All Posts by Jani Ziedins

Rebound continues

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR
Stocks are on track for their fifth consecutive up day and seven out of the last eight.  The market is sitting on the 50dma and within points of 1670, where the previous rally attempt stalled out.  The market is prone to headline volatility and we are still well within the summer’s trading range so the coast is anything but clear.

MARKET SENTIMENT
The market goes back and forth over military strikes in Syria.  Some days it is “on”, other days it is “off”.  Today it seems to be “off”, at least that is one reason the media is giving for today’s strength.  But here is the thing, anyone afraid of these events is already out of the market.  They sold at a discount over the last two weeks to more bold traders willing to take the risk.  This churn in ownership brings more stability to the market.  Anyone holding here acknowledged the risk of military action and chose to buy or continue holding.  If bombs start falling, these people are less likely to hit the sell button because they already demonstrate a willingness to hold in the face of these uncertain risks.  This ownership churn is how markets price in events long before they even happen.

Between Taper, Syria, and weaker than expected employment, the market has every reason to sell off, yet here we are, reclaiming lost ground and only 2.5% from all-time highs.  That’s how this game is played, we rally when everyone is scared and slide when everyone feels safe.  The more nervous people are, the more upside there is and vice-versa.  It is hard to find people excited about this market and makes it easy to find a bottom.  After all the nervous and paranoid sellout, there is no one left to sell.  The best trade is usually buying what you don’t want to buy and selling what you don’t want to sell.

MARKET BEHAVIOR
Expected Outcome:
The market is challenging last month’s rebound highs.  Either this is resistance and sets the trend of lower highs, or it is the middle of a double bottom that propels us to new highs.  Given the lack of complacency and fear surrounding recent headlines, my money is on new highs.  No doubt I could be wrong because nothing is certain in the markets; that is why all savvy traders have a good defense.  While headline volatility will persist, the market already digested the biggest chunks of uncertainty surrounding Taper and Syria and is holding up relatively well.  This market will rollover at some point, but this doesn’t look like it.

Alternate Outcome:
Every dip is buyable until they are not.  The hard part is sucker’s rally looks seductively buyable and is why so many people fall for them.  If this game were easy, everyone would be rich.  If we run out of dip buyers, look for the market to rollover on a lack of demand.  5% dips are routine and happen multiple times a year so we cannot read too much into recent weakness, but every 15% selloff starts with that first point lower.  While I am reluctant to short this market, failing to make new highs is a concern and creates an interesting short entry.  We don’t pick tops, but we do short weakness where we expect to see strength.

Trading Plan:
Hopefully shorts didn’t get greedy and locked in profits days ago.  We remain in a bull market and counter-trend trades need to be nimble and quick.  We broke the 50dma and 1670 in late trade.  If we hold these levels, look for new highs in coming weeks.  If we fail to hold, look for a test of the 200dma.  We can own the market with tight stops under these key technical levels and short a violation of the same levels.

INDIVIDUAL STOCKS
AAPL has its big product launch tomorrow.  It seems like most of the big announcements leaked out already and are already priced in.  While many are looking forward to the iPhone5c, hopefully AAPL does a good job differentiating it from the higher priced model.  A low resolution screen, slower data antenna, and smaller battery would both make the phone cheaper and keep demand strong for the high-end phone.  If there is no meaningful differentiation, expect most buyers to opt for the new, fun, and cheaper iPhone5c.  That will kill revenue and margins.   I am in favor of the iPhone5c, but it must be a clearly inferior phone to its bigger brother to both open lower end markets yet not cannibalize flagship sales.  If the c has retna, 4G, decent battery, and is sold in the developed world, expect to see massive cannibalization.

Plan your trade; trade your plan

Challenging the 50dma

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR
We opened higher on marginal employment, but gave up 20-points minutes later as Obama reiterated his resolve to bomb Syria at the G-20 summit.  Nearly as quickly as we fell, we bounced back, erasing all early losses by late morning.  While headline volatility persists, moves either direction quickly stall, leaving us in this persistent, choppy sideways trade.  We remain under the 50dma and recent resistance at 1670, but are inching higher.

MARKET SENTIMENT
Employment numbers missed the mark, but  were close enough to avoid a major move either way.  Syria remains a wildcard and will continue driving volatility, but to understand where this market is headed, it helps know the different traders in the market.  The easiest way to segregate traders is by their holding period.  We have the buy-and-hold-forever crowd.  Most big money managers hold for approximately one year because of the difficulty building and unwinding positions.  Then comes smaller and more nimble swing- and day-traders.

Most of us recognize only traders buying and selling in the present affect prices, while everyone else is simply along for the ride.  No matter how big a trader, once they are fully invested, there is little they can do to actively steer market prices.  This is why day- and swing-traders play a much larger role in the day-to-day price moves.  Over the course of a year, someone who trades 10x per day has 2,000 the impact as the one who trades 1x per year.    But this isn’t the whole story.  Nimble traders have to be small by nature because that is the only way they can effortlessly enter and exit positions.  So while they have huge influence, they also have limited strength.  These are the skittish traders that drive volatility as they react to every headline, but because of their limited size, they cannot push the market more than a few percent either way before their influence fades.  Only buying and selling by larger groups can sustain a breakout move.

