Monthly Archives: June 2013

AM: Weakness persists

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:51 EDT

AM Update

MARKET BEHAVIOR
Stocks struggled for a second day.  We opened higher, but slipped under 1620 by midday.  Failing support set off a brief wave of stop-loss selling, but the market quickly regained its footing at 1615.

MARKET SENTIMENT
Stocks had another invitation to breakdown as we dipped under previous support, but arresting the slide so quickly shows there is not a lot of sellers with tight stops at levels.  We are always looking for clues to what the market thinks and how it is positioned.  Bouncing at 1597 last week, 1622 yesterday, and 1615 today shows there is little excess fuel to propel a major breakdown.  Obviously any bull would like to see the market climb instead of consolidate, but recognizing the environment we are in makes it easier for us to identify the next high-probability trade.

An analogy is a prairie in the middle of fire season.  Sometimes the fire danger is extreme, other times low, it all depends on the environment.  At 1687 the fire danger was high because there were so many new buyers with weak resolve.  The resulting 90-point selloff swept through the market and burned most of the excess brush.  The ground is still smoking and we have dips like yesterday and today, but the fire danger is actually quite low simply because there is so little fuel left since most of it was consumed in the previous fire.  Today’s and yesterday’s flare ups didn’t go anywhere because there was nothing left to burn.

Obviously the market is more opaque than a prairie, so we are only guessing on how much fuel is remaining, but seeing perfect selling opportunities stall shows there is not a lot left to catch fire.  This doesn’t mean the risk is zero and we must always defend ourselves, but success in the markets comes from trading probabilities and right now a bounce is more likely than a continued selloff.

TRADING OPPORTUNITIES
Expected Outcome:
The rebound is struggling, but is not surprising given how nervous buyers are.  The encouraging thing is holders continue holding these dips under support and shows they are committed to their positions.  Continued selling seems unlikely and this is the safest place to own the market in over a month.  Keep buying dips and selling rips.

Alternate Outcome:
No matter how resolute a trader appears, everyone has their breaking point and nothing crushes a holder’s will like seeing the price move against him.  While current holders are comfortable with a 10 or 20-point selloff, anything bigger could unleash a new wave of selling.  As long as we stick to our stops we will avoid getting caught up in the ensuing panic.

Trading Plan:
There is no reason to sit through this summer’s chop, but if someone is compelled to trade, the better position is long this market.  The new low to watch is 1615 and major support is at 1600 and the 50dma.  We need to be increasingly defensive under 1620, but at this point the risk reward does not work for shorting.  Failure to hold support changes things and we will evaluate that situation if we get there.

Plan your trade; trade your plan

PM: Down one percent

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
The S&P500 ended down 1%, giving back Friday’s gains in average volume.  The market is still holding above minor support at 1620 and major support at 1600 and the 50dma.

MARKET SENTIMENT
While it felt dramatic, today’s dip did not do any major technical damage to the rebound.  Markets remain uncertain and that leads to volatility.  Yen and Nikki swings are putting the squeeze on major banks and hedge funds and that anxiety is rippling into our market.  It is unlikely turmoil in Japan will directly affect our economy, but it could influence where liquidity ends up.  Contrary to today’s move, instability over there can create renewed demand for US stocks and bonds as traders flee to our relative safety and stability.

TRADING OPPORTUNITIES
Expected Outcome:
Selling today is not a surprise.  The market is entering a consolidation phase following sizable gains and choppiness is part of that cathartic process.  Support and a bounce off 1620 on Wednesday is bullish.

Alternate Outcome:
Failing to hold 1620 and testing 1600 so soon after finding support is troubling and forces us to take a more defensive stance.

Trading Plan:
A bounce on Wednesday is buyable and a breakdown is a warning flag.  Stick to our stop-losses and don’t let recent profits turn into losses.  While the more adventurous can trade these swings, a more conservative trader can sit on recent profits and wait for a higher probability trade.  Making money in the markets is easy, the hard part is keeping it.  The best way to avoid giving back profits is to avoid forcing a trade where there is none.

AAPL daily at end of day

INDIVIDUAL STOCKS
AAPL‘s developer presentation on Monday failed to impress the market and the stock remains stuck at the 50dma.  Another catalyst came and went without reviving excitement in the company and its products.  Holding support this long is encouraging, but also sets the stage for an avalanche of stop-loss selling if we break through it.  Quick profits can be made here buying the breakout or shorting the breakdown.  Wait for the market to make its move and jump onboard with tight stop-losses.  But don’t hang on too long and take quick profits after a few days.  Since January AAPL’s been a trading stock and buying dips and selling strength is still the best way to play this name.

Plan your trade; trade your plan

AM: Dragged down by Japan

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:56 EDT

AM Update

MARKET BEHAVIOR
Stocks opened weak following turmoil in Japanese markets, but US markets brushed off those worries and reclaimed a chunk of the early losses.

MARKET SENTIMENT
There are plenty of issues in Japan, but current volatility is largely driven by an over-crowded hedge fund trade going long the Nikki and short the Yen.  It was guaranteed easy money until it started falling apart a couple of weeks ago, no doubt execrated by margin calls on over-leveraged hedge funds.  But that is there and this is here.  We live in an interconnected world and some of that spills over, but remember the US markets are leaders, not followers.  Bearish traders trying to get a jump on the expected breakdown in our markets shorted US stock futures overnight, but much to their dismay, the US market bucked the trend bounced just minutes after the open.

