three-years if this is news to them.  The market is trading near pre-Cyprus levels, meaning little risk premium has been priced in, thus there will be little bounce when the crisis is resolved.

Right now we still don’t know who will buy the market going into the second quarter and that is why I remain wary of the market.  Without a doubt momentum could carry us another 10 or 20-points higher, but the next 50-point move is lower, not higher.

TRADING OPPORTUNITIES

Expected Outcome:
When everyone is buying the dip, we should sell the strength.  Contrarian investing works because when everyone is bullish and owns stock, there is no one left to buy and keep pushing prices higher.  It has nothing to do with fundamentals and everything to do with supply and demand.  Without demand, prices cannot continue higher no matter how good the news.

I am really tempted to short today’s strength.  Three is often the magic number in the markets.  The first peak usually bounces back because everyone is still excited by the rally.  The second peak also bounces, but less enthusiastically.  By the time we get around to the third dip, most of the buyers bought the first two dips and there is little left to prop up this dip.  Over a very short time-frame, we have that with last Thursday’s peak, this Wednesday’s rebound, and now today’s strength.  If we cannot hold these levels, there are few buyers left to buy the dip and the slide will start shaking free previously confident holders.

Alternate Outcome:
We continued past February’s volatility and there is no reason we can’t do it again.  But just because something is possible doesn’t make it a good trade.  Success in this game comes from understanding probabilities.   Of course we could continue higher, but given how far we’ve come and all the other warning signs, we should be more fearful of this market than enthusiastic.  Most of my bearish thesis rests on weakness after the first quarter chase ends.  If the market holds up and builds constructive support in April, that signals the rally is still on.  These things always come to an end at some point, but they often surprise us by lasting longer than we ever imagined.  I expect near-term weakness, but am open-minded to a continuation.

AAPL daily at 1:18 EDT

INDIVIDUAL STOCKS

AAPL is up to the 50dma.  Reclaiming this moving average is significant because it hasn’t been above it since early October.  The biggest question is if people are buying in anticipation of this event and that leave few buyers to buy the actual breakout.  We often see this with expected news events and is where the axiom “Buy the rumor, sell the news” comes from.

AAPL remains one of the most followed and loved stocks in the market.  This technical milestone will be shouted from the hilltops everyone will know about it.   It will be interesting to see how traders respond.  Anyone out of the stock could use this signal to buy the dip.  But how far will this dip-buying carry the stock without a fundamental catalyst to bring in a wider pool of buyers?

The easy trade here is buying the break above the 50dma and using a stop $5 under the MA.  If the stock doesn’t explode to the upside, then most of the buying happened ahead of time and there will be little new demand, making this a sell-the-news trade.  If the stock cannot hold the 50dma and crashes back through, it will likely continue sliding to new lows.  If a trader’s thesis is to profit on the strength from a 50dma breakout, if that surge doesn’t happen, they need to sell ASAP because their original analysis is flawed and invalid.  Long-term success in the markets is all about defense, not offense.

Stay safe

PM: Can we still make all-time highs?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Stocks couldn’t hold yesterday’s gains and closed under 1550 and the struggle to break all-time highs continues.  AAPL saw midday strength fade into the close as the stock is still looking for the incremental buyer.

MARKET BEHAVIOR

Stocks dipped and ended near 1545.  The all-time closing high is proving more difficult than anyone expected when we finished just two-points shy of that historic mark last week.  Volume was below average today and continues the trend of apathetic trade.

MARKET SENTIMENT

It’s not often we see the market dip nearly a percent on light volume.  There is something quite unusual about the lack of selling by holders as we break key technical support at 1550.  Are they are asleep at the wheel?

Light-volume means different things at different stages in the market cycle.  Low-volume dips always signal holders are resisting the temptation to sell into weakness.  As the rally is bouncing off previous lows, the market is primarily made up of value investors who trust their analysis and are less concerned with daily fluctuations.  This is why they willingly hold through volatility early in the rally.  Later on these value investors are replaced by momentum chasers as the rally continues breeding complacency the higher it goes.  But the key difference is on the buying side.  Early in a rally, cynicism rampant and these traders resist the young rally, meaning there is still ample supply of buyers available to push the market higher.   Late in the rally, most of the cynics have changed sides and jumped on the bandwagon, meaning there are few buyers left.  More simply, markets rally in the face of fear and decline on the back of complacency.

TRADING OPPORTUNITIES

Expected Outcome:
It is increasingly likely we won’t set new highs.  The market was rebuffed two-times after closing above 1560.  Friday might be the last shot we have at this historic level, but even then that milestone is a better short entry than breakout buy.

Alternate Outcome:
1550 is providing a sticky level and the market has bounced back from several dips below it already.  Part of the reason volume was so light today when we dipped through 1550 is Tuesday’s violation of this technical level already triggered most of the stop-losses, meaning there was less selling this time.  To continue higher, the market needs to prove it can break and then hold 1565.  The trend is still higher, but this late in the game it needs to show me it still has legs.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL’s midday strength faded into the close.  I’ve stopped paying attention to rumors so I really don’t know what caused the midday surge.  It seems the market is also increasingly cynical of these big intraday moves since this one didn’t even hold through the close.  Rumors of new products or cash distributions are the boy who cried wolf.  One of these days it will be true, but by that point the market will have stopped listening.

The 50dma is still the technical level to follow and breaking above this will trigger a wave of momentum, swing, and dip buying.   Ride the trade higher, but take profits early because these short-term traders will sell after a $40 move up to technical resistance.  On the other hand, failing to reclaim the 50dma shows no one is interested in buying the stock and it will breakdown to new lows, most likely $400.

Stay safe

AM: Where are we going?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:24 EST

AM Update

Stock are down and retesting 1550 after yesterday’s rebound.  AAPL is oblivious to market weakness and higher on hopes of a rebound.

MARKET BEHAVIOR

Stocks opened lower and are retesting support at 1550.  The market is on track for four out of five down days, but even with all the selling, the market has not lost much ground.  Either this is supportive of a continuation, or the ground eroding under our feet.  Our job is figuring out which and how to trade it.

MARKET BEHAVIOR

The market is doing its best to abuse both bulls and bears with these head fakes and it is doing a good job.  We make new highs, then break down, only to rebound again.  A trader reacting to these moves is getting killed because this whipsaw volatility leads to buying and selling at the wrong times.

Tops and bottoms are some of the most erratic periods because this is where bulls and bears are on equal footing.  The dominant side is losing its grip and the underdog is coming on strong.   While the top will be identified as a single day, the process takes months to complete.  If this is a top, it started last month with the drop to the 50dma.  Most rallies do not end on their first dip and that was the case here as the market rebounded decisively to new highs.  But as this process continues, each rebound is less and less powerful, eventually ending on the dip that doesn’t bounce.

Currently we are building and testing support at 1550, just a few ponts shy of all-time highs.  Everyone expects us to take out these highs and that is why we struggle to get there.  Traders who normally wait the breakout bought early in anticipation.   Bears are not shorting because they are waiting for new highs first. Everyone is mostly just waiting around and that is why we are not moving and volume is so light.

To figure out where the market is going we need to understand what other people are thinking and how they are positioned.  If most bulls are in ahead of the expected breakout, the actual breakout will not trigger a wave of buying because everyone is already in.   If shorts are holding back until we make these new highs, a breakout will actually be greeted by a wave of shorting and profit taking.

I’ve been waiting for a high-volume surge to signal an exhaustion top, but the way the market is set up here, I don’t know if we will get there.  Rather than end with a bang, this rally leg could exit on a whimper.    The bang ending requires a pool of reluctant buyers chasing in the final moments, but it feels like many of them are already in the market and there is no one left to power the chase higher.

INVESTING OPPORTUNITIES

Expected Outcome:
There is little reason to own this market.  Most of the upside has already been realized and a lot downside is underneath us.  The trend remains higher, so it is a risky short the market, but that does look to be the next high-probability, high-profit trade.

Alternate Outcome:
This will be the third year in a row the markets top in the April.  I like the precedent, but I worry about the predictability.  The market hates being predictable and is this too much?  I would be more worried if talking heads were making a big deal out of it, but so far it is not getting much coverage.  People are talking about pullbacks, but each bounce back quiets the pessimistic commentary.   I have no idea what will happen next, but I do see the odds stacked against a continuation. But even if the chances for a pullback are 80%, that means one time out of five this rally will continue higher.  Low-probability or not, we need to watch for the continuation and buy it when it invalidates our previous analysis.

AAPL daily at 1:24 EST

INDIVIDUAL STOCKS

What do you know, AAPL is up when the market is down.  This stock is operating in a world of its own and AAPL traders have such intense tunnel vision they don’t see, nor care about what is going on around them.  The benefit for the bull is even if the broad market sells off, AAPL could surge higher on a break of the 50dma as traders chase the rebound.  But if people are buying the stock strictly for technical reasons, expect them to sell for technical reasons too, likely running into resistance near $485/$500.  Enter and exit a technical trade on technical levels.  Enter and exit a fundamental trade on fundamental data.  This story is still missing the fundamental catalyst necessary to reclaim much higher levels, so don’t let a technical bounce convince us to hold for larger gains when this will most likely be a temporary bounce.

Stay safe

PM: Rally on

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Markets shook off previous worries and have their sights set on all-time highs again.  AAPL could not hang with the market and continues struggling with the 50dma.

MARKET BEHAVIOR

Markets bounced back from Cyprus induced weakness and closed less than 10-points from the all-time closing record.  Volume was lighter than yesterday’s selloff and continues the trend of below average trade.

MARKET SENTIMENT

This market is persistent.  No matter what headline is thrown at it, it bounces back hardly missing a beat.  Of all the bad news this rally shrugged off, it was unlikely it would be taken down by banking problems in a tiny island most didn’t even know was part of the Euro Zone.  Today’s rebound confirms most traders either don’t care or assume it will be resolved without wider implications.  Right or wrong, we trade the market and this is what it thinks about Cyprus.

Resilience in the face of countless negative headlines shows just how committed holders have become.  They are stubbornly holding for more gains no matter what they say on CNBC or write in the WSJ.  Their holding is the source of the light volume, if holders are not selling, there is nothing to trade.

Today’s flat trade after the opening gap is also telling.  It shows shorts were not driven from this market in the typical relentlessly climbing short-squeeze.  Either shorts are confidently holding on, or they just aren’t there.  Given the lack of recent short-squeezes triggered by new highs and unexpectedly bullish employment news indicates most bears have either changed sides and joined the bull bandwagon or given up and gone home.   Either way this is a significant shift in sentiment and trader positioning.

Bouncing back from Cyprus is just one more reason for bulls to relax and enjoy the ride.  This market is gaining wide recognition as the rally that just won’t quit and no one needs to worry about anything because everything is under control.  And that is exactly what I am afraid of.

TRADING OPPORTUNITIES

Expected Outcome:
The rally remains intact.  I can’t tell you if we will see 5, 10, 25 or 50 points of upside from here, but I suspect it will be on the lower end of the range.  This market has become too easy for bulls and obvious for the casual observer.  It has also beat bears into submission to the point where they are not even trying anymore.  At this point it is hard to imagine people becoming even more bullish on this market and the last of the buyers are finally streaming in.

1565 and 1576 are the levels everyone is watching and I actually wonder if we will see a wave of selling hit the markets at those levels since there are so few left to buy the breakout.  It will be interesting to watch how the market responds to these levels, assuming we get there.

The high-probability trade remains sitting this one out and waiting for the next trade, likely shorting the completion of this head-and-shoulders pattern.  I wonder if sell in May comes early this year and if we fall to 1400, we could actually see a Summer rally this year.

Alternate Outcome:
This market could continue higher if the new-high headlines hit Main Street and triggers an influx of new investment from the general public.  While this will happen over time, it won’t occur at a rate high enough to affect the near-term trade.  The great rotation out of bonds and other secure investments into equities will take many years and will drive a secular bull market, but it will not be enough to avert the normal dips, pullbacks, and corrections every market experiences.

While I am out of the market waiting to get short, I will watch for strength carrying over into the second quarter.  I will consider going long again if it looks like there is more sustainable support and strength left in this market, but it will have to prove it to me first.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL didn’t share in the markets good day, but that’s nothing new since AAPL disconnected from the market months ago.  Without a doubt this stock will find a bottom.  Have we already passed that point, or are we standing on another trapdoor?  We can actually start thinking about Q1 earnings because that is the next major catalyst guaranteed to happen.  Dividend/buyback/product launch might or might not happen and we can’t plan on these events.  It seems Q1 and Q2 expectations have been ratcheted down a fair bit, but that is likely offset by the high level of optimism remaining in the stock.

For a trade, if the stock cannot reclaim the 50dma, there is little support for a continuation and expect lower prices.  If the stock breaks above the 50dma, it will be a major milestone and look for swing, momentum, and dip buyers to flood the stock trying to make a quick buck.  But these traders are not loyal to the company and will bail after a $20-$40 move.  We should do the same because there is a monumental supply of regretful owners that are praying to get out at break-even and this will slow any potential rebound.

Stay safe

AM: Cyprus who?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:21 EST

AM Update

Stocks recover from Cyprus fears, but is the coast clear?  AAPL is struggling with the 50dma and is building a trade one way or the other.

MARKET BEHAVIOR

Stocks bounced back from Cyprus weakness and are solidly above 1550 this morning.

MARKET SENTIMENT

Europe is a three-year old story and if it hasn’t crashed the global economy yet, it probably won’t.  Our historic 2008 financial implosion occurred over a period of months and if Europe has limped this far, they will likely pull out of it.  This Cyprus stuff is largely noise.  We survived Greece which is 10x the size, so Cyprus is simply a bump in the road.  The biggest concern isn’t the size of the bailout, but the precedent a savings account tax sets.  There is a bit of hubris at the ECB and the biggest problem is the way they presented this bailout.  Instead of calling it a tax, the should have approached Cyprus depositors and said “Your bank is about to go bankrupt and you will lose everything.  The ECB will step in and bailout out your bank if you are willing to pay 10% fee.  If you chose not to pay the fee, you will likely lose everything.”  Phrased that way it is hard to argue with them and most would be grateful the ECB ‘saved’ them instead of the outrage we are currently seeing.  Presentation and perception is everything.

The rebound from Cyprus selling shows the market is less worried about a domino effect and fear based selling has largely dried up.  We can now add Cyprus to the long list of bad news the market shrugged off.  This teflon rally is immune to headlines and it is unlikely one will take down this market.  Instead we need to watch for a diminishing supply of available buyers.

Markets top for one of two reasons, a wave of selling or an absence of buying.  Holders have repeatedly  proven how comfortable they are at holding through weakness and this prevented negative headlines from crashing the market.  Today’s rebound further reinforces this stubborn holding behavior.  The next question becomes how much buying is left because that is what will finally kill this rally.

Shorts are largely absent as demonstrated by the lack of meaningful short-squeezes on good news, new highs, and reversals.  If shorts are absent and bears less vocal, this is a major shift in sentiment and likely shows many cynics have joined the rally bandwagon.  As a contrarian there is nothing as unnerving watching the critics disappear.

TRADING OPPORTUNITIES

Expected Outcome:
The market is within 10-points of all-time closing highs and it seems likely the relief rally will push us through this level.  But rather than be a bullish breakout, this minor double-top could very well be the end of the rally.  Everyone knows rallies cannot last forever, meaning one of these upcoming dips is not going to bounce.  The impending rollover to the second quarter will give institutional investors a clean slate and often they approach the next quarter with a different strategy than the one that just closed.

The conservative trade remains sitting out this volatility.  At this point there is limited upside and a lot of downside, so the only real trade is waiting for a good short entry.

Alternate Outcome:
This might simply be another dip on the way higher.  Holding for more gains is getting a tad greedy, but further upside is something we still need to watch for.  Continued strength into the 2nd quarter invalidates a large portion of my bearish thesis and will be a signal to reevaluate the current market for more upside.  The current trading range is somewhere between 1550 and 1576.  If we hold this level for a while, time instead of pulling back will refresh the market and set the groundwork for a continuation.

AAPL daily at 1:22 EST

INDIVIDUAL STOCKS

AAPL is not sharing in the markets good day.  The 50dma is providing significant resistance and it is not surprising since the stock was $650 the last time it traded above the 50.  But this can cut either way.  Rebuffed at the 50 likely means we will see new lows in the near-future.  Break the 50 and it will trigger a large wave of short covering and momentum buying.  Remember, even if the stock breaks out, this is just a trade and lock-in profits in the upper $400s because $500 will provide a significant level of overhead resistance as underwater traders try to get their money back.

Stay safe

PM: Three days in a row

By Jani Ziedins | End of Day Analysis

S&P500 daily at 1:12 EST

PM Update

Stocks weakness continues.  Is this the end of the run?  AAPL is trading well for a change, what should we expect?

MARKET BEHAVIOR

Stocks closed under 1550 for the first time in nearly two-weeks and extended the losing streak to three-days.  The market finished down a modest quarter-percent, but that overlooks the wide intraday range that briefly dipped to 1538.  It will be interesting to watch 1550 in coming days to see if previous support turns into overhead resistance. Today’s selling finally registered above average volume, only the second day in over a week to trade elevated levels, but 5% above average is hardly panic levels.

MARKET SENTIMENT

This is the first time the market traded down three-days in a row this year and signals a potential shift in personality.  Previous dips rebounded with an exclamation point, yet it seems this selloff is picking up speed.  While the rally is not dead, a change in behavior is noteworthy.

We’ve been watching a potential head-and-shoulder top develop over the last few weeks.  A retreat under 1500 could bounce and form the right shoulder before continuing lower.  If, and this is a big if, we are in a H&S top, expect the market to slide as far as the 200dma and a return to 1400 would be a fairly typical 10% pullback.  I have no idea if the market will reach these levels, but it is certainly worth knowing what the downside risks are.

Recent volume is telling as both rallies and dips have been on unusually light volume.  The restrained trade shows holders continue holding no matter what direction we go.  This scarce supply is driving prices higher instead of the more typical strong demand.  Selloffs have also been limited because few holders are dumping shares in market weakness.  Holding through every dip this year has been rewarded with new highs and traders have been conditioned to wait for inevitable rebound.

TRADING OPPORTUNITIES

Expected Outcome:
1550 is the key level to watch.  Closing above this levels likely means we will finally takeout all time highs at 1565, but that is not a sign of strength, simply delaying the inevitable.  A lot of traders are comfortable with this rally, as seen by the lack of elevated selling into recent weakness.  Many have been lulled into complacency because every other dip bounced back, but there is always that final dip that doesn’t bounce and we are closer than ever to it.

The conservative trade remains sitting in cash. It’s been a great few months and the only way to win this game is locking in worth-while profits.  The aggressive trader is looking for a short entry.  A short here with a stop around 1555 sets up an attractive risk/reward.  Seven points of risk to at least 50-points of profit.  This trade has both high-probability and favorable risk/reward on its side.   Nothing is guaranteed in the markets, but it is hard to beat this setup.  If we are early, take our 7-point loss and keep looking for the next opportunity.

Alternate Outcome:
Without a doubt this market will top at some point.  There are many indications this is the top, but often markets continue longer than anyone expects.  Clearly that happened as we already far exceeded calls for a pullback going all the way back to January 3rd.  There is no reason this cannot be another head fake designed to fool bears and shakeout weak traders before resuming the uptrend.

The easiest way to identify an uptrend is by obviously watching it climb higher.  Rallying to and holding 1565 shows support for this market and continued strength into the 2nd quarter will invalidate many of my justifications for selling here.  The single greatest strength we have as individual investor is our ability to jump in and out of the market as conditions warrant.   If we sit through dips we give up the only advantage we have in this game.

INDIVIDUAL STOCKS

AAPL daily at 1:13 EST

AAPL hit its head on the 50dma, but managed to contain losses to just a quarter-percent.  Not a bad day given the size of losses we’ve seen in recent history.  Greg pointed out an interesting observation in the comments from this morning’s post that all of AAPL’s weekly closes have been at the extremes of the market’s range.  The “pain trade” as he insightfully pointed out.  We have to go back two-months before finding a week where we closed in the middle of the range.  There is no telling how far this pattern will continue, but it could provide interesting insight into trading weekly moves.  This week is shaping up as another rally week and a break above the 50dma make for an interesting swing-trade, but if we see a breakdown, look for the stock to test and even exceed the weekly low.

AMZN is trading poorly.  There are only so many times a stock can test the 50dma before breaking it.   The next stop is the 200dma.    The last time the stock broke under the 200dma, it took 5-months to recover it on stronger than expected earnings.  But even in the face of this weakness, I still don’t think the stock is breaking down because there are still far too many cynics and shorts.  I don’t think it makes a good trade but it is interesting to watch and talk about.

Stay safe

AM: Cannot hold 1550

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:12 EST

AM Update

Selling continues for a second day as the market fails to hold support.  AAPL hit its head on the 50dma and is down with the rest of the market.

MARKET BEHAVIOR

Stocks are struggling with support at 1550.  This is a key level that provided support the last couple weeks and failing to hold it has the sharks circling.

MARKET SENTIMENT

Today’s dip under 1550 triggered a swift wave of stop-loss selling and invited shorts to pile on.  The question is if this selling will achieve critical mass and continue lower, or bottom and rebound yet again.  Either scenario entirely plausible.   It wouldn’t be a surprise to see early bears get rebuffed for the umpteenth time as we finally take out the all-time high, but this would be the last gasp of a dying rally, not signs of unbreakable strength.   Alternately stalling 2-points shy of the record last week could easily be the top of this rally leg.  Either way we have far more down ahead of us than up.

I’m not promoting a collapse and remain constructive on the economic recovery, but markets move in a zig-zag pattern and after every period of zigging, is normal and healthy to zag.  We came a long way and this is a reasonable place to take profits and wait for the next trade.    Even the most bullish years see dips of 5 and 10% and we should expect something similar here.

There is one more piece I can add to the contrarian puzzle.  Two-weeks ago I was still behind the rally and receiving a lot of positive feedback from readers.  But since I grew more cautious and bearish, its gotten quiet around here.  I’m not doing this to be popular and am comfortable going against the current, I only point this out as yet another sign of how popular this rally has become.

TRADING OPPORTUNITIES

Expected Outcome:
One of the upcoming dips is not going to bounce, is this it or will it be the next one?  This is not an exact science and no one knows for certain where and when a market will top.  The best we can do is get close enough and call it a day.  Everything I see says this is close enough.  New highs are still on the table because market tops are often volatile and one of these swings could easily take us to new highs, but that doesn’t constitute a high-probability trade.  I’m in this to make money, not pick tops, so I’m quite pleased with how far we came and am happy to cash in here.

The aggressive trader can start looking for a good short entry, but use prudent stops and don’t stubbornly argue with the market if it moves against us.

Alternate Outcome:
Markets are never easy and it takes more luck than skill to spot a top.  Without a doubt I could be 50 or 100-points premature in selling this rally.  But just because I sold doesn’t mean I have to sit out remaining upside.  I am still looking for signs of continued strength and am more than willing to admit I pulled out too early.  The great thing about sustainable rallies is they give plenty of opportunities to get back in.  Long-term success in the markets is less about offense and comes down entirely to great defense.  The only way to make money in this game is selling winners.

INDIVIDUAL STOCKS

AAPL daily at 1:13 EST

AAPL bumped its head on the 50dma and is selling off with the rest of the market.  Talking about AAPL is like discussing politics and religion with family, it just cannot be done without upsetting someone.  This shows just how emotionally charged this trade remains.  Neither bulls nor bears care about anything other than the data that supports their emotionally held position.  Fundamentals just don’t matter in this stock like this and it continues trading on sentiment.  It will surge on any new product rumor or cash distribution scheme and fall when follow-on buying fails to materialize.  AAPL is setting up for a great sentiment driven swing-trade, but it will be a while before this stock is investment grade again.

For a swing-trade, jump on a break of the 50dma and get out around $485.  AAPL has quickly gone from a Return ON Investment to a Return OF investment stock.   Most people no longer dreaming of huge profits and simply want to get out at break-even   This selling will put a lot of pressure on any rally.

Stay safe