Taking this concept to the present, we have lots of intraday reactions to headlines, but most of these moves stall as the larger pool of longer-term investors sits on their hands.  Most significant is the masses are not spooked by scary headlines driving this choppy volatility.  The lack of wider selling keeps tight reigns on supply and puts a floor under this market.  The only way for this move lower to continue is if it convinces larger investors to bail and so far it hasn’t done that.

TRADING OPPORTUNITIES
Expected Outcome:
The extended selloff remains MIA.  We are lower by a few percent, but if we were standing on a trapdoor, early weakness would have triggered an avalanche of selling, something we haven’t seen.  At this point it looks more like stalled selling than anything else.  Traders are watching the 50dma and 1670 closely and look for a wave of breakout buying and short-covering if we cross these levels.  If we don’t see a decisive breakout, that means the market struggles to find buyers and bulls need to tread lightly.

Alternate Outcome:
Sucker’s rallies only work because they look real.  If tops and bottoms were obvious, this game would be easy and everyone would be rich.  Clearly that’s not the case, so we must watch every move with suspicion.  The market remains under the 50dma and until we cross this barrier, bears remain in control.  If we see buying dry up as we break through this technical level, short the break back under.

Trading Plan:
The market remains volatile and choppy.  Anyone trading this market needs to be confident in their positions and give them more room to move around or risk being shaken out at the exact wrong time.  This adds to the risk and makes for a poor risk/reward.  Every time we hold stocks, we expose ourselves to risk.  Owning or shorting a sideways market piles on the risk, but don’t get paid for it.  That’s why it is better to sit in cash waiting for the next directional move.  Of course where is the fun in that?  We are traders and the best way to follow the market is to be in the market.  So anyone long here, cover under recent lows and anyone short cover a strong break above 1670.  Just recognize the elevated risk in trading a choppy sideways market and adjust position sizes accordingly.

Plan your trade; trade your plan

AM: Holding yesterday’s gains

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR
Stocks traded modestly higher, holding yesterday’s gains.  The market remains a few points under the still upsloping 50dma and is the next major hurdle for a days old rebound.  1670 is another notable technical milestone representing the middle high of a potentially bullish double bottom.  Volume is inching higher this week as traders return from summer vacation and start positioning their portfolios for the last few months of the year.

MARKET SENTIMENT
Weekly jobless claims are at their lowest levels in years, but tomorrow’s monthly jobs report is far more influential for both the Fed and market.  Years ago the monthly employment numbers moved markets, but it’s been over a year since they generated anything more than intraday volatility and as long as they are not shockingly good or bad, expect much of the same tomorrow.  Earlier in the year bad was good when traders worried about the sustainability of QE, but that ship already sailed and everyone is expecting Tapering in coming months at the latest.  Since Tapering is already priced in, good is good again and a strong employment number is bullish for the economy and markets.

Some of the Syrian hype and fear is dying off as traders are coming to terms with military action.  Bad news isn’t all that bad when it is quantified, it is the uncertainty that kills markets.  As the political debate rages on in DC, it appears like this will be a very limited action and the market is gradually becoming less concerned over it.

Between the impending Taper and the shock over Syria, the market had every excuse to selloff, but bears just couldn’t get it done.  In fact it looks more like selling stalled on the heels of these fearsome headlines.  Scared markets plunge dramatically and three weeks into this selloff, it would be hard to call 3% off all-time highs a plunge.  There is nothing wrong with distrusting this market, even going so far as shorting recent weakness, but we have to pay attention to how the market behaves to determine if our trade is working.  We use stops as a last resort to get us out of bad trades, but most of the time we should exit trades that are not working long before our stops force us out.

TRADING OPPORTUNITIES
Expected Outcome:
The selloff seems stalled and is looking more like a buyable dip than shorting opportunity.  We are still under the 50dma and the middle peak of a potential double bottom.  Use either of these as a valid entry.  A bolder trader could buy under these technical levels and use recent lows as a stop, but for most of us it is better to be a little late than a lot early.  If we regain and hold the 50dma, new all-time highs are all but a done deal.

Alternate Outcome:
Bears can shoot against this market using the 50dma or 1670 as stops. We’ve come a long way and historically September has seen some brutal selloffs as big money managers dump shares into the end of the year.  While the political debate around Syria is creating more

clarity, escalation by either side could catch the market by surprise.  When calculating risk/reward, it is more than just probabilities but also magnitude of the potential windfall.  Even if a rebound to all-time highs is more probable, betting against this market could be the better trade if the size of the payout is significantly larger.  This is the highly profitable black-swan trade.  While the world appears stable, the profit potential of everything unraveling can be attractive.  Since these lottery style trades don’t work very often, the best way to trade them is through options that limit the losses of the more probable outcome.