From a supply and demand point of view, much of the selling in US markets took place last week, meaning there was little supply left to continue a breakdown.  Fundamentals or not, the market bounced because there was no one left to sell.

TRADING OPPORTUNITY
Expected Outcome:
Everyone wants a strong market to pullback so they can get in at lower prices, but every time they get what they asked for, they become paranoid and are afraid to buy the dip.  Last week’s selloff gave people a chance to get in at 1600, those that missed Friday’s strength had another chance this morning.  The market is entering a volatile range as we consolidate recent gains.  Don’t get greedy and lock in long and short profits early and often.  We can trade the breakout when it happens, but as long as we remain inside 1600-1700, swing-trade it.

Alternate Outcome:
Today’s weakness shows some buying restraint by those watching the bounce from the outside, but we are still well above the 50dma and 1600.  Falling back to this level so soon after testing them shows buyers are scarce and the breakdown is finally here.

Trading Plan:
Shorts that failed to cover last week can use this weakness to take profits.  Staying above 1622  means the bounce is still intact and buyable.  Falling under 1622 over the next couple days is a red flag and demonstrates lack of demand.  Outside of that, look for the market to trade up to 1670ish over the next couple weeks where we will take profits and short weakness.

Plan your trade; trade your plan

PM: Constructive trade

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks traded flat on low volume, following last week’s decisive rebound from 1600 and the 50dma.

MARKET SENTIMENT
Following all the selling and subsequent rebound last week, everyone is standing around wondering what comes next.  Volume was light as few chose to trade, preferring to see what happens next, but this is bullish.  It shows holders are comfortable holding and no one is rushing to lock in profits or sell the bounce.  We have rallied the last six-months on tight supply and can continue doing it here.

The obvious top seems less obvious today.  We broke through key support at 1600 and the 50dma, but it failed to trigger a wider wave of selling.  We didn’t bounce because traders were complacent and rushed to buy the dip.  No it was quite the opposite, everyone expected the plunge as we were in the mist of the long-awaited correction.  Complacency and dip buying didn’t prevent the selloff; fear, panic, and a huge wave of selling ended it.  Once the pessimists and fearful were out or short, there was no one left to sell, supply dried up, and we popped.  Supply and demand at its most simple.

TRADING OPPORTUNITIES
Expected Outcome:
If this bounce is built on unsustainable dip-buying, it will fizzle Tuesday.  Anything that lasts at least four-days has wider buying behind it and is safer to own.  Last week squeezed many of the late shorts, but there is still an army of shorts holding on from higher up and hoping this bounce is a bull-trap.  Unfortunately for bears, they had the perfect setup to break this market last week and could not get the job done.  If a bear did not heed the warnings last week, there is still time.  It is okay to be wrong, it is fatal to stay wrong.

Alternate Outcome:
If the rebound collapses on Tuesday, it means this bounce was built on a foundation of sand and the selling is not done yet.  No matter what we think, we use stops to get us out of bad situations.  Failing to hold the 50dma or 1600 so soon after bouncing is not encouraging and shows bears gained the upper hand.

INDIVIDUAL STOCKS
AAPL’s early gains fizzled following their developers conference.  We have OS X 10.10, a fairly modest upgrade, but for me personally, the redesigned dual-monitor support is huge.  Apple barely supported dual-monitors since Snow Leopard and upset many of their professional users that carried the company in the pre-iPod days.  The new Mac Pro was also a nod to power users since many assumed the line was being discounted in favor of consumer grade computers.  The downside for investors is these power users don’t even add up to rounding errors on the income statement.

P at end of day

The big deal for average users is the completely redesigned iOS7 that finally moves the iPhone out of 2005.  It is still playing catchup to Android, but at least it isn’t as far behind.  But for AAPL investors, icon designs don’t drive phone sales, features do and expect AAPL to continue losing market share to cheaper and larger phones.  AAPL has a lock on expensive 4″ phones but that is because they are the only one selling $600 small screen phones.

iRadio is a joke, they even joked on stage that it was just like Pandora.  P spiked on the news of how little attention iRadio was getting and it seems more a novelty than anything that will drive sales or revenue.  At best it will drive a few iTunes sales, but they didn’t give any reason for people to change from Pandora or Spotify.

Plan your trade; trade your plan

AM: No profit taking yet

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:49 EDT

AM Update

MARKET BEHAVIOR
The market is holding current levels following last week’s bounce off the 50dma.

MARKET SENTIMENT
Traders are not selling the rebound, showing renewed support following a nerve-wracking 5% pullback.  Most unsustainable bounces fail within a couple of days as the dip-buying dries up.  Trading flat is encouraging and holding here through Tuesday shows the runaway selling is over.

Much of the selloff was driven by predictions and anticipation of the widely expected selloff.  This flushed out many momentum based bulls, but after a certain point we run out of people willing to sell and that point was last Thursday.  If recent dip-buyers are optimistic, they will continue holding for higher gains instead of quickly flipping the stock and locking in profits.  Keeping supply tight is what will keep the rebound going.

