All Posts by Jani Ziedins

Still hanging on to 2k

By Jani Ziedins | End of Day Analysis

End of Day Update: 

Stocks barely held 2k following the Labor Day break. After opening modestly higher, there was a swift, late-morning selloff that pushed us under 2k. It wasn’t until the final 20-minutes of the session that we finally held above this psychological milestone. Volume was elevated in comparison to the lethargic flows in the final weeks of the market’s traditional summer session. In coming weeks we should expect big money to return to the markets and begin adjusting their portfolios heading into year-end.

This was the sixth day we traded around 2k. While we cannot break through this psychological barrier, we are not turning away from it either. Without external support, markets tend to fall under their own weight, meaning this sideways trade is actually supportive of a continuation. It shows few owners are worried and locking-in profits. As long as owners continue holding, supply will remain tight and keep propping up this low-volume rally.

There is a tremendous amount of headline noise coming from Eastern Europe and the Middle East, but so far the market is not paying attention to it as we continue to trade near record highs. And it isn’t only the stock market, but commodities too. Between a rising dollar and few worries that any of these situations will expand beyond regional conflicts is keeping a lid on fear and risk premiums. Since most of these hotspots have been flaring up for months without any major consequences, the market is already looking beyond them. If it is on the front page, it is already priced in.

The million dollar question is what does big money see when they look at this market. Are there still bargains to be found? Or are values getting a little too rich to put new money to work? As they look to year-end are they more inclined to keep buying, or will they start taking profits? It is easy to say this rally’s come too far and needs the proverbial ten or 20% pullback. But at the same time it is foolish to fight the trend. I wish I knew the answer, but the best we can do is wait and see what happens. Either we are basing for a continuation, or building a double-top/head-and-shoulders reversal. Only time will tell.

Jani

Why stocks no longer care about Ukraine

By Jani Ziedins | End of Day Analysis

End of Day Update

Stocks cratered when Ukrainian officials announced Russian forces invaded their country. Actually cratered might be a too strong of a word to describe the early 9-point selloff. How about we say stocks yawned 9-points following reports of a Russian invasion.

Here’s the headline bears have waited for and they are dumbfounded by the market’s lack of a reaction. How could such bearish news result in this small of a dip? Easy, everyone who feared the Russian escalation sold a couple of weeks ago during the dip to 1,900.  With all those worrywarts long gone, that means anyone still holding stocks isn’t afraid of the Ukrainian crisis since they already demonstrated a willingness to own stocks through the previous dip.  While the media can hype up the story all they want, if owners don’t care to sell the fear, stocks will hold firm in spite of the noise. The time to sell the Ukrainian crisis was when it first developed. Now that it’s old news, the market doesn’t care. If bears are looking for something to takedown the market, they need fresh and unexpected headlines.

Volume continues to be pathetic leading up to the three-day weekend. Labor Day is the traditional transition from summer trade to the more serious fall session, ultimately leading to year-end positioning. Big money managers that spent the summer at the beach house are returning to work and the decisions they make will determine how we close the year.  Will they feel compelled to chase the market and continue bidding prices up to record highs? Are they content with their portfolio and will coast into year-end?  Or do they see valuations getting a little too rich and start locking-in profits? While we don’t have the answer to these questions now, at least we know what to look for in coming weeks as September trade sets the tone for the fourth quarter.

Stocks continue trading near 2k and show both a lack of breakout buying and profit taking.  But pausing more often leads to a continuation than a reversal, so we should expect the next move to be higher. But if this is the start of the next leg higher, or one last short-squeeze before reversing lower has yet to be seen.  By mid-September we should have a better view on what big money is thinking and how they are positioning for the rest of the year.

Jani

Holding 2k

By Jani Ziedins | Intraday Analysis

End of Day Update

A lot of nothing as the market barely moved intraday, ultimately finishing flat on unusually low volume.  But sometimes no news is good news.  This is the third day we held the 2k level.  This is significant because markets typically stumble from unsustainable levels fairly quickly.  Holding here for another couple days shows we haven’t stretched the rubber band too far yet.  This isn’t a justification to buy record highs with reckless abandon, but simply suggests the next few points will likely be higher.  And even bears can get behind a few point rally because double-tops and head-and-shoulder patterns by definition exceed the previous high before breaking lower.

As for what traders are thinking, those that own are comfortable owning and those that are afraid of the risks continue staying away.  When no one changes their mind, we don’t have waves of buying or selling that drive market moves and is why the we are pausing at 2k.

It is noteworthy this technical milestone didn’t set off a wave of breakout buying or short covering.  That shows many traders anticipated this move and took their positions ahead of time.  It also indicates few owners think we’ve come too far and are taking profits by selling into the strength.  The one concern I have is how many people assume our next stop is 2,100.  If the average trader thinks we are headed to 2,100, that means they already bought in.  But if they already bought in, that means there are fewer left to continue buying the market and pushing us higher.

While the final few weeks of low-volume summer trade is interesting to watch, nothing really matters until big institutions start maneuvering their portfolios for year-end following the Labor Day holiday.  The million dollar question is if big money wants to continue accumulating stock because they still see bargains, or if they are more inclined to lock-in gains because everything appears fully valued.  It seems highly unlikely the market will finish the year at 2k and either we continue marching higher, or we crash through the August lows.  At this point I’m fairly agnostic and will simply wait for the market to tell me which way it wants to go and seeing how we trade through the first few weeks of September will go a long way to telling us how the market wants to finish the year.