Trading Plan:
Watch this market, waiting for the eventual breakout/breakdown.  The ambitious can buy/short with tight stops.

Plan your trade; trade your plan

AM: Yo-yo continues

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR
The yo-yo continues as stocks returned to 1650 following yesterday’s weak close that gave back most of those early gains.

MARKET SENTIMENT
Syria induced volatility is chopping up anyone reacting to these wild swings.  Naturally everyone wants to buy low and sell high, but anxious traders are doing the exact opposite as we ricochet between failed breakouts and failed breakdowns.  Today’s trade is shaping up as a one-way short-squeeze as we push beyond recent highs and trigger a wide swath of short-sellers’ stop-losses.  Can this rebound continue or will it stall retest recent lows?

While we all know what is happening, we only make money by trading what will happen.  Taper is a distant memory as Syria dominates headlines.  Obama shocked everyone by seeking Congressional approval, leading to yesterday’s opening gap higher, but that surge faded as many on both sides of the isle came out in support of military intervention.  It is harder to pin down an exact news catalyst for today’s surge, but the market doesn’t need one.  We are going up because more people want to buy than sell, and so here we are.

Part of the reason we have so few sellers is most afraid of recent turmoil are already out.  They sold yesterday, last week, or last month.  No matter how bad the headlines, if no one is left to sell, the market will hold up fairly well.  Recent volatility and intimidating headlines chased off the weak who sold at a discount to far more confident investors willing to stomach the uncertainty.

Every other dip this year was buyable and we will soon know if this continues or breaks the trend.  With as much bearishness as there is in financial headlines and how little the market’s come down, it really feels like there is limited downside remaining in this move.  Often the market acts like a coiled spring and explode one direction or the other. Between Taper and “war”, there has been plenty to unleash a coiled spring, but 4% off all-time highs is more fizzle than bang.  The lack of an explosive move lower shows the market is not poised to collapse because it already ignored multiple invitations to do just that.  Weak hands already bailed out and the new owners are not interested in selling.  Low volume, high volume, it doesn’t matter; when owners don’t want to sell, we go up.

TRADING OPPORTUNITIES
Expected Outcome:
While I remain constructive on this market because of the muted downward moves, volatility will persist and anyone lacking conviction in their positions is best suited sitting this one out.  No doubt today’s explosive rebound will go the other way within days, even hours.  The safest and easiest play is waiting for this volatility to work its way through the system and buy as the market starts acting more decisively.  That doesn’t mean when the coast is clear and it finally feels safe to own because that is clearly too late.  Buy when uncertainty is coming out of the market, but it is still plenty scary.  In war situations, that often means when the bombs start falling because we are no longer wondering “if” or “when”.  Then it is simply a matter if the consequences are as bad as feared, which most often they are not.

Alternate Outcome:
The problem of trading with conviction is it often leads us right off a cliff.  As the saying goes, know when to hold’em, know when to fold’em.  The simplest way around this problem is waiting for better setups.  The goals isn’t to make all the money, just the easy stuff.  Trading sideways chop is the most frustratingly difficult ways to make money.  Take some time off and come back for the next directional move.

Trading Plan:
Without an iron gut, sit this one out, or at least dial back the size of your stake.  Anyone who wants to trade this, trade proactively, not reactively.  That means taking profits early and often because they will evaporate days later.  My bias is for an upside resolution, but we could see more weakness before then.

Plan your trade; trade your plan

AM: Syria Relief

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks popped following the Labor Day break, flirting with 1650.  Obama is seeking Congressional approval before taking action in Syria and is the most cited reason for today’s relief rally.   This pushed us above last week’s stalled rebound, but we are still well under the 50dma.  The silver lining is the market violated support multiple times, yet selling never accelerated and we remain relatively stable despite of all the anxiety.

MARKET SENTIMENT
Summer is finally coming to a close.  Kids are back in school and rich money managers are returning from their countryside estates.  While active traders make up a bulk of the daily activity, they are a very small group and can only take the market so far before running out of money.  The lack of meaningful participation by big investors is largely responsible for the sideways trade we’ve seen since May.  Only guys with deeper pockets (mutual funds, pension funds, etc) can drive the markets sustainably and as they jump back in over the next few weeks, hopefully that will be the catalyst to get us out of this sideways summer chop.

The bigger question is if these guys will liquidate ahead of expected weakness, or continue buying the slow, but steadily improving economy.  Europe survived contagion.  China is still chugging along.  Japan has not imploded.  All in all, things are far better than worst case and that relief is a large part of this year’s strength.  While many still fear the end of easy money, all the people selling the bond market need to put that money to work somewhere and that certainly could be bullish for equities.  Valuations, fundamentals, and technicals don’t matter when people keep throwing money at equity fund managers and they have no choice but to buy stocks.

TRADING OPPORTUNITIES
Expected Outcome:
If all you did was listen to the chatter, you’d think the market took a pretty good wallop this summer.  StockTwits SPY sentiment is 76% bearish, the most skewed I’ve seen it.  Headlines focus on Taper, Syria, and the weak economy.  But the funny thing is the market is higher since the end of April and just a few percent from all-time highs.  Calls of the sky falling are clearly premature.

