Monthly Archives: February 2016

Sell When We Don’t Want to Sell

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 broke through 1,940 resistance Monday, driven by hopes of an imminent OPEC production cut. But the good times were short-lived when the Saudis and Iran threw cold water on those expectations Tuesday. That sent us tumbling back to the 1,920s where we finished near the lows of the day on lighter than average volume.

During choppy periods like this, we are often our worst enemy. Almost all of us come to the market with a bullish or bearish bias. Either we think the economic dominos are already falling and it is only a matter of time before stocks wake up to this reality. Or all these headlines and fear mongering are nothing more than Chicken Little and stocks will rebound once people realize the sky isn’t falling. The problem with thinking with a bias is it causes us to get sucked into every breakout or breakdown that confirms our outlook. Slip to the lower end of the trading range and bears are greedily shorting with reckless abandon. On the other side, bulls are buying hand over fist every time we approach the upper end of this range. Unfortunately these have been the worst moves to make at the worst possible times because moments later prices have reversed sharply. Buying breakouts and selling breakdowns is a great strategy in trending markets, the problem is we are stuck in a range bound market and smart money is buying weakness and selling strength. While bulls and bears are duking it out on social media, the pragmatist is making money in the market.

Two-weeks ago owners were emotionally selling stocks at steep discounts near 1,800 because they were desperate to get out before things got even worse. I told readers of this blog that was the exact wrong move to make. Markets move in waves and it is a mistake to sell at the bottom of a wave. If they held that long, then they should continue holding and wait for the inevitable bounce. Now that we rallied 140-points, the previously fearful owners are now getting cocky and patting themselves on the back. But rather than gloat over their good fortune, they should recognize we are nearing the upper end of this range and this is a far better time to be selling defensively. Holding when we are scared and selling when we feel good is hard to do, but going against our emotions is often the best trade to make.

The reason stocks remain range bound is most traders are stuck on their bullish or bearish outlook and no headline or price move is going to dissuade them. Stubborn owners keep holding even when the headlines and price-action are dire. But no matter what headlines proclaim, if owners don’t sell, then we stop going down. That happened in January the first time we tested 1,800 support, and lo and behold the same thing happened when we retested 1,800 support two-weeks ago. Owners that didn’t want to sell in January also didn’t want to sell this time. While that kept a floor under prices, we are also bumping our heads on a ceiling near 1,940. This is where those with cash are no longer interested in chasing stocks given this economic uncertainty. In the same but opposite phenomena, when we run out of buyers, stocks stop going up.

Until one side is unequivocally proven right and the other wrong, expect this stubborn standoff of wills to continue through at least the end of the first quarter. Prices move when people change their mind and adjust their portfolio. Be on the lookout for that new development that persuades one side to give up and join the other. That is when we will finally break out of this sideways market.

As for a trade, 1,900 support will be a key test over coming days. Hold this level through early next week and it is building the foundation for a run to 2,000 resistance. Tumble through 1,900 over the next few days and expect another test of 1,800 support.

Jani

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Strategies for Trading this Rebound

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

Thursday was a rest day for the S&P500 following three-days of powerful gains that recovered 100-points of the recent selloff. Given how far and fast we moved, it’s neither a surprise nor unhealthy to take a small step back. The question is if this is nothing more than a pause before continuing higher, or hitting our head on resistance before returning to 1,800.

The last few days have been painful for bears and no doubt a big chunk of the buying has been propelled by a short-squeeze. But short covering and dip-buying only represents a small sliver of the demand necessary to sustain a larger move higher. While this smaller group can kickoff a move, they don’t have the buying power to keep it going. For that we need big money. The thing about big money is it is far more conservative and hates chasing fast moves. These more experienced and patient investors wait for the dust to settle and prices to pullback before making their move. And in a bit of a self-fulfilling prophecy, their lack of buying actually causes the pullback and buying opportunity they are waiting for.

Long-time readers of this blog know markets move in waves and were expecting this pause near prior resistance. What is less clear is what happens next. There are three possibilities. We are off to the races again tomorrow. Unfortunately the higher and faster we move, the less sustainable the move becomes and we will like stall near 1,960 and the 50dma before crashing back to earth. The next possibility is a gentile pullback to 1,900 support over the next several days. These minor discounts and subsequently stability will be enough to convince big money it is safe to buy at these levels and their demand will in turn drive the next leg of the rebound. The last possibility is we slice through 1,900 support on our way back to the lows of the trading range. Stocks stumble from unsustainable levels fairly quickly and it won’t take long before we know if this is happening or not.

The biggest differentiator between these possibilities is time. The unsustainable climax surge higher will happen on Friday if it is going to happen at all. If the market wants to return to the lower end of the trading range, it will show its hand by Monday at the latest. On the other hand, if we can hold 1,900 support into Wednesday, then things are stable and present good entry for those that missed the first leg of the rebound.

