Monthly Archives: November 2015

What Just Happened?

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

It was a dramatic day for the S&P500 in this holiday shortened week. A NATO nation intentionally shot down a Russian fighter jet and fears of a military escalation sent traders scrambling for cover. European markets plunged 2% on the news and the selling spilled over to US markets when we opened. But by midmorning the reactive selling stalled and we found support at 2,070. Not only did the market find a bottom, but by the close we recovered all the losses and finished in the green. Without a doubt this counterintuitive price-action left a lot of bears scratching their heads.

Russia is clearly upset about what happened and the world is anxious to see what happens next. Realistically Putin only has two options, retaliate or complain. While a military escalation between Russia and the West is terrifying to contemplate, Russia would suffer tremendously if he chose this route. Putin is most definitely a bully, but he is not a madman. He has little to gain from a direct confrontation with NATO and everything to lose. Inflammatory rhetoric is the only sensible tool for him to wield because he cannot afford to do any more. Maybe he could withhold oil and natural gas, but even that is cutting off his nose to spite his face because this would do far more damage to the Russian economy than Europe. Traders waking up to this realization is what allowed us to recover from those early, reactive losses.

Since this is a holiday week, most big-money, institutional investors are on vacation. Without their guiding hand, we often see increased volatility as smaller and more impulsive traders take over. Had these events occurred during a more typical week, most likely we would not have fallen as far since cool-headed money managers would have snapped up the irrationally discounted stocks. Without big money’s help this morning, the only thing that saved us was running out of sellers. The thing that kept these losses relatively modest was the fact that we’ve seen a tremendous amount of turnover through the last few months. August’s plunge purged most of the weak-kneed owners and replaced them with far more confident dip-buyers. Anyone who bought the fear and uncertainty over the last few months clearly has thick skin and they demonstrated that again today by not reacting to this mornings headlines. While most people are confused by the market’s reaction today, if you understand the underlying factors, this modest dip and decisive rebound make perfect sense.

As for how to trade this, it is hard to get more bullish than this type of response to bad news. If we won’t sell off on falling energy prices, slowing global growth, a surging dollar, disappointing earnings, rate-hikes, terrorism, and now military conflict with Russia, it is hard to imagine a scenario that will scare these confident owners into selling. Bearish headlines don’t matter if no one sells them. Given this environment, plan on another Santa Claus rally this December.

Jani

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Who Bought the Dip?

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

Wednesday produced the second 1.5% up-day this week as the S&P500 launched through 200dma resistance. The headline catalyst was Fed releasing their monthly meeting minutes. While the crowd assumed the market needs never ending easy money to keep this rally rolling, today we surged on the strongest hints yet of an imminent rate hike. Has the market lost its mind? Or is the crowd looking at this the wrong way?

Something that trips up a lot of traders is they assume there must be a reason behind every price move. Why did we drop last week? What made us go up today? The financial media lives off of this hunger for explanations. And just like everyone else in the market, rather than admit they don’t know the answer, journalists will gladly make something up. We expect them to give us reasons, not say “I don’t know”. They claim we rallied today because of the Fed meeting minutes. Had we sold off instead, no doubt they would have just as effortlessly spun the same data into a bearish tale. I’m not being critical of journalists because they are giving us what we ask of them. Filling our needs isn’t their fault. The problem lies with us and always needing a reason.

Armed with this “information”, traders further compound the problem by assuming every small move is the start of something larger. We like to draw long trend lines from small data sets. Last week’s 90-point pullback was the start of a 300-point plunge through 2015’s lows. At least that is what it felt like Friday. But that’s not what happened. Instead we find ourselves up nearly 70-points and the week is barely half over. What happened?

Everyone knows markets go up and down. They know we take a step-back for every two-steps forward. We all know it is better to buy stocks when they are cheap and sell them when they are expensive. Anyone can look at the middle of a chart and identify the obvious tops and buy-points. But once our eyes drift to the far right edge of the page, we forget everything we know. All of a sudden a very routine and buyable dip transforms into a terrifying cliff. Or a big runup feels like safe and comfortable place to buy instead of a what it really is, the last chance to take cover before the storm.

While I had no idea what the headlines would be, in my November 5th blog post I warned readers that we were setting up for a very normal and healthy pullback following a 200-point rebound from the October lows. Then in my November 12th blog post I said this was the pullback we were waiting for so instead of run scared, take advantage of the discounts. After the fact these seem like brilliant calls, but that is grossly overstating the amount of brain power it takes to see these moves for what they are, simple swings in supply and demand. We sell when the crowd is buying and buy when the crowd is selling. It doesn’t get much easier than that. Rather than get freaked out by the headlines and the far right edge of the chart, remember what you already know. It only takes a moment to find the obvious answer if we clear our mind of all the noise.

Jani

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One-Step Back

By Jani Ziedins | Intraday Analysis

S&P500 daily

End of Day Update:

The S&P500 sliced through the 200dma as it slumped 1.4% Wednesday. This move leaves us just above 2,040 support that comes from earlier in the year. Volume was barely average, telling us there wasn’t a lot of reactive and emotional selling today.