Jani

2,000

By Jani Ziedins | End of Day Analysis

End of Day Update:

Break out the party hats, the S&P cracked 2k for the first time.  The market came a long way from the 666 doldrums in 2009 and with the benefit of hindsight, all the predictions of doom and gloom were grossly exaggerated.  Maybe the Fed’s intervention saved us, or maybe it was the resilience of the human spirit.  Either way it shows it is better to bet on the market than against it.  Further, I have no doubt this secular bull is not even halfway done, but that is the long-term view, as traders we are more interested in what comes next.

While the market is clearly higher than it was a couple of weeks ago when it sank to 1,905, bears desperately cling to a few glimmers of hope even as we make record highs.  Today’ volume was pathetically low.  The only day in recent history undercutting today’s low was July 3rd’s half-day.  We were also unable to close above 2k when breakout buyers failed to flood the market following this momentous occasion.  Summer’s traditionally low-volume often leads to more erratic moves since it gives a larger voice to smaller players.  The real question is what will happen when big money returns after Labor day.

With the VIX back in the 11’s, whatever fear sprouted from the Ukrainian and Iraqi crises has clearly vanished.  While the 90-point plunge did a good job purging weak holders, it seems like we returned to nearly the same level of complacency.  While complacent owners are often bullish because their reluctance to sell keeps supply tight, we have to wonder how many prospective buyers have not already bought into the invincible rally.  While markets can top in a dramatic inverted V pattern, more often they end with a double-top or head-and-shoulders.  Very few people see a top coming and either fail to lock-in profits when times are good, or they assume every dip is buyable.  The recent rebound further reinforces the widely held view that every dip is buyable, but by the time everyone knows something, it soon stops working.

While I don’t have a crystal ball, it seems the market is at a critical juncture and either we end the year dramatically higher or dramatically lower .  Will buyers continue to chase prices to record highs?  Or will smart money start locking-in profits in coming weeks ahead of the inevitable pullback?  It won’t be long before we have our answer.  If the market continues marching higher, join the bandwagon, but another dramatic sell off in the near-term will be a big warning sign to anyone who is paying attention.

Two-years ago the market was afraid of its own shadow and traders would scramble for the exits every other week.  Now it seems civil wars and sanctions against some of the world’s largest oil producers hardly raises an eye.  My how far sentiment has swung in a couple of years.  While everyone knows the market will pullback at some point, the hard part is figuring out exactly when it will happen.  Is it next week, next month, or next year?  I think the next few weeks will go a long way to telling us how the year will end.

Jani

Just under resistance

By Jani Ziedins | End of Day Analysis

End of Day Update:

Buyers jumped back in following yesterday’s minor dip.  Volume was modestly higher, but still well under average as the trend of apathetic trade, or more accurately a lack of it, continues.  Owners are comfortable owning and few are selling the strength.  Those that don’t believe in this bounce already sold it, with the more bold going short.  And most with cash are reluctant to bid up prices in anticipation of future gains.  Those factors conspired to leave us slightly above the recent 1,910/1,940 consolidation.  While today was technically a breakout, the lack of follow-on buying was uninspiring.  Of course the more widely followed and significant level is 1,950.  That has history going back to early June and will likely generate far more trading activity than a minor break of 1,940.

Tuesday evening I said Wednesday would be a big day because either we breakout to the upside, or slip back into the consolidation.  And wouldn’t you know it, the market made a liar out of me by doing neither and instead creeped higher, but fell shy of a 1,950 breakout.  Being so close to a major technical level is too tempting for market makers and bots to not push us through, triggering all the automatic breakout buying and short-covering that would follow.  But what happens after that is what we are most interested in.  Do we find support and continue higher, or is this the last gasp of the rebound before retreating back into the consolidation?

If I am right/wrong:
At this point the market could go either way.  We are nearly exactly in the middle of the 1,910/1.990 trading range that began in mid-May.  At the halfway point it is hard to claim we are overbought or oversold.  Without an edge one way or the other, the best trade is to wait for a better trade.  If forced to choose, at this point I would stick with the up-trend simply because that is where the momentum is.

Trading Plan:
Holding above 1,950 and ignoring fearful headlines is bullish.  Stalling and retreating back into the trading range is not necessarily bearish, but at best it means the rally needs more time before continuing.  Looking ahead, most likely the real trading opportunities will come after Labor Day and everything before then is just noise.

Jani

What comes next?

By Jani Ziedins | End of Day Analysis

End of Day Update:

And on the third day the market rested, giving up a fraction of a percent following a two-day, 30-point rebound.  Volume continues falling off a cliff as every day over the last five finished with less volume than the day before.  Some claim low volume is bearish, others say it is bullish.  But what we know for sure is traders are growing comfortable with their positions and simply waiting for the market to make its next move.