TRADING OPPORTUNITY
Expected Outcome:
Holding these levels through Tuesday means anyone betting on a market crash is going to be disappointed.  We shouldn’t expect the rally to continue racing ahead and sideways consolidation is normal.  Buy weakness and sell strength.

Alternate Outcome:
Buying the dip is the most predictable and tired trade of the last six months.  One of these days it won’t work and the masses jumping in will get run over.  While the trend is our friend and we need to assume every dip is buyable until they are not, we cannot be nieve about it.  Be deliberate with our entry points and always use stops to protect us from the inevitable time when we get it wrong.

Trading Opportunities:
It is a little late to buy the dip, but continued support gives us the green light to continue holding.  We are likely falling into a range between 1600 and 1700, but trading it is far easier said than done.  At any point within this range the market can bounce or breakdown, making timing entries and exits difficult.  In situations like this buy weakness and sell strength, taking profits when we have them and look for the next entry.  Getting greedy and holding too long will likely lead to those profits evaporating.  An alternative for more sophisticated traders is selling time premium in the option market.

For the near-term we likely have more upside left in the bounce, but keep a hard stop-loss under 1600.  Failing to hold this level so soon after testing it means more selling is in store.  If we break 1650, that is a good place to move up a trailing stop.  If someone likes the gains they made over the last couple days, there is nothing wrong with cashing those in too.

INDIVIDUAL STOCKS
This is AAPL‘s big developer conference key-note.  While the stock started higher, it’s been flat to slightly lower once it started, but channeling Job’s ghost, expect Cook to save the good stuff for the end.  Right now investors are looking for another home run and will likely leave disappointed with a base hit.  A music service is a sideshow, the real meat will be hints on a large screen phone and a cheap phone, two markets AAPL is currently giving away to Android.

Plan your trade; trade your plan

AM: Bounce continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:12 EDT

AM Update

MARKET BEHAVIOR
The bounce continues for a second day as the market pushes back into the middle of the 1600/1700 range.

MARKET SENTIMENT
The headline event was the monthly employment report.  175k new jobs appears just right, not too hot to threaten QE and not too cool to signal economic weakness, or at least that is how the talking heads are spinning it.  Truth is we are up again because we ran out of sellers yesterday.  The market moves on nothing more than supply and demand.  Tight supply equals higher prices.

It is another painful day for aggressive and greedy shorts who failed to lock-in profits.  Many of the late shorts are forced to cover at a loss and their buying is a big part of today’s lift.  The flashing neon warning sign for bears was bouncing after breaking 1600 yesterday.  When the violation of support failed to trigger an avalanche of stop-loss selling, that was our signal we were running out of sellers.  If a bear’s investment thesis predicted a swift drop after breaking support, not seeing that move was a sign something was wrong and it was time to lock-in profits.

But that was then and this is now.  Where are the markets headed?  Is today’s bounce a bull-trap or a buying opportunity?  All the anxiety surrounding recent weakness flushed nervous holders out, replacing them with confident traders willing to buy the fear.  As anxious and paranoid as traders feel in the aftermath, a 5% pullback is very therapeutic and often all the market needs to refresh itself.

Source: Yahoo Finance 6/7/2013

The crowd remains bearish here, meaning the contrarian trade is still believing in this market.  This morning there was a Yahoo Finance poll prior to the jobs numbers showing only 24% believe the economy is getting better.  It shouldn’t surprise anyone the market bounced again.  When everyone is constantly talking about how “overly bullish” the market is, the crowd is bearish, not bullish, and the contrarian trade is sticking with the trend.

TRADING OPPORTUNITIES
Expected Outcome:
The market can do one of three things; up, down, or sideways.  The pervasive bearishness and recent flush exhausted the supply of sellers and the bounce killed any downside momentum, meaning a crash is unlikely.  The market had a huge run in the first five months of this year and continuing that rate of gains seems unlikely.  The only thing left is trading sideways.  Recent trade likely set boundaries for the range between 1600 and 1700.  Sell strength and buy weakness.  Let profits grow to a worthwhile amount but don’t wait too long because they will likely disappear a few days later.

Alternate Outcome:
If we expect a trading range, the alternate is a directional move.  The outside limits of this range appear to be 1598 and 1687, but for simplicity’s sake lets call it 1600 to 1700.  The biggest threat is a near-term pullback to 1600 and likely means the rally is in trouble.  Breaking out to the upside means the rally is not done, but up-legs are slower and more deliberate than selloffs so we have plenty of time to jump on the rally bandwagon if that is the direction it goes.

Trading Plan:
Stay long until we get to the upper half of the trading range and then follow with a trailing stop.  Shorts should lock in any profits if they have some left.  Buy weakness and sell strength until we break out of the 1600/1700 range.  Swing trading a range is hard because we don’t know exactly what strength and weakness is.  Rather than get greedy trying to capture all of a move, build up some profits over a couple of days, lock them in, and look for the next trade.  More experienced investors can short or sell options.

TSLA daily at 2:14 EDT

INDIVIDUAL STOCKS
In addition to the exciting new square icons for iOS7, we can look forward to iRadio.  Lets hope it will drive new phone sales like Ping, iCloud, and Apple Maps.  No doubt iRadio will add some incremental revenue from existing users, but AAPL doesn’t have a revenue problem, they have a market share problem.   Without some new, must have feature, they will continue losing market share to Android.  People already have a Pandora account and all their friends are on Spotify, so I don’t see where iRadio fits in and it is nothing more than a late, platform dependent, me-too product.  I’m sure most don’t even remember Ping, but that was Apple’s attempt at a social network built into iTunes.  It was a gigantic flop because it was late and didn’t provide anything new for users.  Unless iRado offers something that blows away Pandora and Spotify users, expect another iFizzle.

GLD is down again as the volatility continues.  There is no reason to hold gold here until it breaks and holds $140.  It no longer provides safety and stability for a portfolio and the widely expected hyper-inflation just isn’t happening.

TSLA is sending shorts running for cover…again.  Shorting this stock is a suicidal game, but if someone can’t help themselves, at least take profits quickly because invariably it will bounce.   This is a nice swing-trading stock for nimble, fast, and courageous day-traders, but everyone else should watch with fascination from the sidelines.

Plan your trade; trade your plan

PM: What comes next?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Dramatic turn of events as the market briefly penetrated 1600 following a sharp, midday slide, but rebounded decisively and finished up  0.9% for the day.  Volume was average, but slightly less than the recent down days.

MARKET SENTIMENT
With the expected bounce is behind us, we need to figure out if this is simply a temporary reprieve before further selling, or just another bear-trap on the way higher.   The problem for us is it easily could be either.

The selloff was becoming obvious, a little too obvious, as both holders and shorters anticipated a larger correction and sold preemptively into the weakness.  This proactive selling took much of the supply out of the market and made this bounce inevitable as selling exhausted itself.

We violated widely followed support, but failed to trigger an avalanche of selling.  That is an extremely revealing piece of information when it comes to evaluating how other traders are positioned and what they think.  Breaking the 50dma and 1600 was the point where everyone should have rushed for the exit at the same time, yet they stayed in their seats, leading to the bounce higher.  This shows most holders are not spooked by the dip and their resolve (or stubbornness) caused today’s bounce.

The interesting thing about this bounce is blunted all the momentum bears built up over the last two weeks and now puts bears on the defensive.  As far as sentiment goes, this is potentially a game changer.  It brings confidence back to nervous bulls and makes bears doubt themselves.

Friday we have the monthly employment report that will be good for some early volatility, but after a couple of hours it will be long forgotten and we will resume trading the supply and demand skew that lead to the recent selloff and today’s rebound.

TRADING OPPORTUNITIES
Expected Outcome:
The ball is in the bull’s court following today’s bounce.  Expect the rebound to continue for a couple more days as we squeeze shorts that overstayed their welcome.  From there it will be a a coin-toss if we continue to the upper end of the range or retest the lows.  Either way we are likely heading into a range bound market for the remainder of the summer and the best trade is buying weakness and selling strength.

Alternate Outcome:
Once the short-squeeze runs its course, the market could collapse due to a lack of demand if buyers continue avoiding this market.  It makes no difference what the fundamentals or technicals say, if we cannot find new buyers, the market falls under its own weight.

Trading Plan:
Buy the bounce with a stop under today’s low.  Shorts should lock-in profits before they evaporate.  We are moving into a choppy market and if we don’t capture profits early and often, they will likely disappear.  1600 is still the line in the sand.  Retreating under it over the next couple days shows buyers cannot support this market and we are likely headed lower.  But if we hold 1600, look for a move to the upper end of the range.  Until this market breaks-out/breaks-down, buy weakness and sell strength.

Plan your trade; trade your plan

AM: Bounce or false bottom?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:44 EDT

AM Update

MARKET BEHAVIOR
Stocks slipped again in early trade, challenging 1600 and the 50dma.

MARKET SENTIMENT
The market clearly wants to test these widely followed technical levels, but the real question is how much stop-loss selling is left to trigger.  If we saw a large amount of preemptive selling on the way down, there are fewer traders left to dump this violation of support.  Under this scenario we will see an initial surge of selling when we break support, but since so much defensive selling happened early, it quickly exhausts itself and bounces in decisive a capitulation bottom.  This is the exact behavior we saw on April 18th when the market rebounded strongly after testing the 50dma.

The alternative is many traders are anticipating the inevitable bounce and have all their stops clustered under 1600.  A modest dip will set off a furious tidal wave of selling that doesn’t stop until we plunge at least 20 points.  At this point either outcome seems likely and the most conservative trade is to watch from the sideline.  It is an ego boost and gives us bragging rights to challenge the market and win, but allowing our ego trade is a good way to go broke.  Let the market show its hand and jump on the subsequent move.

TRADING OPPORTUNITIES
Expected Outcome:
The market briefly dipped under 1600 as I wrote this and all we can do is wait and see what happens.  Was this the capitulation bottom, or the prelude to a major QE selloff?  I wish I had the answer, but like everyone else I’m simply a spectator.  1600 is an important level because so many people are watching it and basing their near-term outlook on how we respond. Over the next couple days we will know a lot more about the what the market thinks and how people are positioned.  A bounce is buyable for a trade, but resist adding new shorts if we keep selling off.  Bull or bear, expect a short-squeeze/bull-trap bounce in the next couple days.