People trade their outlook.  When is the last time any of us heard someone say “this market is going crash so I bought more stock this morning”?  Of course not, they say “I sold everything last week and am 100% in cash because this market is going lower.”  So what happens when everyone is bearish?  That means everyone already sold.  Clearly the term “everyone” hyperbole, but when short-term traders bailout, they sell at a discount to more confident long-term holders who are not afraid of near-term volatility.  These new buyers’ calm nerves suck up supply and the selloff stalls as we run out of sellers.

Alternate Outcome:
Every bear market starts with that first point lower and so will the next one.  The heated debate people is if we are already in the early days of a bear or this is just another routine dip on the way higher. While short-term traders are nervous and most are already out, complacency is creeping into the longer-viewed investors as every dip since the 2009 bottom has been a great buying opportunity.  Markets go up and markets go down, that’s what they do.  It’s been a good year, but we need to watch for signs the aging bull is running out of gas.  While the economy and Taper are already priced in, Syria is the new wildcard and the longer the political grandstanding drags on, the more uncertainty it injects into the market.

Trading Plan:
While we should expect more near-term volatility surrounding Syria, look for the market to break out of this trading range in coming weeks.  Maybe we have another horrible September as big money dumps shares at heavy discounts.  Or maybe they buy the discounts short-term traders are hand out.  I expect an upside resolution, but I will wait for the confirmation either way.  In the meantime we let the impulsive traders get chewed up by this volatility.

Plan your trade; trade your plan

AM: Forget the Taper

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks dipped at the open on stronger than expected GDP numbers, but recovered into the green within minutes.  We cleared the minor speed-bump at 1640 and the next meaningful hurdle is the 50dma at 1660.  The summer chop continues, but Labor Day next week marks the start of the Fall trading season and we should expect more involvement from big money.  Their deeper pockets move markets and will finally take us out of this 1600/1700 trading range.  The million dollar question is if they will they buy the late summer dip or sell the weakness?

MARKET SENTIMENT
The knee-jerk reaction from many traders was selling the stronger than expected GDP numbers because they are still trying to trade the Taper.  Months ago we lived in the bizarro world where strong economic numbers were bearish because it threatened easy money.  Unfortunately for anyone trading in the rear view mirror, the Taper trade is already old news.  We beat that poor horse to death this summer and the market is already on to something else.  Right now that is fretting over Syria and welcoming the slow, but steady economic progress.

People have a hard time believing the Taper trade is already dead because it hasn’t even happened yet.  How can we safely ignore something that is still in front of us?  Easy, the market is forward-looking and people trade their expectations of the future.  I have yet to find a single person who thinks the Fed will continue buying $85 billion per month in debt all the way through 2014.  That means most everyone expects the Fed to Taper some time over the next 15-months.  In fact many are convinced it will happen sooner with most of the debate focused on September or January.  People trade what they expect and the market expects Taper, so that means it is already priced in.

No doubt there is some uncertainty surrounding Taper and the market hates uncertainty, but paradoxically that is a reason to buy the Taper weakness, not sell it.  When the Fed starts tapering in a moderate and responsible fashion, it will remove a big piece of uncertainty.  Since the eventual Taper will be less bad than feared, the market rallies on the news.  Sell the rumor, buy the news.  Rallying on the start of Tapering only seems irrational to those who don’t understand how the market works.

Syria is a whole different can of worms and we should expect more near-term volatility as the political posturing ramps up, but  this will be ancient history soon enough and we should buy when the missiles start flying.

TRADING OPPORTUNITIES
Expected Outcome:
The market is finally firming up after digesting the Syrian headlines.  Some hecklers want to give me a hard time because I remain constructive on this market while we sold off for a few days.  I’m not sure what these people expect, but no one has a crystal ball and I never claimed the ability to perfectly time every daily move in the market.  Many of these critics fail to realize successful trading is more about being wrong than right.  It is easy to make money in the markets, just ask any monkey with darts.  The harder part is keeping those profits.  That is where discipline, risk management, and stop-losses save the day.  Anyone can be lucky, but only the people who know how to be wrong will survive this game.

But back to the markets, the runaway selloff really didn’t get started.  While we slipped 5% from all time highs, the Tapering and Syrian fears cleared a lot of weak holders and brought in a new crop of owners willing to sit through this turmoil.  The market is fragile here and traders remain on edge, but sharp selloffs are swift and this one never really got going, meaning we are not standing on a trapdoor.

Alternate Outcome:
We are on shaky ground.  That means one of two things, either this is a great buying opportunity, or the floor is about to fall out from under us.  Major declines always start as small selloffs and we must always take weakness seriously.  While we don’t need to run from it, we should respect it and that means watching for signs of dip-buying drying up.  Every dip this year has been buyable, but eventually we will run into one that is not.  We made a lot of nice profits this year, it would be a shame to let those evaporate as we stubbornly hold through the top of this rally.