Wednesday is an important day.  Either we breakout and reclaim 1,950 support, or the rebound stalls and we fall back into the consolidation.  Obviously a breakout is bullish, but slipping back into the trading range is not necessarily bearish.  It could mean the market needs more time before resuming the up-trend.  But the risk is the longer we stay inside the trading range, the more vulnerable we are to slipping under 1,900 support and triggering all the technical stop-losses littered under this widely followed level.  That could kick off another round of emotion selling.  But rather than fear this, we should embrace it because it will likely form a capitulation bottom and set the stage for a sharp, and profitable, rebound.

The one warning I have bulls is rebounds from oversold conditions snap-back with ferocious force.  Trading between 1,910 and 1,940 for nearly two weeks shows the market is clearly not stretched to unsustainable levels.  Either that means we have more selling left before finally reaching extreme levels, or the market is content hanging out here and we should expect a more protracted consolidation.

If I am right:
Most of the time markets trade to extremes, meaning there is a good chance we will slip even further before this pullback is done.  Often corrections find support halfway through the move as dip-buyers rush in and prop up the market.  But if we cannot find a more diverse pool of interested buyers, demand dries up and we stumble into another leg lower.  Failing to escape from this consolidation in coming days leaves us at greater risk of one last leg lower.

If I am wrong:
It’s been a fearful couple weeks and we’ve seen quite a bit of turnover as ominous headlines scared out the weak and replaced them with confident traders willing to buy the dip.  Retaking and holding 1,950 support will show the worst is behind us, at least in the near-term.

Trading Plan:
At this point the market could go either way and we don’t have an edge in coin-flip style trades.  Bulls can stay long, bears can stay short, and those out can stay out.  But soon I expect we will get more clarity from the market as it reveals what it is thinking.  From there we can find a trade with better odds.

Jani

Rebound or false bottom?

By Jani Ziedins | End of Day Analysis

End of Day Update:

There was a little something for everyone today.  For bulls, this was another relief rally, adding 0.3% to Friday’s bounce.  For bears, we finished near the lows of the day as a lack of follow-on buying failed to fuel further gains.  While we finished near the upper end of the recent 1,910/1,940 consolidation, an early attempt to break 1,950 was rebuffed.  Ultimately few were motivated to trade today’s rebound and volume came in at the lowest level in several weeks.

The question on everyone’s mind, is the worst behind us, or is this just a bull trap before continuing lower?  If we use history as a guide, the last couple of times the market broke down, it temporarily found support before plunging one last time.  See the accompanying chart.  January 30th we traded to the upper end of a consolidation, but stumbled into a 60-point sell off two-days later.  Same thing happened to April 9th’s rebound, two-days later we were down 55-points.  The bullish takeaway from both plunges is they formed powerful capitulation bottoms that were excellent buying opportunities.

While some fear is dissipating as Western forces gain the upper hand in Iraq and Ukraine, markets remain on edge.  Another bad headline could send traders running for cover yet again.  But rather than fear the volatility, we should embrace it because one man’s panic is another man’s gain.

If I am right:
If buyers cannot push the market above 1,950, then we need to be wary of one last selloff.

If I am wrong:
If buyers shrug off further fearful headlines and continue bidding up prices, holding above 1,950 and the 50dma will signal the worst is already behind us.

Trading Plan:
As long as we remain inside the 1,910/1,940 consolidation, we are in no-man’s land and the market could break either way.  I would be reluctant to buy until the market proves the worst is behind us by reclaiming the 50dma.  If the market stumbles in coming days, that creates an interesting, but very brief shorting opportunity.

Jani

Bulls cannot get it done

By Jani Ziedins | End of Day Analysis

End of Day Update

Market Analysis:
Even with the wind at their back, bulls could not get it done and early strength faded into yet another down-day. It doesn’t matter what the financial press attributes this weakness to because we know the truth, no one wants to buy this market.

Every day the market is flooded with hundreds of pieces of news and data. Some of it is bearish, some of it is bullish, and most of it is irrelevant. But in the short-term, none of it matters because most traders simply look for an excuse to justify their preconceived bias. If they are bullish, they will find plenty of reasons to buy. A bear will find countless number of reasons to dump his stock. Allegedly the market sold off on a slight variation of Russian and European news that’s been making the rounds for months. Who cares why the market sold off, the only thing that matters is what people are thinking and how they are positioned.

We are still in a long-term secular bull market and this is just another buyable dip on our way to record highs, but we need to exercise restraint in the near-term. The inability to escape the lower reaches of this trading range proves we are not yet oversold. We all know the market always overdose it, so we need to wait until it reaches those extreme oversold levels before calling a bottom. While some use complicated mathematical formulas to calculate overbought and oversold levels, the only thing that matters is what the market thinks. We’ll know when we’ve gone too far because, it will snap back with decisive speed and ferocity. Groping for a bottom for five days is anything but ferocious.

If I am right:
Watch out for another leg down. This slow motion crash isn’t enough to shake free those hanging on by their fingertips.  We need something more spectacular to send the last of the holdouts scurrying for cover. Breaking under 1,900 support will trigger an avalanche of technical stop-loss orders and the swiftness of that automatic selling will convince others to join in the dash for the exits.  But rather than cascade into the collapse everyone fears, this will be the dying gasp of this correction before we capitulate and bounce higher.

