PM: Where are the buyers?

By Jani Ziedins | End of Day Analysis

May 31
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
It was a dramatic close on Friday.  We went from flat to down 1.4% in the last three-hours with losses accelerating into the close.  It was a 2% plunge from the morning highs and reminiscent of last Wednesday’s selloff.  Volume was above average between end of the month window-dressing and stops getting triggered as the selloff picked up speed.

MARKET SENTIMENT
Buying opportunity or continuation of last week’s selloff?  You’ll get different answers depending on who you talk to.

On the surface this looks like the selloff everyone’s been talking about and waiting for, but since when does the market do what everyone expects?  Clearly price has been on the bear’s side as we slipped nearly 60-points from recent highs.  This market rallied 150-points over five-weeks and everyone knows that is too-far, too-fast, so this correction is long overdue.  Hard to argue with the logic and subsequent price-action, but I’ll try.

This was a boring, holiday-week where the market hardly moved.  Trading floors were lightly staffed going into Friday’s close as those that actually worked this week cut out early.  Why stick around when nothing is happening, you are not going to buy anything, and automatic stop-losses will cover you incase the market breaks down?  Junior traders and computers have the authority to sell when the prices cross stops, but are not allowed to initiate new or add to existing positions.  This leads to moves like today’s close where stop-losses get triggered and no one is left to buy the dip.  There was no real news to justify the afternoon selling and it was simply a structural due to a cascade of stops getting triggered.

But we don’t have to speculate for very long.  If this was simply a matter of lightly staffed trading floors and auto-pilot selling, the market will effortlessly rebound next week.  If selling continues, there is more to this and the crowd might actually be right this time.

TRADING PLAN
Expected Outcome:
No matter what people say, we are still in a bull market and the odds are better trading with the trend than against it.  A day and swing-trader can take advantage of this volatility, but take profits quickly when going against the trend.  The uptrend remains intact even if we fall to 1600 and the 50dma and a bounce anytime between here and there is buyable.  If we fail to find support and continue under 1600 then we have to reevaluate our bullish thesis.

Alternate Outcome:
Every rally comes to a painful end and this one will be no different.  It is premature to call a top, but failing to make new highs and violating key support at 1600 shows buyers are scarce and further selling is likely.

Trading Plan:
Assume the market will bounce until proven otherwise.  Shorts should be taking profits, not initiating new positions.  Any rebound is buyable with a tight stop under the bounce’s low.  1600 is the key support and failing to hold this will force us to reevaluate our outlook.

GLD daily at end of day

GLD daily at end of day

INDIVIDUAL STOCKS
AAPL finished modestly in the red and is still solidly above the 50dma and $440 support.  I’m not sure how much upside there is but the stock acts like it wants to go higher in the near-term.

GLD had a poor close as the volatile trade continues.  It is not behaving like the lows are in and expect further declines in the near future.  Once upon a time gold would surge on market uncertainty, but it quickly shifted from safety to speculation and gets lumped in with every other asset dumped when people hit the panic button.

Plan your trade; trade your plan

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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.

Md June 1, 2013

I think the “crowd” or the herd are the bulls right now EVERYONE expects the market to go higher bears have been decimated the press are all bullish headline hitting fund managers are bullish SO I think that you are wrong in your assessment that EVERYONE is expecting a sell off. I honk the thing people expect least is a BIG SELL. The majority expect correction and continuation of the rally

    Jani Ziedins June 2, 2013

    Obviously the term “everyone” is an oversimplification and exaggeration on my part. I agree with your assessment that most expect a near-term pullback and that is why we have not seen one. I also agree with you that most don’t expect a 2008 style collapse either. We will know the answer soon enough.

spearchew June 1, 2013

My opinion – take as a proxy for the shoe-shine-boy…

1) The path of least resistance is clearly to upside, despite being in the midst of another dip.

2) However, the market is looking blatantly overbought to my eyes – miles off the 200 day moving average, recently hitting the +3 stdev boundary (50 day period) FWIW.

3) US fundamentals I would describe as “meh”… hardly justification for a relentless rally through and beyond record highs. Fundamentals abroad poor – especially perhaps Europe, swamped in debt and unemployment rampant.

http://s21.postimg.org/vbvbpdscl/us_jobs.png
(could equally have chosen other key macro indicators painting a “meh” fundamental picture)

4) as noted on zero hedge, recent Fed minutes stated:
“concern about the possibility of a breakout of inflation”
“and of an unsustainable bubble in equity and fixed-income markets given current prices.”
– seems the Fed is becoming more obviously worried about their artificial support.

I think this house of cards can build up just a few more levels – perhaps culminating in a really ludicrous rise in which the very last disbeliever thinks “despite what I said earlier about weak fundamentals, I admit defeat, I’ll buy!” – shurely just around the corner now?!

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