Alternate Outcome:
Trading would be so much easier if the market actually did what it is supposed to do.  The problem is it has a nasty habit of convincing us we are wrong just before proving us right, or convincing us we are right just before proving us wrong.

Bears are looking for a collapse, bulls a bounce.  Obviously one is right and the other wrong, but if only the market’s price-action was so clearcut.  A likely outcome is fake out with a false move before reversing and revealing its true intentions.   A bounce before a plunge, or a plunge before a bounce.  Just because the market is doing what we expect doesn’t mean we can let our guard down.  Prepare for, even expect it to snap back in our face.  In uncertain and volatile periods like this, take profits early and often because they will likely be gone in a couple of days.

Trading Plan:
Let the market do its thing.  I still expect a near-term bounce because everyone is on the selloff bandwagon, but the momentum is clearly on the bear’s side.  A bounce is buyable with a stop under recent lows.  It is late in the game to be adding new shorts and existing shorts should look to take profits.  The goal isn’t to make all the money and hold for top dollar is a sure way to give back all your hard-earned profits.

GLD daily at 1:44 EDT

INDIVIDUAL STOCKS
AAPL challenged its 50dma this morning, but is holding it at the moment.  It is hard to be excited about this company given the complete lack of meaningful innovation over the last couple years.   Rumor is AAPL will release new default icons for iOS next week.  Without a doubt they need to get rid of the cheesy glare and  gimmicky graphics on the in-house icons, but hopefully there is something bigger than that.  Of course at the same time we also don’t want another half-baked iMaps episode either.  If the market is not wowed next week, expect traders to continue souring on AAPL’s and actually start to question the company’s long-term prospects.  It’s up to Apple to prove it is not the next Palm Pilot or BlackBerry and the way it is bleeding market share is not a good start.

GLD reclaimed some of its luster in the face of today’s selloff.  Thank a plunging dollar for the lift.  Gold could continue higher on Dollar weakness, but if we are making a currency trade, trade currencies, not gold.  Fundamental reasons to own gold continue eroding along with people’s trust.  Maybe gold will come back some, but it will be a long while before it reclaims its economic fear driven heights.

Plan your trade; trade your plan

PM: Another leg down

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks continue sliding, down three of the last four trading sessions and are 80-points off the high set a couple of weeks ago.  The market closed just above support at 1600, the 50-dma, and the lower trend-line of the uptrend.  Is this the place for another routine bounce off of support, or is this the start of something bigger?

MARKET SENTIMENT
What goes up must come down.  This is the pullback everyone was waiting for, but now they are scared and predicting market crashes.  This is how it usually goes, we hope and pray for something, but when it happens we are too afraid to act.  People who wanted the market to pullback so they could buy more, are panicking and selling with the crowd instead.  But that is the way it has to be.  If this were easy, everyone would be rich and we clearly know that’s not the case.

From here the market can do one of three things, bounce off of support at 1600, dip under 1600 and trigger one last wave of stop-loss selling before rebounding, or continue the relentless slide lower.  It really comes down to the dynamic between buyers and sellers.  Will we exhaust the supply of holders easily spooked into selling for a discount?  Will prices become so attractive value buyers can no longer resist?  Better or worse we will have our answer in a couple of days.

For all the talk of doom-and-gloom we are only 5% off all time highs.  Obviously every 50% collapse starts with that first 5%, but not every 5% pullback leads to a 50% collapse.

TRADING OPPORTUNITIES
Expected Outcome:
Stocks are still a few point above support and we must assume the market will bounce until it proves otherwise.  The challenge with trading technical levels is they are better drawn with a crayon than a straight edge.  Sometimes we bounce early, sometimes late.  Each trader needs to pick a stop-loss level that balances their tolerance for risk versus desire to avoid getting shaken out.

Even if the market is topping, expect either a doubt-top or saw-tooth decline with multiple short-squeezes and sucker’s rallies along the way.  Bull or bear, look for the market to bounce in the near future.  The only thing up for debate is how sustainable the subsequent rebound is.

The most encouraging thing about all this selling is it is pricing in the end of QE.  Once we work through this episode, we no longer need to worry about it.

Alternate Outcome:
Markets are notorious for overshooting on both the low and high side.  This market will pullback like everyone before it and this easily could be the start of that move.  If nothing else, use stop-losses as a last line of defense.

Trading Plan:
There is no reason we need to be in this market.  The mistake many traders make is feeling compelled to always have a trade on, but most of the time that is when they give back all their hard-earned profits.  Making money in the markets is easy, the hard part is keeping it.  The ambitious can look for a buyable bounce off of support on Thursday with a tight stop under recent lows.

Plan your trade; trade your plan

AM: Selling continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:55 EDT

AM Update

MARKET BEHAVIOR
The market stumbled lower and undercut recent support at 1620.  The next major level for bulls to defend is 1600.

MARKET SENTIMENT
We slide as buyers stay away and stop-losses trigger under widely followed support levels.   The pain trade is clearly on for late buyers of the recent rally.  There is no obvious headline driving the decline, but we know headlines are only loosely related to market moves.  Traders are afraid to buy and the continued slide is forcing out weaker holders.  When that happens, it doesn’t matter what the headlines say.