Trading Plan:
Bears and shorts need to tread lightly.  They’ve been right the last couple weeks, but the goal of this game isn’t to be right, it is making money and the only way to do that is selling our winners.  Selloffs are typically swift and this one is proving quite stubborn, meaning recent weakness is unable to shake many confident holders loose.  Of course the one time selloffs grind lower is bear markets.  While that is possible, it seems premature, especially given historically strong earnings and better than expected economic growth.  Our next bear market is coming, but we need people to forget about the last one first.

As for bulls, the market will likely remain choppy through next week as we wait for Syria to be resolved and bigger trader to come back from the holiday.  While I remain optimistic, forcing a trade here is a good way to get chopped up in these swings.

Plan your trade; Trade your plan

AM: A little relief

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks recovered some of yesterday’s selloff, ending the steady stream of selling, but feelings of uneasiness remain.  We are still stuck near 1640, which provided  support last week.  Often what was support becomes resistance and today’s rebound could stall at this level.  Of course support/resistance is proportional to the number of times the market bounces off a level.  By that measure 1640 not all that meaningful and is a speedbump at best, but in a weak market it might only take a speedbump to derail this bounce.

MARKET SENTIMENT
Yesterday’s selloff caught everyone by surprise and the dip-buying crowd held off, waiting to see how much better prices would get.  The widespread anxiety didn’t come from what we’ve debated for months, but something new and unexpected.  While events unfolding in Syria will likely have a limited economic impact over here, it is a new risk factor not previously priced in and is what made people so uncomfortable.  We’ve been debating Taper for so long that everyone already made up their mind, but Syria is new and people didn’t have time to cement their opinions.  Add in the pressure from a declining market and many simply chose to sell the uncertainty.

All of this leaves us in a delicate position.  Most people rationally realize Syria will be a non-factor just like Libya and Egypt, but markets hate uncertainty and all this political grandstanding is exaggerating the situation.  Expect the market to remain volatile in the build up to a conflict, but rally after the start of military operations when everything becomes quantifiable.

TRADING OPPORTUNITIES
Expected Outcome:
The one way selloff ended, but we are not out of the woods yet.  Four percent from all-time highs is hardly oversold and there is plenty of air beneath us, so jumping all over this rebound is still a risky trade and counts as picking a bottom.  While I am not worried about Syria, the crowd’s shifting sentiment concern me.  Previously confident holders are no longer greedily expecting new highs and are considering selling for the first time in a while.  Sometimes we don’t need a reason to sell other than everyone else is selling and that is what I am wary of.  While I still think recent weakness is creating a buying opportunity, I would rather be a little late than a lot early.  I remain optimistic in the medium-term, but recent weakness leaves me cautious.

Alternate Outcome:
Every dip is buyable until it isn’t.  We all know this rally is coming to an end and most of the times it is a fairly innocuous event that marks tops and bottoms.  If tops and bottoms were obvious it would be easy to make money in the markets and we all know that is not the case.  Yesterday’s “plunge” came on barely average volume, showing many holders continue holding.  The risk is if we add in a little more weakness, that dam of confidence will shatter in a cascade of selling.

Trading Plan:
Stay cautious as momentum remains with the bears.  The Syria situation is overblown but markets rarely act rationally in the face of new and uncertain events.  If the market rebounds to 1700, there will be plenty of time to get on board, so wait for stability and sanity to come back before buying the dip.  Our goal is to make the easy money, not buy the bottom.  Don’t forget, we remain in the choppy summer market and both bulls and bears should continue locking in profits early and often.

INDIVIDUAL STOCKS
AAPL slipped under $500 on yesterday’s weakness and how the stock responds to this level in coming days will be revealing.  Will big money come in and buy discounted shares at $490, putting a floor under the stock?  Or did everyone and anyone buy all the AAPL they could hold in the recent rebound and we are rolling over from a lack of follow-on buying?  I’m still fearful of a buy the rumor, sell the news going into the Sept product launch.  The iPhone5c is the worst kept secret since an Apple employee left an iPhone4 prototype in a bar a couple of years.  Anyone buying in anticipation of a “cheap” iPhone surge will likely be disappointed unless Apple hits us with something revolutionary that hasn’t already been leaked out.

Plan your trade; trade your plan

AM: Buy high, sell low

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks are lower by a percent on fears of US involvement in Syria.  This dip undercut the lows of last week as many traders take a sell first, ask questions later approach to the news.  While the move is lower, we are still well within the summer’s trading range and this sideways chop is consistent with recent behavior, so at least for the time being, the market is not signaling the start of something new.

MARKET SENTIMENT
Paradoxically wars are good for markets, it is the uncertainty leading up to the initial confrontation that weighs heavy on them.  The start of armed conflict is a relief to markets and leads to powerful rallies as seen in WWII and the first Gulf War.  The Syria “conflict” will likely be nothing more than a few cruise missile, or at worst air support for rebels like we saw in Libya.  While we might experience a 25 or 50 cent spike in the price of gas, we lived through $4/gal gas before and will do it again.

