Where’s the Beef?

By Jani Ziedins | End of Day Analysis

Nov 07
S&P500 daily at end of day

S&P500 daily at end of day

MARKET BEHAVIOR
Dramatic reversal in fortunes as the market opened strong on interest rate news out of Europe, but then collapsed nearly 30-points intraday.  This slide pushed us through 1750 and undercut last week’s lows.

MARKET SENTIMENT
There was no clear headline catalyst for today’s selloff and it appeared to be mostly herd induced selling.  Without any real meat to the story behind this slide, it is less likely to stick.  Complacent owners have been trained to ignore weakness since every other dip this year was a buying opportunity and anyone who sold headline fear-mongering came to regret that decision.  What are the chances these same owners will impulsively sell weakness that doesn’t even have a compelling story behind it?  Fear of selling prematurely, again, will keep most owners sitting on their positions this time.  Bears will criticize that complacency, but that resolve by owners to continue holding keeps supply tight and makes it far easier for the market to find a bottom.

Q:  If complacent owners were not selling, who was?
A:  All the active traders trying to outsmart the system.

Near-term volatility is driven by opinionated bulls and bears who insist on buying strength and shorting weakness.  Unfortunately, sideways consolidations are the exact wrong time to make these directional bets.  Bears shorted weakness last week, but were forced to cover during this week’s strength.  Then bulls bought the last few days of strength, only to get chased out by todays collapse.  And so the up and down cycle continues.  The thing to remember is active traders don’t have deep pockets and explains why these volatile moves fizzle so quickly.  Without bigger money jumping on this selloff, it will stall this time too.  Since most holders are increasingly comfortable with their positions, I don’t expect many to rush for the exits any time soon.  That resolve puts a floor under this market.

TRADING OPPORTUNITIES
Expected Outcome:
As discussed in recent weeks, we expected the market to consolidate and trade sideways following the 130-point rebound from the October lows. It shouldn’t surprise any of us these breakdowns and breakouts over the last two weeks stalled.  Now we are left pondering the latest selloff.  Another round of selling will likely push us down to 1740, but that could be where short-term selling exhausts itself and we bounce on tight supply.  But rather than try to catch the falling knife, wait for support.  This selloff could easily take us back to the 50dma or even 1,700.  While I expect a bounce sooner than that, the swing-trader in me would like to see a bigger selloff simply because that gives us bigger profit opportunities on the rebound.

Alternate Outcome:
While there is no story behind this move, it is hard to deny the strength of the herd.  When we see other people selling en masse, it shakes our confidence and conviction.  Drop far enough and the most resolute bull turns into a sacred bear.  While it is more likely this market will find a bottom in the near-term, we must defend against a larger selloff that takes us further than even the bears expect.

Trading Plan:
Sideways chop is only suitable for day-traders and longer-viewed investors who ignore the volatility.  Intermediate time frame traders are best suited to sit this one out since these failed breakouts and breakdowns cause us to chase our tail and lose money in the process.  If anyone must trade, buy weakness and sell strength.

TSLA daily at end of day

TSLA daily at end of day

INDIVIDUAL STOCKS
TWTR splashed on to the scene with an impressive 73% first day pop.  Since few got the IPO price, the rest of us are left deciding if TWTR is worth more than $20 billion.  At this stage earnings and valuations are meaningless.  This is a momentum stock and will trade according to the whims of the greater fool theory.  For the more practical trader, these IPOs will settle down over the first few weeks and give the bull the opportunity to get in on a valid buy point as it clears the initial IPO consolidation.  Until then, let the gamblers pay in this name.

AAPL had a bad day in sympathy with the broad market and is just above $510.  We will probably dip closer to $500 before finding support.  While support creates a nice entry for the bull, be wary of a dip under $500 and the 50dma.  We only date stocks because invariably they all let us down if we fall in love with them.

TSLA slipped for a second day following earnings and news reports of a 3rd car fire.  The euphoria quickly shifted to concern with the stock down nearly 30% in less than two-months.  The higher they rise, the harder they fall.  If the stock can consolidate around these levels for a couple of weeks, it will likely bounce, but keep this a trade with clearly defined sell points.

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.

Sam November 7, 2013

If one didn’t heed last week’s key reversal day, then today’s key reversal must be respected. Sure we may go higher in the intermediate to longer term, and perhaps bounce a bit in the next few days, but divergences that have been piling up for weeks finally mattered today and means that bounces are now for shorting. Underperforming junk names and defensives can mask the underlying weakness for only so long.

    Jani Ziedins November 8, 2013

    I agree. I’m in cash and eagerly awaiting the next buyable dip. The sideways chop is too hard to trade, so I’m waiting for the next directional trade.

Todd Cox November 8, 2013

Jani,

I just wanted to say that I read your article every day. I really like it. It makes sense out of the market. You explain why things are happening; andthat is a big help to me.

Thanks
Todd Cox

    Jani Ziedins November 8, 2013

    I’m glad you appreciate it. Writing this blog is an important part of how I analyze the market. Logically laying out my views to a skeptical audience holds me accountable and helps combat emotional and impulsive decisions that we are all vulnerable to.

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