If I am wrong:
The longer we hold near the lows, the more likely it is we will crash through support, but there is a chance this slow motion selloff is convincing enough fearful owners to sell to more confident dip-buyers.  If we churn over an extended period of time, we might not have enough fearful owners left to trigger another emotional selloff.  This is a much more ambiguous bottom and it is impossible to pick a nearby point where it would be clear I was wrong.  I wouldn’t trust this sideways consolidation unless it stretches on for a few more weeks or finally holds above 1,950.

Trading Plan:
The longer we hold near the lows, the more likely it is we’ll see another leg lower.  Shorts can hold on for another leg lower and dip-buyers need to keep their powder dry until we have that capitulation bottom.  Longer-term investors can ride this out, but they should wait a few days before adding to their favorite positions.

Jani

A long way to nowhere

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
A long way to nowhere as the market opened lower, then broke into the green, before ultimately finishing flat.

MARKET SENTIMENT
While we held 1,920 support, the market had a hard time finding dip-buyers willing to chase prices higher.  Most often capitulation bottoms are violent whipsaws with decisive rebounds.  Treading water at this level is anything but decisive and shows we haven’t reached such extreme oversold levels that the market couldn’t help but snap back.

While we could be forming a rounded base, there is far too much emotion in the market for such a boring move.  Every day we fail to escape this gravity is one more day where late-to-the-party dip-buyers work up the nerve to buy support.  But the more of these guys that get in, the greater the risk of crashing through support as we undercut all the automatic stop-losses forming under our feet.

TRADING OPPORTUNITIES
Expected Outcome:
This is nothing more than another buyable dip in a secular bull market, but given the market’s inability to bounce shows we have not reached extreme oversold levels yet.  This means we likely have another whoosh lower when the market undercuts all the stop-losses accumulating under support.

Alternate Outcome:
The huge spike in volume over the last several days shows many of the willing sellers have already sold, meaning there is a far smaller pool of prospective sellers remaining.  Markets bottom when everyone is convinced the selloff will continue and this selloff has everyone nervous.  We will reach a point where there is no one left to sell and the market rebounds on tight supply.  Every day of sideways churn brings us one day closer to that day where we run out of sellers.

Trading Plan:
The longer the market holds in this trading range, the more likely it is we will break through support.  While we are close to a bottom, the market is not acting like it is oversold yet.  Bears can hold their shorts and dip-buyers should step back and wait for another whoosh.

Plan your trade; trade your plan

More fear

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks gave back all of Monday’s gains on above average volume and ever so slightly undercut Friday’s lows in intraday trade.

MARKET SENTIMENT
Confidence was shattered when someone in the Polish government claimed Russia was preparing to invade Ukraine.  While most doubted the accuracy of this claim, it was enough to send an already weak market into a 15-point tailspin midday.

Poland is a member of both NATO and the EU and the US has a couple dozen F-16s stationed in the country.  It is ridiculous to think Putin would share his war plans with anyone in Poland, so we can discount these particular comments as overblown hyperbole and they don’t warrant further attention.  (Poland has been lobbying for months for the US to increase its military presence in the country and these alarmist comments are self-serving.)

While we can ignore these alarmist comments, it is noteworthy how strongly the market reacted to even a hint, no matter how dubious, of an escalation in Ukraine.  Market participants are skittish following the dramatic selloff last week and any whiff of problems sends them running for cover.

The market is a modest 3.5% from record highs, but you wouldn’t know it given all the pundits claiming the sky is falling.  Sentiment is plummeting, put/call ratios are spiking, and anyone watching the financial media is scared to death.  Given how dramatic the reversal in sentiment, it seems likely this is an overreaction to recycled headlines that have been in the news for months.

Simple fact is markets move up and down.  If everyone knew a dip wasn’t the start of something bigger, no one would sell it, everyone would buy it, and we’d all be rich.  But we know the market doesn’t work that way.  Dips are dips because they scare the hell out of owners and everyone assumes prices will continue dramatically lower.  If they didn’t, no one would impulsively sell their stocks at a discount and we wouldn’t get a dip in the first place.

Most everyone agrees the economy is still improving and the fundamental data backs it up.  The criticism bears have is this market’s gone too far and is overvalued.  They have long claimed we are on the verge of a correction and they are confident this time is the real deal.  And so far they’ve been persuasive enough to convince a lot of other people to dump their stocks too.

TRADING OPPORTUNITIES
Expected Outcome:
Every dip in the history of the market was a buying opportunity and this one will be no different.  The only question is how far this will go before it is buyable.  Given how quickly sentiment shifted and how little meat there is to the fundamental justifications for this weakness, the bottom is likely quite near.  While we might have one last leg lower, that would be the last flush before we bottom.

Alternate Outcome:
If Putin actually invades Ukraine, the threat of WWIII will crush the markets.

Trading Plan:
The best trading opportunities arise from having the courage to buy when everyone else is scared.  While the market is poised for another dramatic down day if we fail to hold 1,920, we should be looking for bargains to be bought rather than dumping stocks at a discount.  Everyone knows markets go up and down, but they always forget it in the moment.

Plan your trade; trade your plan

Through adversity comes opportunity

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
We go from boring, sideways trade to one of the most exciting days of the year.  Today’s 2% decline was the fourth largest of the last 13-months and volume was off the charts as we smashed through prior support and the 50dma.

MARKET SENTIMENT
They say a picture is worth a thousand words, so check out the adjacent chart.  Today we plunged through support and finished at the lows of the day.  Looking back over the last year, we can see multiple examples of similar dramatic crashes through support.  The most noteworthy thing is each of these prior down-moves was the final gasps of a selloff.  If we use history as a guide, today’s huge volume selloff could very well mean the worst is already behind us.

Today’s move lower was a pain trade, plain and simple.  We didn’t get blindsided by a shocking headline and most traders had a hard time pointing to the one thing that triggered this selloff.  The best journalists and talking heads could come up with was recycling old headlines about taper, interest rates, Ukraine, sanctions, Israel, and Argentinian debt.  There was nothing new today that hasn’t been talked about ad nauseam over the last few weeks and months, meaning today’s selloff wasn’t really being driven by these recycled headlines.

What if the true root cause was simpler?  What if today’s huge move was nothing more than normal market gyrations that got carried away?  Breaking support sent technical traders running for cover and once they started selling, others followed their lead even though they didn’t know why they were selling.  This is the herd mentality that was ingrained in our species by evolution.  When everyone else in the clan started running, our ancestors started running too because anyone left standing around was about to become lunch.  And so while no one could explain why the market sold off today, they sold alongside everyone else anyway.

TRADING OPPORTUNITIES
Expected Outcome:
We all know the best trading opportunities come from going against the herd but it takes a lot of courage to buy when everyone else is selling.  The market never found its footing today and finished at the lows of the day, but if we look back at previous pullbacks in this bull market, big down moves that broke support and finished at the bottom of the day’s range is fairly bullish.  While we might dip under today’s low by a few points over the next few days, if the aggressive selling doesn’t continue on Friday, the worst is likely behind us.

Alternate Outcome:
If it was too easy to buy the dip, then we haven’t found the bottom.  Everyone knows this is a buy-the-dip market, but we also know this cannot go on forever.  If we don’t find a bottom near Thursday’s lows, then we have to endure more pain before this is over.

Trading Plan:
If we find support Friday, the selloff is dead and everyone should buy the dip.  If we crash another 20-points in early trade, get out of the way because this thing will keep on going.  While we have the monthly employment report Friday, the market will largely trade the direction it wants to go regardless of report shows.

Plan your trade; trade your plan

BTFD

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
A fairly dramatic day.  We gapped higher at the open on stronger than expected GDP numbers, but sold off minutes later and tested 1,960 support.  The Fed rescued us midday with a rosy outlook, but those gains also failed to stick.  For as much as we moved around, we ended almost exactly where we started.  Volume was the highest in a month as many traders reacted to every headline and gyrations.

MARKET SENTIMENT
It was an interesting session with two energetic upside moves that failed to stick.  It’s hard to hang a bullish hat on that kind of performance, but can we infer we are on the verge of collapse?  Not yet.  All today’s price-action tells us is those with cash didn’t want to chase these bullish headlines.  While that limits our upside potential in the near-term, it is the other side of the house that determines if we keep declining.  Right now the market’s fate rests in owners’ hands.  Do they sell at a discount or do they assume we’ll bounce like every other time over the last year-and-a-half and keep holding?  A lot of people are throwing the complacency term around like it is a negative thing, but complacent owners don’t sell and it is really hard to get a correction started without supply.

TRADING OPPORTUNITIES
Expected Outcome:
So far this price-action looks like a vanilla Buy-The-F’n-Dip.  Of course with every BTFD, the challenge is figuring out when we’ve bottomed.  Given today’s weak follow-on buying, it doesn’t feel like we’ve reached the bottom yet.  1,960 is technical support and often the market likes to fool us by violating support before turning around and going the other direction.  If we breakthrough 1,960 but the selling stalls shortly after, that gives us an interesting entry point.

Alternate Outcome:
Every dip, correction, or crash is buyable, the only question is how long to wait before jumping in.  While most of the recent dips were buyable within days, we will eventually find ourselves faced with a longer and deeper dip.  Nothing shatters confidence and complacency like seeing everyone else rush for the exits.  Wait for the selling to stop before buying any dip.

Trading Plan:
Don’t be surprised if we slip under 1,960 in coming days.  But if the selling stalls shortly after, bears should consider locking in profits and bulls can buy-the-dip.  On the other hand, if selling accelerates and we blow through 1,950, hang on because the next stop is 1,930 and 1,900 if that one fails to hold.

Plan your trade; trade your plan

Nervousness returns

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks continued yesterday’s rebound in early trade, but stumbled midday and sold off into the close on elevated volume.  The market held Monday’s lows and remains comfortably above 1,960 support.

MARKET SENTIMENT
Talking heads attribute Tuesday’s reversal to increasing sanctions on Russia, but giving up less than 0.5% hardly qualifies as an emotional rush for the exits.  While the West is incrementally stepping up pressure on Russia, both sides are co-dependent on each other and it is unlikely either side will act rashly.  While it was enough to make buyers think twice today, these developments are largely priced in and unlikely to pressure the market.

But just because the Russia thing is old news doesn’t mean we cannot selloff for other reasons, namely typical supply and demand fluctuations.  The market is building a trading ranged between 1,690 and 1,690 and no matter what the headlines, the market seems content hanging out in this area.  Prospective buyers are not confident enough to chase prices to new highs and owners are uninterested in selling bearish headlines for a discount.  Apathetic buyers and complacent owners leaves us range bound.

TRADING OPPORTUNITIES
Expected Outcome:
The longer we hold support, the more likely the next move will be higher.  Markets tend to breakdown quickly and holding 1,960 for a month in the face of significant geopolitical headlines surely doesn’t qualify as a meltdown.  If the market holds 1,960 yet again on Wednesday, expect us to make new highs again in the short-term.

Alternate Outcome:
While owners are confident here, nothing shatters confidence like seeing everyone around them start selling.  While a modest, intraday dip under 1,960 is nothing to worry about, if the selling accelerates after violating support, we have further to fall.  If bulls cannot defend the 50dma and 1,950, then 1,900 and the 200dma are in play.

Trading Plan:
We are in no man’s land.  Those with long or short positions can stick with them, but use stops to prevent small losses from turning into big ones.  Those outside the market should wait for further confirmation before placing a trade.  Closing above 1,960 on Wednesday is bullish and crashing through it is bearish.

Plan you trade; trade your plan

Finishing flat

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks recovered early losses to finish flat.  Volume was below average, even by summer standards.

MARKET SENTIMENT
Last week we failed to breakout; today we failed to breakdown.  Seems those with cash don’t want to buy new highs and those with stock are uninterested in selling weakness.  Until someone decides to do something we will continue trading sideways in this developing trading range between 1,960 and 1,990.

Wile bears are pointing to a dozen different reasons we should selloff, the market already knows them and doesn’t care.  Free-markets are exceptionally efficient at pricing in new information and events in Ukraine and Palestine are ancient news.  While either of these situations could deteriorate dramatically, it would take something even more shocking than downing a civilian airliner to get the market’s attention.

While there is little doubt this market will pullback at some point, the hard part is figuring out when.  Some are making seemingly bold predictions of a 20% pullback in the next 12-months, but what happens if we go up 30% before the expected correction?  Knowing what the market will do next is easy, getting the timing right is where all the money is made and a “sometime over the next 12-month” prediction isn’t worth the paper it’s written on.

TRADING OPPORTUNITIES
Expected Outcome:
Given the opportunity to both breakout to new highs and test support in recent days, the market instead chose to do nothing.  It seems like it wants to consolidate in this 1,960 to 1,990 trading range over the near-term.

Alternate Outcome:
This morning’s bounce could be little more than an automatic buy-the-dip reflex, but if we are running out of dip buyers, the market will let us know when it fails to hold 1,960 support.

Trading Plan:
The market is not giving us a lot to trade.   Since we are still in an uptrend, we should give bulls the benefit of the doubt, but as far as risk/reward goes, it feels like a coin-toss and we should wait for better odds.

Plan your trade; trade your plan

Challenging record highs

By Jani Ziedins | End of Day Analysis

End of Day Analysis

MARKET BEHAVIOR
Stocks tested recent highs near 1,985, but failed to set a new closing high.  The last few weeks of sideways trade allowed the rapidly rising 50dma to catch up and we are now less overbought than the last time we found ourselves up here.

MARKET SENTIMENT
While we are back near the highs, market participants are far less giddy this time.  Conflict in Israel and Ukraine are keeping traders on edge, but the truth is these headlines are already old news as far as the market is concerned.  Anyone who fears these situations already sold.  Those who bought during this uncertainty showed an appetite for risk and willingness to hold the volatility.  And of course as we’ve seen in previous dips, the vast majority of owners have no interest in selling no matter what the headlines shout.  While all the talking heads try to scare us with this or that, without sellers this market will continue to defy gravity.

But that is the near-term assessment.  Over longer time frames it is hard to think of the catalyst that will drive the next bull leg higher.  Typically markets climb the proverbial wall of worry.  This is when prices are oversold as traders fear the worst.  Then there is a gradual thaw and markets rally as traders change their mind and slowly buy back in.  But we find ourselves with the opposite condition, everyone is fat, dumb, and happy.  With everyone so content, there are fewer and fewer people left to change their mind and buy in at ever higher prices.  While the momentum is clearly higher, we are on thin ice.

TRADING OPPORTUNITIES
Expected Outcome:
We are a few points from record highs and the resulting short-covering and breakout buying that will push us toward 2,000.  After that, it is anyone’s guess what comes next.  Maybe it is one last surge in a double top.  Maybe we’ll pullback modestly and continue consolidating.  Or will we surge higher and never look back?  Only time will tell as we watch to see how traders respond to the breakout.

Alternate Outcome:
Many traders expect us to hit 2,000, but often the market gives us the opposite of what the crowd expects.  Today’s failed breakout could be all we get before retesting support at 1,950.

Trading Plan:
It is too early to be short this market since it is completely ignoring bearish headlines.  No matter what people think it should do, it keeps going higher and we must respect that.  1,950 is turning into a major technical support level and breaking through that will force us to reevaluate our outlook, but until then assume the uptrend is intact and plan your trades accordingly.

Plan your trade; trade your plan.

Buy the dip?