Nothing like a little selloff to revive bears’ hopes and dreams. Whether you were watching TV or reading online streams, plenty of people believe this is the “BIG ONE”. But here is the thing, dig back in your memory and recall a time when all the pundits successfully predicted a big selloff before it happened. If you are struggling, don’t worry, it’s not your memory that’s failing you, it’s the pundits. Now don’t get me wrong, most of these people are exceptionally intelligent and insightful. There is also a lot of truth to what their ideas. But what trips them up is the basic laws of supply and demand. When the crowd is convinced we are headed lower, how do you think they are positioned? Once a pessimist sells, they lose their vote and are merely cheerleaders. And right now it feels like we have a lot of people rooting for the market to go lower. The reason people are so quick to jump on the “this is it” bandwagon is because memories of September’s fear and regret are so fresh in their mind.

The biggest headline these days is December’s looming rate hike. In a WSJ survey, 92% of economists predicted the Fed will boost interest rates next month. For all practical purposes it appears like there is universal belief the Fed will finally act. Monetary tightening for the first time in nearly a decade has people predicting doom and gloom for our economy. Of course many of these same people also called for runaway inflation and $10k gold because of the Fed’s “reckless” money printing. If they got the first call wrong, there is little reason to believe they will get it right this time. Further, the conversation shifted to rate hikes as soon as Quantitative Easing wrapped up last Fall. If anything, Janet Yellen has been dragging this out, so it should not be a surprise or shock to the systems when it finally happens. People don’t get hit by the bus they see coming, so this rate hike will be a non-issue.

While people are scared by this selloff, this is just another buyable dip on our way higher. In my November 5th post, I warned people that we should be preparing for a very typical pullback following a large rebound. Sixty points later, that is exactly where we find ourselves. Two-steps forward, one-step back. Technicians frequently find Fibonacci patterns in directional moves. This would be a retracement of 24%, 38%, 50%, or 62%. Following a 225-point rebound, these are pullbacks of 55, 85, 112, or 140-points. We’ve already passed the 55-point mark and 85 isn’t very far away. While we don’t want to catch a falling knife, an interesting entry would follow the market slicing through support and recovering those losses on huge volume. This would be the capitulation day that chased of the last of the sellers. Traders who miss a big run always hope for a pullback that will let them get in, but all too often they lose their nerve when the market gives them what they were asking for. Embrace discounts, don’t fear them.

Jani

What’s a good trade worth to you? How about avoiding a loss?
For less than the cost of a daily coffee, have analysis like this delivered to your inbox every day during market hours. As an added bonus, I share personal trades with subscribers in real-time.
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Who is the Next Buyer?

By Jani Ziedins | End of Day Analysis

S&P500 Daily

End of Day Update:

The S&P500 slipped modestly Thursday, but this was mostly a placeholder day ahead of Friday’s monthly employment report. October’s breathtaking 200-point rally kicked into overdrive following September’s big employment miss. Will October’s employment launch a similarly impressive move?

I cannot begin to guess what the jobs number will be. Maybe we have another big miss. Or maybe economists lowered their expectations so much that it will be an easy beat. But the truth is even if I knew the number ahead of time, I’d still be clueless about how the market will react to it. We vacillate so frequently between ‘good is good’ and ‘good is bad’ that it is challenging to simply figure out which way is up. But rather than guess what the number will be or how the market will react to it, there is a better way.

Everything always comes back to supply and demand. It makes no difference why people are buying, only that they are buying. Same goes for selling. This means we no longer need to worry ourselves over whether ‘good’ is good or bad. The only thing we care about is if people are buying or selling the news. So the question of the day is, “Who is the next buyer?” Find that answer and we unlock the market’s next big move.

To figure out where we’re going, we start with where we came from. Two-hundred points over four-weeks tells us there was a lot of desperate buying in October. Buyers were forced to offer higher and higher prices in order to persuade reluctant owners to sell. Value buying, dip-buying, short-covering, breakout buying, and good old fashioned chasing, we saw it all in October. And that’s what launched us from the lowest levels of the year to near record highs almost overnight. As for what comes next, we need to identify that next enthusiastic buyer.

Near record highs, we can cross value buyers off the list. Same goes for dip-buyers. If there are any shorts left in the market following a 200-point beating, clearly they don’t feel pain and any further gains are just as unlikely to convince them to cover. We smashed through almost every resistance level and moving average on our way higher. The only meaningful level we haven’t crossed is all-time highs above 2,130. But again, if a breakout buyer didn’t buy the previous key levels, is 2,130 really going to get them off the couch?

The one plausible category left is the chaser and given all the selling we saw in September, there are plenty of regretful sellers afraid of being left behind. But while a retail trader might buy after a 200-point rebound, institutional investors are far more stubborn. They are experienced enough to know a pullback is just around the corner and will patiently wait for a hot market to cool off.

And so here we are. I have no idea what the employment number will be or how the market will react to it. But I know that no matter what the knee-jerk reaction is, it is going to be really hard to find new buyers to keep these sharp price gains going. Keep that in mind as you try to figure out how to trade Friday’s employment report.

Jani

What’s a good trade worth to you? How about avoiding a loss?
For less than the cost of a daily coffee, have analysis like this delivered to your inbox every day during market hours. As an added bonus, I share personal trades with subscribers in real-time.
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Fear of Heights

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update: