Monthly Archives: March 2013

Mar 31

LA: Time to leave the party?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

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

Mar 30

WR: We finally did it

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

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

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

Mar 29

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

Mar 28

AM: Holding for the record

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:02 EDT

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

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.

Mar 27

PM: One way or the other

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

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

Mar 27

AM: Comeback kid

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:45 EST

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

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

Mar 26

PM: Here we go again

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The market 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

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

Mar 26

AM: Bouncing back

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:29 EST

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

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

Mar 26

PM: Running out of buyers

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

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

 

Mar 25

AM: New highs, but……..

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:53 EDT

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

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

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