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks plunged on a double dose of international headlines.  The S&P500 gave up more than 1%, making this the biggest selloff in multiple months.  In spite of anxious selling, we are still above 1,950 support and curiously, the volume was the lowest we’ve seen in three days.

MARKET SENTIMENT
Clearly this was a sell first, ask questions later kind of day, but the relatively light volume is noteworthy for such an outsized move.  There are two ways to interpret this.  Either there are still a lot of hopeful owners left to drive out of the market, or alternately, most owners are not interested in selling these headlines and today’s move was driven by a small minority impulsively reacting to headlines.

As for the individual headlines, anyone paying attention over the last few years knows there are periodic flare-ups between Israel and the Palestinians and tensions have been coming to a head in recent days.  This shouldn’t be a big surprise and it is unlikely to lead to a material disruption in the US economy or earnings for US listed equities.  While these stories are never pleasant, we’ve been here before and few people will change their economic forecast based on these events.  That means this headline is largely a non-issue for US markets.

What happened in Ukraine is quite a bit different.  Shooting down a civilian airliner is anything but routine and it clearly escalates the tension between the East and West.  While many feel this will deteriorate the already fragile situation, I’ll take the other side.  This tragedy could actually defuse things.  If it turns out Russia or Pro-Russian separatists were involved, that creates an indefensible position for Putin and he will have little choice but to dial back his rhetoric.  This was an appalling act and there is no way he can defend the people who pulled the trigger, killing nearly 300 innocent people.  Putin could very well distance himself from the separatists following this cowardly act and without their major ally, their resistance will likely fizzle.

But even if tensions remain elevated in Ukraine, the market came to terms with these risks months ago when the situation first developed.  Honestly I think we should be more fearful of what is going on in Iraq than who fired the missile today.  If the market doesn’t care about what is happening in Iraq, then this Ukraine story won’t matter in a couple of days either.

TRADING OPPORTUNITIES
Expected Outcome:
While these clouds will likely pass once most traders realize they will have limited impact on corporate earnings, we could see near-term weakness as traders continue selling before thinking.  But given how quickly the market blew off more serious headlines out of Iraq and Portugal, I doubt today’s weakness will last more than a couple of days and this creates yet another buying opportunity.

Alternate Outcome:
The market has largely been ignoring escalating geopolitical risks.  At some point hoping for the best will no longer work and we could be in the middle of that if the situation Israel and Ukraine continues to deteriorate.

Trading Plan:
Support lies back at 1,950.  While we might dip under this key level if selling continues early Friday, closing above it is supportive of this market.  It tells us the wave of reactive selling has stalled and we likely have another buyable dip on our hands.  But if we slice through 1,950 and keep going, all bets are off and a test of 1,920 support seems likely.

Plan your trade; trade your plan

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks closed above 1,980 for the first time in a couple of weeks, leaving us within a few points of all-time highs.  While the market trades sideways, the upward sloping 50dma and 200dma are quickly gaining ground.

MARKET SENTIMENT
The market no one wants to trust keeps holding strong.  Many traders admit they think stocks have come too far, but they are reluctant to sell because every time they sold over the last year and a half, they watched the market rebound higher without them.

This is the foundation of the “next greater fool” theory in investing.  The logic goes, “I know this is overvalued, but I will buy it anyway because I know someone else will come along later and pay even more for it.”  Traders have a natural fear of heights, but this resilient bull market is making many are more afraid of being left behind than losing money.  This is why so many continue chasing all-time highs and not selling bearish headlines, even though they don’t trust this market.  But like every game of musical chairs, if you stick around too long, you’ll be the one that gets left out.

TRADING PLAN
Expected Outcome:
We are four points from triggering another short-squeeze.  While there is no reason to trust this market, it is giving us every indication it wants to go higher.  Even if we are setting up a bearish double-top, we still need to set new highs first.

Alternate Outcome:
At some point we will run out of dip-buyers.  Maybe that day is tomorrow.  Maybe it won’t happen until next year.  But every dip that gets bought brings us one step closer to the one that doesn’t.  Failure to set new highs this week will be an ominous sign.

Trading Plan:
Both bulls and bears should expect new highs in coming days.  The only disagreement will be what to do next.  Bulls should use a trailing stop to protect recent profits.  Bears should wait a couple of days before jumping in front of this bounce.

Plan your trade; trade your plan

Running out of sellers

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks bounced between 1,980 and 1,965, but spent most of the day in the red and finished in the middle of this range.  Volume was above average and the highest we’ve seen in a couple of weeks.

MARKET SENTIMENT
We were having a good morning until Janet Yellen started speaking to Congress.  From there we plunged more than 15-points as she shared her views of a fragile recovery and asset bubbles in the market.  That was enough for some traders to hit the sell button and send the market lower midday.

To figure out where we go from here we need to understand who was selling, buying, and holding this move.  It really doesn’t seem like Yellen shared anything new in her testimony, so fundamental traders are unlikely to change their outlook based on what she said.  That means most of the activity came from reactive traders responding to the negative commentary and technical/momentum traders selling the weakness and dip under Monday’s close.  But following the initial wave of reactive selling, supply dried up as a wider group of owners chose not to join the liquidations.  This group held through multiple conflicts in the Middle East and Easter Europe, brushed off Portuguese bank defaults, as well as every other bearish headline to hit the wires recently.  From that frame of reference, it seem unlikely Yellen stating the obvious would convince them to sell today either.

TRADING OPPORTUNITIES
Expected Outcome:
Holders keep holding and until something changes, expect the resulting tight supply to prop up prices.  Today’s volume was elevated as reactive traders dumped shares, but those buying the discount showed a willingness to jump in front of these headlines and weak price action.  If these dip-bueyers are more confident than the reactive sellers they replaced, expect supply to get even tighter in coming days.  Swift selloffs are swift and holding 1,950 for four days is anything but swift.

Alternate Outcome:
If we violate support near 1,950, that means we ran out of dip-buyers and there are few things that rattle nerves like a screen filled with red.  Breaking technical support could trigger a larger wave of stop-loss selling and send us to 1,925.

Trading Plan:
We are stuck in no-man’s land between recent highs at 1,985 and lows at 1,950.  Holding last week’s bounce for another day show buyers and owners are comfortable with these levels and we exhausted the supply of sellers.  But fail to hold 1,950 on Wednesday makes a test of the 50-dma likely.  Plan your trades accordingly.

Plan your trade; trade your plan

Extending bounce

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks extended Thursday’s bounce off of 1,950 with modest gains on light volume.

MARKET SENTIMENT
While not many traders participated this low-volume move higher, what is more important is confident owners chose not to sell the rebound.  As long as owners are willing to hold no matter what the headlines proclaim, it is really hard for a correction to take hold without supply.  And that is why, much to the chagrin of bears, this market continues to climb on weak volume in spite of all the ominous headlines.  No supply means no selloff.

While we all know this cannot go on forever and at some point this bull market will stall, the challenge is figuring out when.  Predicting what the market will do is easy, all the money is made getting the timing right.  While there are countless indicators pointing to how high investor sentiment is, in the near-term these indicators are bullish because it means people continue throwing money at the market.  Only after we get too close to the sun will we finally come crashing back down to earth.  Until then, let the good times roll.

The best way we know this is not the top is twofold.  First last week gave the market the perfect excuse and setup to trigger an extended selloff.  But instead of gathering momentum and sending spooked owners scrambling for the exits, everyone shrugged off the headlines and viewed the weakness as yet another buyable dip.  The second indicator is how wound up short-term traders, bears, and the financial press became over a 1% dip.  Bullish sentiment on Stocktwits SPY stream plummeted from 66% to 41% in a week!  That shows there is still a healthy amount of fear and skepticism in the market.  And now these aggressive bears will need to buy the market to cover their premature shorts, adding more fuel to the fire

TRADING OPPORTUNITIES
Expected Outcome:
Selloffs are breathtakingly quick and this is the third day we’ve held 1,950 support, suggesting last week’s dip was little more than a test of support.  While I’m no raging bull, this market is giving every indication it wants to test 2,000.

Alternate Outcome:
One of these days we will come across a dip that shouldn’t be bought.  While the final score might be 99-1, bears will ultimately have the last laugh.

Trading Plan:
Last week’s selloff appears dead and bears should cover shorts before they turn into losses.  Nimble short-term traders can position themselves for a short-squeeze to 2,000.  Long-term investors already in the market should stay in the market but hold off on making new purchases for a couple of months because we will likely see better prices.

Plan your trade; trade your plan

A bullish loss

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks gapped lower at the open on renewed European banking worries, but recovered a big chunk of those losses by the close.  Volume was elevated as fundamental traders responded to the headlines and technical traders bailed on the break under 1,960 support.

MARKET SENTIMENT
While the S&P500 closed down 0.4%, this was about as bullish of a day as we could ask for.  Between the scary headlines and a violating support, owners had every excuse to stampede for the exits.  Instead they did the opposite, absolutely nothing.  The lack of selling tightened supply and there was nowhere for this market to go but higher from the opening lows.

When the market doesn’t do what it is supposed to do, that is a clear indication our analysis is flawed.  Bears had the perfect setup for a cascading selloff between spooky headlines and technical weakness, but when most owners didn’t flinch, it shows bears under estimated the resolve and confidence of bulls.

Even more bullish is the fact that over the last several days many weak-kneed traders sold these down-days, leaving far fewer potential sellers in the market.  Those that bought the dip demonstrated a willingness to own in the face of this weakness and are unlikely to flinch if we see another modest dip.  But a peculiar thing happens when everyone is willing to hold another dip, we don’t get one because when no one sells, there is nothing to push the market down.

TRADING OPPORTUNITIES
Expected Outcome:
Having chased most of the worry-worts out over the last few days sets up a solid foundation of confident owners from which to continue the prior up-trend.  While this rally will eventually end like every rally before it, when the market resists the perfect setup to selloff, it means the rally is not over.

Alternate Outcome:
Buy the dip is the most worn out trade of the last few years.  By the time everyone know something, it is already on its way out.  If we bounced on one last gasp of dip-buying, expect the selling to resume once the dip-buyers run out of money.

Trading Plan:
The market is giving every indication it wants to go higher in the short-term.  Dip-buyers can buy the dip and bears should lock-in any profits they have before they disappear.  If we undercut today’s 1,952 low, all bets are off and the selloff will likely continue.

Plan your trade; trade your plan