AM: Where are we going?

By Jani Ziedins | Intraday Analysis

Mar 21
S&P500 daily at 1:24 EST

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

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

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.

fleischut March 21, 2013

Great analysis as always. Spot on about the levels, I keep waiting for 1575 to sell it hard but am becoming doubtful we get there, unless we get some kind of Cyprus resolution. I would add though that if we don’t pop back up next week to at least 1565 then I’d expect the correction to be shallow, because I don’t imagine that the big sellers of volatility would let traders capture big gains that easily. I agree that there’s absolutely no reason to commit to either direction at this point. These are wild and fun days in the market for me, being lightly invested and opportunistic. A combination of buying the dips using weekly SPY calls (sold for quick profits) and holding out of the money April calls on UVXY, to sell on vol surges, has been working wonders for me these last few weeks, as a way to earn a bit while the market makes up its mind. Rinse. Repeat.

    Jani Ziedins March 21, 2013

    Glad to hear you are able to exploit this volatility and put some money in you pocket, that’s the whole reason we play this game. For the pullback, 5% is pretty benign in terms of intra-year dips and that is 75 points. We also typically see a 10% pullback each year which would drop us 150 points. Maybe we get 5% here and 10% later in the year or vise versa. Either way we trade in the moment and take what the market gives us.

    I agree that bumping our head on 1565 again would be the end of this.

fleischut March 21, 2013

ps I also think gold and coffee are trades worth considering here; some other commodities might also be useful. In general I appreciate commodities’ mild disconnect from equities at this time. Gold of course has an interesting relationship to risk assets; I’m trading that long at the moment for both technical and fundamental reasons. Best wishes.

Marc March 21, 2013

You provide a very thoughtful – at times eloquent – analysis of the day to day gyrations of the market. Thank you again. I’m sure you’d agree however that the bottom line is that – despite your obvious gift for interpreting/intuiting the psychology of the participants – no-one knows where the market goes.
After entertaining myself with the colorful opinions, illustrations, anticipations and projections from so-called experts on Stocktwits lately, I can only comfort myself with the realization that my only edge is this;
I don’t know.

    Jani Ziedins March 21, 2013

    Thank you for the thoughtful comment. When it comes down to it, we are the only ones responsible for our own trading performance. We gather information from multiple sources, but is our decision alone one what we buy and when we sell. Like anything, the more we practice and learn from our mistakes, the better we become.

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