Jani

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1,900: Now What?

By Jani Ziedins | Intraday Analysis

S&P500 Daily

End of Day Update:

Tuesday the S&P500 continued its rebound from last Thursday’s lows and is now just shy of 1,900 resistance. Not a bad turn of events given how awful things looked last week. This strength came on the coattails of a bounce in oil prices due to a rumored OPEC meeting and prospective supply cuts. The meeting happened, but they only agreed to cap production levels, not cut supply as hoped. Failing to live up to expectations sent oil prices tumbling Tuesday, but amazingly enough, the S&P500 closed at the day’s highs despite oil’s reversal. This is highly noteworthy because it was one of the few days this year where oil finished at the lows but stocks managed to close at the highs. Are stocks finally breaking this unhealthy correlation to oil prices? One datapoint doesn’t create a trend, but it is certainly a good start.

In last Thursday’s free blog post I caught flack from hecklers for suggesting that was the wrong time to sell defensively. Luckily for me hecklers are the most bold just before a reversal. While I am in no way suggesting we are out of the woods, a person who resisted the urge to bail out last week was rewarded with a nearly 100-point rebound from the lows. If a person wanted to sell defensively, today was a far better opportunity to do it than at any point last week. Everyone knows markets move in waves, unfortunately most forget that in the heat of the moment.

While I wrote about a rebound to 1,900 last week, I sure didn’t expect it to happen over two-days. But that is the way the market works. Either it takes so long to make a move that it convinces us we are wrong before proving us right. Or it does it so quickly we barely have time to register what happened. Clearly this bounce off of Thursday’s lows falls into the latter camp.

It is nice to talk about what happened, but what everyone wants to know is what comes next. For those that cannot handle this volatility, selling proactively near 1,900 makes a lot more sense than reactively selling near 1,800 and isn’t a bad decision for anyone needing a timeout from this chaos. A few weeks ago I wrote about us falling into an 1,800 to 1,940 trading range and I haven’t seen anything yet to suggest this has changed. Even though we might continue higher in the near-term, this rebound will likely fizzle and almost without a doubt there will be another opportunity to get in near 1,900 in the future. Sideways markets are the worst for longer-term owners because they hold the risk of a larger decline but are not getting paid for it with an appreciating stock price. This isn’t a problem for the resolute buy-and-hold owner, but those with less conviction are at a greater risk of reacting poorly to the choppiness inside a trading range.

Those of us that have a little larger appetite for risk, Tuesday’s price action was encouraging. As I already mentioned, it was a significant development when oil finished at the day’s lows and equities at the highs. Historically oil prices and the broad equity market have a very weak correlation and at some point this unhealthy relationship will end. Could this be the start of that? While OPEC didn’t give us what many were hoping for, production caps are a good start. Much of the fear fueling this plunge in oil prices was producers ramping up volumes to offset their declining incomes. A break from this runaway ramp in supply is a good start. If oil stabilizes around $30, while not a healthy number, at least equities can price it in and move on. As I shared in a previous post, we have fallen far enough that we shouldn’t plan for a v-bottom and instead expect this sideways choppiness to persist through at least the end of the quarter. But for the nimble swing-trader this presents a trading opportunity. Buy weakness and sell strength until something new comes along.

Jani

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Your Next Move

By Jani Ziedins | End of Day Analysis

End of Day Update:

Thursday was another rough day for the S&P500 as we were taken down by overnight weakness in Asia, Europe, and the oil market. There wasn’t anything new driving this global selloff and it seemed to be more of the same global growth fears that have been hanging over us since the start of the year.

Two-weeks ago everyone felt better when oil surged above $33 and stocks reclaimed 1,940. As relief spread across the market, it felt like the worst was behind us. Unfortunately that was nothing more than the calm before the next wave lower hit us. Here’s the thing, everyone knows market move in waves. Rationally we understand we should buy stocks when they are cheap and sell when they are expensive. But if we know better, why do most people buy when we go up and sell when we go down? That makes as much sense as telling your neighbor that you refuse to buy gas at $1.75 and will take public transit until prices return to $3.00. How stupid is that? Well that is exactly what most people do in the stock market. They greedily buy stocks when they are expensive and fearfully sell them when they are cheap. No wonder most people have a hard time making money in the market.

Looking at equity and oil prices on Thursday, are we at the upper end of a wave, or the lower end? Sure looks like the lower end to me. Armed with this knowledge and using the rational side of our brain, should we be selling or buying stocks on days like these? Of course some people will justify selling because they are getting out “before things get worse”. Well unfortunately I’m afraid I have some bad news for you, if you are down 15% things are already worse. That’s because we are closer to the end of this move than the start. Over the last 65-years we have only fallen 30% from the highs five-times. And it’s actually better than it seems because two of those times we only exceeded 30% losses for a handful of days before rebounding sharply. For all practical purposes only three-times in 65-years has a 15% loss been closer to the beginning than the end. That averages out to one time every 21.7 years. Not exactly a high probability event.

Sure we might fall another 5% from here, but if someone is already down 15% and we only have another 5% to fall, should they be selling defensively now, or just riding it out since they already came this far? The time to sell defensively is before these things get away from us, not after the damage has been done. January 4th when we were still above 2,000 I told my subscribers to get out because things didn’t look right. That is the proper way to sell defensively. Waiting until the pain gets too great is nothing more than trading emotionally and the best way to give away money.

Three-weeks ago I told readers of this free blog that it was the wrong time to sell because we were getting close to bouncing and a couple of days later that is exactly what happened. Then I warned readers that the rebound was bound to stall near 1,940 as we carved out a trading range that would take us into the second quarter. If a person wanted to sell defensively, that rebound was their best chance to get out. Now that we find ourselves at the lower end of the range, this is where we should be looking to buy the dip, not sell it. While we could fall a little further and undercut recent lows, there is nothing new to these global slowdown headlines and no reason for them to take us dramatically lower. Expect the market to bounce over the next few days and return to 1,900 over the next few weeks. If someone wants to get out, selling at the higher end of the trading range is a better time to do it.

Jani

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Get Ready for the Bounce

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 ended a turbulent day exactly where it started. But given the headlines and early losses, a flat close is actually a win. Japanese stocks were gutted 6%, oil plunged 5%, and Europe was down nearly 2%. In the face of these tremendous headwinds, our market held up amazingly well by not succumbing to the global panic. Unfortunately flat might not be good enough.

Typically oversold markets rebound with explosive force. While that bounce might arrive Wednesday, if it doesn’t, that means we have a little more downside remaining. Two-weeks ago I suggested we are on the verge of entering an 1,800ish-1,950ish trading range and so far that is exactly what has happened. We rebounded off the January lows when we ran out of fearful sellers and existing owners were no longer willing to discount their stocks any further. That put a floor under the market and helped stocks rebound to 1,940, but beyond that point those with cash were no longer willing to chase prices higher in the face of this looming uncertainty. The resulting lack of demand pushed us back to the lower end of the trading range. At least to this point, stock owners are once again showing a reluctance to sell at lower prices and is why we found support the last two days. This confidence is keeping a lid on supply and propping up prices. No matter what the global headlines say, when few are willing to sell, prices remain resilient.

While it is easy to say this is little more than a normal and routine trading range, it sure doesn’t that way. But the thing to remember is nothing ever feels routine in the market. By rule every move has to be dramatic. If it didn’t, no one would sell. And when no one sells, we don’t go down. Therefore every time we go down, it must feel real. This is circular logic, but it happens every, single, time. The only time a market looks easy is when we are reviewing a chart months after the fact. And to this point, I have little doubt that two-months from now it will seem painfully obvious what we should do. But without the benefit of hindsight, making a trading decision today is anything but easy.

If we don’t bounce Wednesday, that tells us we haven’t found the capitulation bottom. As I stated earlier, rebounds from oversold levels are decisive and meandering around this level for three-days is anything but decisive. The ideal capitulation bottom is a relentless intraday selloff that slices through January’s lows and breaches 1,800. But just when it looks like we are going over the waterfall, we run out of sellers and bounce. That will be our buy signal to buy and hold a return to the upper end of this trading range. But in this instance it is better to be a little late than a lot early. Wait for the bounce to ensure we are not in fact plunging off a gigantic waterfall.

Jani

Free blog posts Tuesday and Thursday evenings. Weekend video recaps coming soon!

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The Trading Range is Here

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 failed to hold Friday’s gains and we challenged 1,900 support Tuesday. But regular readers of this blog expected last week’s rebound and this week’s retrenchment. A week ago I told them to prepare for a 1,820ish to 1,940ish trading range to develop and to this point the market is acting like it should. January’s 10%+ pullback did a little too much damage to put in a v-bottom, meaning we should expect a sideways consolidation and trading range to develop in the near-term. While most of us come to the market with a bullish or bearish bias, we need to resist the temptation to overreact these swings. Instead of buying the breakout or selling the breakdown, anticipate these reversals and trade against them. Take profits when the crowd is rushing in and buy when they are giving away stocks at steep discounts.

Trading ranges develop when both sides are entrenched and unwilling to yield. If a stock owner didn’t sell last August’s China meltdown and this year’s oil collapse, what are the chances they will bailout due to a recycling of these same headlines? The is also true on the other side. Recent sellers abandoned the market because they are convinced things are only going to get worse. A modest bounce is unlikely to convince them to buy stocks with reckless abandon anytime soon. With such strong and opposing viewpoints, we settle into a trading range until something new shakes up the status quo.

Jani