Recent weakness shows the value of selling into strength and taking profits.  We are in this to make money and the only way to do that is selling our winners.  It also highlights the risks of chasing a strong market.  The best trade is often the hardest trade.  That means selling an invincible stock and buying when everyone is convinced things are collapsing.

TRADING OPPORTUNITIES
Expected Outcome:
I still don’t believe in the selloff, but that’s what stops are for.  At some point the rally will bounce because they always do, the only  question is if it is a real rebound or bull-trap.  As we discussed through May, a pullback following such strength is normal and healthy.  1600 has long been the line in the sand and retreating to this level is not alarming.    How the market responds here lets us know what comes next.

The market is down nearly 5% from recent highs and that qualifies as a refreshing pullback.  It is reasonable for the market to enter a trading range for the remainder of summer.

Alternate Outcome:
No matter what we think, we must respect and follow our stops.  It is better to be out of the market wishing we were in, than in the market wishing we were out.  Buyers remain reluctant to jump in and buy the dip.  The longer they withhold their support, the further we slide.

Trading Plan:
Assume the rally is intact until we violate 1600.  If the market falls under our stops, we must sell, no questions asked.  It is easier to buy back in if we get out prematurely than it is to recover mounting losses by sticking around too long.  As always, if we don’t feel comfortable, stay out of the market.  It is easy to make money in the markets, the hard part is keeping it.  Don’t force bad trades.

Plan your trade; trade your plan

PM: What bulls?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks closed in the red, but held yesterday’s low of 1622 and finished above the intraday lows. Volume was above average, but off of the elevated levels seen on Friday and yesterday.

MARKET SENTIMENT
Holding 1620 through Wednesday’s close shows sellers just don’t have what it takes to push this market any lower.  No matter what anyone says about too-far, too-fast, overbought, overly-bullish, etc, this market remains cautious, hesitant, even bearish.  The most common mistake people make is assuming the trend represents popular sentiment, but in fact they have it exactly backwards.  Sustained trends are only possible when the crowd expects the opposite will happen; overly-bearish markets rally and overly-bullish markets slide.

The only reason the current market rallied this long and far is because of how overly-bearish it was following Obama’s reelection and the impending Fiscal Cliff.  Even seven-months and 350-points later it refuses to breakdown because people still don’t trust it.  StockTwits maintains a sentiment indicator and right now users are 68% bearish and only 32% bullish.  That is anything but overly-bullish.  Over the last two-months the indicator has only been above 50% for a couple of days, yet the market rallied 150-points in that same period.  This market rallies because it is overly-bearish and as long as the cynics continue fighting it, it will keep going.

Source: StockTwits 5/4/2013

The silver lining to all this volatility due to speculation over the future of QE is this selling is removing that overhang.  The more scared the market is now, the less of a big deal it will be when it finally happens.  Everyone who fears QE ending is selling to buyers unafraid of it.  When QE finally ends the fraidy cats will be on the sidelines and the confident will continue holding.  Just another time to sell the rumor and buy the news.

TRADING OPPORTUNITIES
Expected Outcome:
Everything I see shows this market remains overly-bearish and the recent selling chased out weak holders.  With most of them out of the way, selling will dry up and the market will bounce.  Strength on Wednesday is buyable with a stop under 1620.

Alternate Outcome:
I’ve been wrong before and without a doubt I’ll be wrong again.  The goal isn’t to be right all the time, but to minimize the cost of being wrong.  If the market slips under 1620, expect a dip to support at 1600.  While we will assume every dip is buyable, failing to hold 1600 shows we need to reconsider the viability of the rally.

Plan your trade; trade your plan

AM: Another round of selling

By Jani Ziedins | Intraday Analysis

S&P500 daily at 3:06 EDT

AM Update

MARKET BEHAVIOR
Stocks retreated following early strength.

MARKET SENTIMENT
In spite of this weakness the market is still above recent lows and is maintaining its composure.  With so many calling for a correction and claiming recent price action was the top, support at these levels for the third day is constructive and bullish.  Many of those that could be shaken out are getting shaken out, eventually leading to selling exhaustion and price recovery.

Understand what people think, how they are positioned, and what moves they have available to them.  Most expect a pullback after such a strong rally, sold recent weakness, and the only thing they can do is buy back into the market.  As for the bears, many shorted recent weakness and will be forced to cover when prices bounce.

TRADING OPPORTUNITY
Expected Outcome:
Continued support here is a warning for bears to cover shorts before they get squeezed out.  There is nothing wrong with making an aggressive trade, but recognizing when the trade is not working as planed is a key part of surviving the market.  Market collapses are scary fast, yet this selloff is two-weeks old tomorrow and hasn’t even fallen 4%.  Trading against the trend requires nimbleness and a deft hand. Take profits early and often; don’t get greedy and hold too long, allowing profits to turn into losses.

When we finally bounce, don’t expect the strong rally to resume.  The market moves in three directions; up, down, and sideways.  We did a lot of up recently, everyone expects down, so sideways it is.  Sell the breakout and buy the breakdown.

Alternate Outcome:
One of these days bears will be right and the market will correct when no one expects it.  It will start like any other dip, except this one doesn’t find a bottom and continues lower.  The best defense is keeping an open mind when the market doesn’t behave as expected, and when all else fails, hard stops.

Trading Plan:
Swing traders can buy the market with a stop under yesterday’s 1622 low.  Look for a move up to recent highs.  Breaking through 1622 likely means a retest of support at 1600 and represents another dip buying opportunity.  Slipping under 1600 will trigger a wave of stop-loss selling. At this point it is anyone’s guess if that will lead to a multi-day selloff or quickly find a bottom, but we will worry about that when we get there.  At this point assume every dip is buyable until we come across one that isn’t.

INDIVIDUAL STOCKS
AAPL continues holding above the 50dma and $440.  Seeing the eight-month selloff take a break is encouraging.  The big fundamental catalyst comes next week at AAPL’s developer conference.  In the past AAPL used this platform to announce new products and services.  Given the huge price decline since the iPhone5’s release, pressure is on Cook and Co to wow developers, the media, customers, and the market.  The fear for an AAPL bull failing to unveil anything more than software tweaks.  Without a big announcement, expect the slide to continue as investors assume AAPL is out of ideas.

Plan your trade; trade your plan

PM: A bullish reversal

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
The market staged a positive reversal after falling to 1622 in early trade.  Volume was well above average as the morning dip flushed out another round of stop-losses.

MARKET SENTIMENT
While it is premature to say this bounce is the real deal, it clearly overcame early weakness and prevented it from cascading into wider selling.  Bears had the perfect setup and failed to deliver for the umpteenth time.  Early stop-loss selling quickly fizzled and didn’t spread because most of the potential sellers sold last week.

Success in the market is not found in the charts or the fundamentals, but understanding what people think and how they are positioned.  Many traders anticipated a correction and bailed at the first signs of weakness.  This lead to steep declines on the 22nd and last Friday, but all that selling consumed the bulk of available supply, meaning there was little downside left.  When we run out of sellers there is nowhere to go but up.

TRADING OPPORTUNITIES
Expected Outcome:
Most of the nervous selling is behind us, so expect the market to continue rallying on tight supply.  This will lead to a near-term short-squeeze as aggressive bears are forced to cover, but the wider pool of buyers remain nervous, so don’t expect them to climb over each other to continue pushing this market higher.  Buy strength and sell weakness until the market indicates it is ready for the next directional move.

Alternate Outcome
Further weakness and undercutting 1622 invalidates the thesis most weak hands are already out of the market.   The next key level is 1600 and failing to hold that puts the rally in jeopardy.

Trading Plan:
The dip is buyable with a stop under 1622.  Look to take profits near the previous highs as the market stays range bound through summer.  Seeing the market break 1600 on the low side or 1700 on the high side means the market is ready for its next directional move and we will trade that when we get there.

Plan your trade; trade your plan

AM: Buy the dip

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:29 EDT

AM Update

MARKET BEHAVIOR
Stocks are modestly lower in early trade as last week’s selling continues.  We are still well above major support at 1600 and the 50dma, but violated minor lows at 1635 last week and undercut Friday’s lows this morning.

MARKET SENTIMENT
The Sell in May folks are now promoting Sell in June.  It doesn’t have the same ring to it, but we shouldn’t let semantics get in the way of stubbornness.  Bears also point to the Hindenburg Omen, a scary warning of imminent calamity.  Add to this the already pervasive claims this market is extended, over-bought, and overly-bullish.  No one trusts this market and people invent new reasons to stay away each week.

We all want to buy and hold the next big move, but it is our innate fear of heights that keeps most out of the biggest winners.  We are natural cynics and distrust anything that moved too far, too fast.  This is a mixture of disbelief and regret we missed the big move everyone is talking about.  We want to join the party, but insist on waiting for the inevitable pullback so we don’t look foolish chasing a hot stock, or in this case market.  But typically the market either never pulls back, or when it does, we chicken out because it looks like it is breaking down.

Fear and indecision is what keeps most out of the best, easiest, and safest moves.  This market rallied over 300-points since the November lows and people still don’t trust it.  This has been one of the easiest times in market history to hold stocks as we marched higher week after week with no real pullbacks along the way, yet most are still afraid of it.  There will eventually be a time when everyone finally embraces this market and is truly over-bought, but when traders and headlines scream this is the top every time we dip 20-points, we know we are not there yet.

This market will top, but only after everyone stops expecting it.  Supply and demand dictates when everyone fears a correction, they sell proactively and aggressively at the first signs of weakness.  With so many people watching this market with an itchy finger, much of the defensive selling is already behind us as many blew their load early.  That premature selling takes supply out of the market and makes it easier for the market to bounce.  Further, these early sellers are the next buyers as they chase the market higher.

Many traders are waiting for the monthly employment report on Friday, but it has been a year since the market reacted strongly to an employment report.  It was a big deal when we transitioned from job losses to gains,but the market expects modest gains and as long as we keep getting them, this report is simply talking-head fodder.

TRADING OPPORTUNITIES
Expected Outcome:
Friday’s weak close did not lead to an avalanche of selling today, and while we are modestly lower, the market is calm and rational.  Unfortunately for us, markets cannot go up every day, so selling of 10, 20, and even 50-points is normal and expected.    Resist the urge to jump out the window every time the market doesn’t go up.

The market is likely transitioning to a flat trading range for the remainder of the summer.  I’m just spitballing things here, but expect the market to stay between 1600 and 1700 over the next couple months.  The best trade is buying weakness and selling strength.  Savvy and experienced investors can sell option premium.

Alternate Outcome:
While it doesn’t happen often, sometimes the crowd gets it right.  This market could implode Hindenburg style and we cannot stick stubbornly to our original thesis once the market moves convincingly against us.  We came a long way and at some point we will run out of buyers.  Once that happens it doesn’t matter what the headlines are or what the Fed does, without demand markets tank.  Assume the uptrend is intact until it proves otherwise, but once it does, be flexible and quick enough to profit from the new trend.

Trading Plan:
Look for a bounce to buy the dip and use the recent lows as a stop.  Assume the market is stuck in a range and take profits as we approach recent highs.  The aggressive can then reverse and short the subsequent weakness.  A break below 1600 or break above 1700 means we need to watch for the next directional move.

S&P500 daily at 2:30 EDT

INDIVIDUAL STOCKS
AAPL continues finding buyers above the 50dma and shows legitimate support for the first time since the selloff began.  I suspect most new buyers are coming for the recently raised dividend and these investors are notoriously price sensitive.  Growth investors are shying away from this name and it is unlikely we will see them push this stock any time soon.  A trader can make money here, but it takes a different strategy than the easy buy-and-hold days of years past.

GLD‘s volatility continues as we jump 2% today following Friday’s 2% decline.  Speculators and day-traders are gaming the metal trying to scalp a profit here and there.  The loser is the cautious investors seeking safety and security.  It will take a while for the commodity to regain its safe-haven status and expect recent volatility to continue.

Plan your trade; trade your plan

WR: Brace for the plunge?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review and Look Ahead

MARKET BEHAVIOR
Stocks closed lower for the second week in a row, but still finished May with impressive monthly gains.  Weekly trade was off due to the holiday shortened week and is not directly comparable.  Of note is the first back-to-back weekly decline since November’s lows 300-points ago.

MARKET SENTIMENT
No one disputes the rate of gains since the April lows is unsustainable, the argument centers on if we consolidate or rollover.

Markets decline one of two ways: they plunge when everyone is caught off guard by unexpected news and under appreciated risks, or grinding lower when everyone is fat, dumb, and happy; the proverbial boiling an oblivious lobster one degree at a time.  Our job is deciding which, if any, these scenarios apply.

Lets test the first one, plunge on unexpected news and under appreciated risks.  Recent examples are the 2008 Financial Crisis and the first bout of Euro Contagion fears three-years ago.  The market is blindsided and collapses as the new risk factors are priced in.  Over the last two-weeks did we uncover something new and unexpected?  Are there risks the market under appreciated?

Following financial press headlines covering this two-week selloff, it appears the headline worry is QE ending a couple of quarters early.  First, the Fed has given zero indication this will happen, and second, everyone already knows QE is going to end.  Where is the new risk factor worthy of a steep selloff?  We don’t have one and is why the market didn’t fall into a 5-day, 10% slide following the Fed minutes two-weeks ago.  Panicked selling is unbridled and impulsive; if it hasn’t happened yet, it is unlikely to start without a new catalyst

The second option is grinding lower.  These are the tops at the conclusion of long bull moves where we finally run out of buyers.  These typically end on good news, not bad, as demand exhausts itself in one last push higher.  AAPL’s 40% haircut following the strong iPhone5 launch is a perfect recent example of this.  The market top in 2007 is another.  In situations like this everyone is excited about the future and buying every dip, worries are few and far between.  Those calling for a big decline are labeled extremists.

Currently it seems everyone is bracing for the inevitable pullback/selloff/meltdown.  The market is on edge following recent selling, not complacent.  Even bulls are unsure and lightening up their exposure on the fear the market might be topping.

Now we ask, do we have new and unexpected news followed by a sharp correction?  No.  How about a complacent market topping on good news?  Some will debate me on this, but the fact that there are so many people promoting the bear case makes this also a no.  What does it mean when neither of these topping scenarios apply?  The bull is resting, not dying.

TRADING OPPORTUNITIES
Expected Outcome:
When everyone calls for a continuation or a breakdown, maybe answer is we trade sideways and consolidate recent gains.  We came a long way since the April lows and further upside at this pace is unlikely.  On the other side, everyone is waiting for the obvious selloff, so that won’t happen either.  All the nervous sold the recent weakness and we are running out of new sellers to keep the declines going.  That means we likely fall into a trading range for the next couple months.  Buy the dips and sell the rallies.

Alternate Outcome:
The market can fall apart at a moment’s notice and selling often triggers more selling.  I don’t expect a major correction here, but I’ve been wrong before and without a doubt I’ll be wrong again.  We use stop-losses to get us out of a bad trade and when the market doesn’t act as expected we must reevaluate our original thesis.  This market will violate material support if it fails to hold 1600, until then this is a normal pullback following a strong run.

Trading Plan:
The assumption is dips are buyable until they aren’t.  While new strength is buyable, but don’t get greedy and take profits as we approach recent highs since it is likely we are moving into a range bound market.  The risks for a market meltdown are always with us and use stop losses to control our risk.  If the market bounces on Monday, Friday’s low of 1630 is a decent stop for a dip-buyer.

Plan your trade; trade your plan