Through uncertainty comes opportunity.  Everyone is fairly confident this Syria thing won’t be a big deal, but we don’t know for sure and that keeps buyers away.  Traders selling this weakness are offering attractive discounts to those willing to take the risk.  For one side it will be a good deal at the expense of the other, but only time will tell if this is the end of Syria based selling, or just the start.  The gap lower at the open and the progressive slide lower is heightening the pain for those trying to hang on and is the cleansing process of setting the market up for the eventual rebound.  No one can consistently pick bottoms and tops and I won’t try, but all these previous Middle East selloffs created buying opportunities and this one will likely end the same way.

TRADING OPPORTUNITY
Expected Outcome:
Markets often act irrationally and emotionally.  As frustrating as that feels in the moment, those cracks in efficient markets allow us to profit from other people’s impulsive behavior.  I have no idea how low this dip can go and picking bottoms is a fool’s game, but this weakness is creating opportunity.  As for Syria, we’ve seen this story many times before and the worst fears are never realized, but we need to wait for the market to sort this out before jumping in front of it.

Alternate Outcome:
We long knew Tapering was a non-issue and it was going to be something else that brought this rally down.  Syria is new and few are actively promoted the impending Debt Ceiling.  Together these two headlines could conspire to kill this rally since they are not currently priced in.

Trading Plan:
Stay cautious, but be ready to buy with both arms when the missiles start flying.  Syria is a non-issue, we just need to wait and see how much of a discount sellers are willing to give us first.  Shorts can keep riding this down, but take profits early and often in this sideways, summer chop.

Plan your trade, trade your plan

AM: Stability means what?

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks eked out minor gains and added some cushion above the 50dma.  Neither bulls, nor bears have been able to move the needle in the final weeks of summer as we continue hovering indecisively around this widely followed moving average.

MARKET SENTIMENT
The widely expected Tapering collapse is still MIA.  In the bear’s defense, markets never move in straight lines so this could simply be a sucker’s bounce, but swift selloffs typically take our breath away before pausing and 4% is hardly breathtaking.

Everyone knows Tapering is coming and it really doesn’t matter much if it starts in September or January.  The Fed is ultra sensitive to the markets and it is highly likely tapering will start nominally to give markets plenty of time to adjust to a new reality.  Everyone, including the Fed, knows what would happen if they abruptly shut down the program and it is unnecessary given stable inflation and anemic growth.

If Tapering is already priced in, we need to keep an eye out for what comes next.  Remember, markets only move when people change their minds.  That means we are looking for new revelations that shows things are better or worse than most expect.  Disappointing earnings out of bellwethers like WMT, M, and CSCO could be the cracks in this already weak economy.  Or all this money fleeing bonds could bid up stock prices.  If these things were easy to figure out, everyone would be rich.

For all those worried about “War” in the Middle East, that is quickly becoming one of those Chicken Little things.  Afghanistan, Iraq, Iran, Egypt, Libya, Syria, etc.  Last year’s “Arab Spring” didn’t crush the market last year and is unlikely to do it this year.  Everyone’s long gotten used to $4 gas and it really isn’t a big deal anymore.  Outside of a revolution in Saudi Arabia, it’s business as usual.

TRADING OPPORTUNITIES
Expected Outcome:
No one knows what comes next and the best we can do is trade probabilities.  Violating the 50dma was the perfect invitation for sellers to rush for the exit and the market to collapse.  But that didn’t happen and we found a floor instead.  At the very least it tells us holders remain confident in the face of modest weakness.  Traders often focus on demand, but we mustn’t forget about supply.  No matter how dire things look, it is easy to prop up prices when supply remains tight (ie no one is selling).

When in doubt, stick with the trend, especially when the market is afraid of headlines; Tapering, Syria, weak retail results, etc.  A skittish market is an underweight market.  An underweight market is a buyer’s market.

Alternate Outcome:
Buying the dip is the most tired trade of the year.  While it worked every other time, there will come a day when all these cocky dip buyers give back a year of profits in one swift selloff.  While the odds always favor a continuation (markets continue countless times but only reverse once), we must always play defense.  Trading above the 50dma should have triggered a short squeeze, but we only saw modest gains over the last couple days.  We must always tread lightly when the market doesn’t do what we expect.

Trading Plan:
While the sideways trade continues, stability favors an upside resolution.  Bears need to be careful with recent profits and not let the market take those away.  Adventurous Bulls can own here, but keep stops tight.  This sideways trade will likely continue frustrating both sides as the market’s indecisiveness lasts into early fall.  The best trade is waiting for the next trade.  In coming weeks the market will let us know what it wants to do and we simply jump on board.

INDIVIDUAL STOCKS
AAPL continues hanging on to $500 days before it’s widely anticipated product launch.  We already know about iOS7 and people are fairly certain about the iPhone5s and the iPhone5c.  Those should be well received even if they are not all that innovative, but the one thing many investors overlook is just how dependent AAPL is on corporate charity from ATT and V.  Many iPhone users upgrade every two-years like clockwork, taking advantage of the $400 phone company subsidy.  Years ago AAPL was in control and could dictate terms to ATT and V as high-value customers lined up to buy iPhones, but the tides have turned as Android is the most popular flavor of smartphone domestically.  This is doubly good news for ATT and V.  First, Android phones are much cheaper and require less subsidy.  Second, they are less dependent on the iPhone and we could very well see a decrease in that all important subsidy.  Even a modest bump from $200 to $300 will put a significant dent in the number of iPhone customers opting for an upgrade.  Innovation or not, the day the phone companies reel in their subsidies will be a very bad day for AAPL shareholders.  I have zero knowledge of anything like this happening, but it is one of the biggest risks facing AAPL shares.

Plan your trade; Trade your plan

AM: Are we finding a bottom?

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks continue hanging around the 50dma as the widely expected Taper selloff is MIA.  We are less than 3% from all-time highs and the market is holding together quite well.   Typical selloffs are swift, while rallies grind higher.  Seven-trading days near the 50dma is more grind-like than swift-like, suggesting the market is finding a temporary bottom following earlier weakness.   We are in the tail end of the summer trading season and  will likely see more directional moves this fall.

MARKET SENTIMENT
While many are obsessing over the Taper, that chatter is self-defeating and minimizes the impact of the Taper.  The more the market talks about something, the fewer people there are that remain undecided.  Right now traders are falling into one of two camps, those that fear the taper and those that don’t care about it.  Those that fear it ran for cover early in the summer and are already in cash.  Those that are not worried about it don’t respond to Taper headlines.  With so few people undecided about the taper, it no longer matters.

Ignoring what the crowd fears is a common theme for this blog, but  it is one of the most difficult concepts of contrarian investing to have faith in.  Humans by nature are pack animals and long ago natural selection wired us to be in tune and empathetic with the people around us.  When everyone else was running scared, the best reaction was to run for our lives too.  Anyone who stuck around to see what all the fuss was about quickly became lion food.  But what worked in the wild 50,000 years ago will bleed us dry in modern financial markets.  Stand apart from the crowd and exploit their heard mentality.  Buy what they are selling and sell what they are buying.

TRADING OPPORTUNITIES
Expected Outcome:
While we have not decisively broken through the 50dma, today’s support is constructive.  Bears had fear and anxiety on their side, but were not able to do much with it.  We have multiple 5% pullbacks every year and so far that is how this weakness is behaving.  Every 5% pullback feels like the next big selloff when we are in the middle of it, but that is why they work.  They shake free weak holders, clearing the way for the continuation higher.  The hardest trade is usually the right trade and holding this weakness in the face of imminent Taper is not an easy thing to do.

Alternate Outcome:
The market typically overreacts on both the up and downside.  We go higher than we should and sell off further than is reasonable.  This is the herd mentality taking control of otherwise rational people.  All it takes is one catalyst to send already nervous traders running for cover and we always need to be careful.  While the recent weakness chased off a lot of nervous holders, it is really easy to turn confident owners into nervous sellers when prices start declining.

Trading Plan:
While the summer chop might continue, it seems like the recent selloff is finding a bottom and bears can use this pause to unwind shorts instead of waiting until the pain of a strong move higher chases them out.  If a bear insists on staying short, keep it on a tight leash and use a trailing stop to protect recent profits.  A bull can buy the break above the 200dma and use recent lows as stops.  If the selloff fails to materialize, look for the market to reclaim 1700 in coming weeks.

INDIVIDUAL STOCKS
MSFT exploded higher on news of Balmer’s departure.  While it is a bit overdone, this might be the emotional catalyst the stock needs to become popular again.  As any regular reader of this blog knows, I think MSFT is on the right track by building full-power tablets instead of limiting users with neutered, mobile-centric operating systems like iOS and Android.  The biggest risk for MSFT is appointing a new CEO that tries to turn the company into an AAPL clone by focusing on low capability devices.  Hopefully the next leader will play to it’s strengths as the only real choice for anyone doing real work.  In the very near future people will no longer own both a tablet and computer.  Their tablet will be their computer and only one company has the universal platform to offer nearly 100% compatibility with the programs they need for work and school.  99 cent apps are great for games and todo lists, but real work requires real software.  Forget iOS and Android, those are so 2012.  The future is full-powered mobile devices that plug into desktop docking stations.  Why choose between taking your tablet or laptop when you can take both in a single device?  That is the future and hopefully MSFT’s new CEO sees that vision.  No matter what the street thinks, MSFT is positioned perfectly for Mobile Revolution 2.0.

Plan your trade; trade your plan

AM: The whipsaw continues

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks rebounded from yesterday’s weak close, but still remain under the 50dma as the battle between bulls and bears rages on.  The market is less than 4% from all-time highs and so far predictions of doom and gloom seem premature.  Of course every 50% selloff begins with that first point lower.

Interesting developments in the NASDAQ as they were forced to halt trading midday.  This appears to be a computer glitch and trade should resume normally, but big moves in TSLA and AAPL prior to the shutdown could lead to unexpected trade when, or if trade resumes this afternoon.

MARKET SENTIMENT
Wednesday’s swings frustrated and humiliated anyone with an itchy trigger finger.  Breaking recent lows sent longs running for cover and seduced bears into shorting the obvious collapse, but minutes later the market reversed sharply, turning the tables on bears and forced them to run for cover.  But the market wasn’t done, when bulls were finally breathing a sigh of relief, the rebound collapsed under their feet.  This is a choppy, sideways summer market and reacting to these moves leads to buying high and selling low.

Wild swings purge the market of impulsive traders who react to price moves instead of acting deliberately and thoughtfully.  Those that bought or held the volatility demonstrated calmness and confidence in their outlook.  Replacing impulsive traders with thoughtful owners is always good for stability and typically favors price increases.  The objective of every shakeout is getting rid of weak holders before resuming the uptrend.  Violating the 50dma and recent volatility moves us toward that goal.  The thing we are left wondering is if this shakeout was big enough, or if we need to cut deeper first.

TRADING OPPORTUNITIES
Expected Outcome:
The market recovered most of yesterday’s losses but failed to find buyers willing to push it back above the 50dma.  The market price is the exact balance point where you have equal numbers of bears and bulls on each side. Traders were willing to buy yesterday’s weakness, but demand tapered off as we approached the 50dma.  I want to buy 1655, but only if other traders are willing to follow me in and that is not the case today.  I still believe in the rally and am looking to buy the dip, but I would rather be a little late there than a lot early.

Alternate Outcome:
Sideways trade is constructive for a rebound, but only if traders are willing to buy the rebound.  If buyers continue stepping away every time we approach resistance, the market will eventually fall under its own weight.  Shorts can continue holding, but keep tight stops and take profits proactively because they will likely evaporate days later.

Trading Plan:
Either we bounce here and resume the uptrend, or the shakeout takes another leg lower.  It is hard to know for sure so we wait for the market to show it’s hand.  Breaking above the 50dma will send shorts running for cover and their buying will start the rebound.  Of course further weakness will turn currently confident holders into nervous sellers.

No matter what it feels like, the up-trend is still in tact, so we can hold positions in the direction of the trend longer and should capture counter-trend profits more proactively.  We are still in the tail-end of the summer trading season and expect the indecisiveness to continue until big investors start moving money around in preparation for year-end.

INDIVIDUAL STOCKS
Not much to talk about since the NASDAQ halted trading.  This will be a non-issue assuming they resolve it tonight.  If it carries through tomorrow and the weekend, it could lead to larger gaps when trade finally resumes, but we made it through the Sandy shutdown and this will be much of the same.

Plan your trade; trade your plan

PM: Have we come too far?

By Jani Ziedins | Intraday Analysis

PM Update

MARKET BEHAVIOR
Dramatic swing of emotions as the market digested the Fed minutes.  We opened lower and fell immediately following the minutes release, but the market rebounded and reclaimed all the day’s losses, but just when everything seemed normal, we collapsed to close near the day’s lows.

The market retreated from the 50dma on surprisingly light volume given the hype around the Fed minutes and dramatic trade that ensued.  In spite of all the excitement, few traders seemed to care and sat on their hands.  The market closed at a new relative low and the next meaningful technical level is 1600.

MARKET SENTIMENT
The Fed statement came out and was as wishy-washy as ever.  I have yet to find a single person whose mind was changed as bulls and bears remain married to their positions.  The market is forward-looking and the Taper trade is ancient history, but it makes for good TV and is why the media keeps talking about it.  Honestly, what is the impact to the stock market 6-months from now if the Taper starts in September or January?  This is all manufactured hype and the market is already focused on what comes next.

This rally will end at some point, but a 15% annual gain is fairly typical and anything but too-far, too-fast.  A 27% annual return barely breaks into the top quartile, meaning we could easily see another 10% of upside from here and still fall within normal market behavior.  Source  That doesn’t mean we won’t see near-term volatility, but the crowd loves to hate this rally and is the fuel that keeps it going.  Markets climb a wall of worry because by the time the world finally feels safe, everyone is fully invested and there is no one left to buy.

TRADING OPPORTUNITIES
Expected Outcome:
I bought yesterday and was stopped out today.  That is just the way it goes.  I took a calculated risk, speculating we ran out of sellers under the 50dma and it didn’t work out.  That doesn’t make it a bad trade and if I had to do it all over again I would.  The key to success in the markets is not the individual outcome, but the process.  Stick with a sound trading strategy and over time we come out ahead.  There are always trolls who criticize other’s mistakes and brag about their successes, but those traders are often washed out within a year because they focus on the outcome, not the process.

I was disappointed by today’s close and it suggest more downside is possible.  While I still believe this is a temporary pullback, sellers remain in control and we need to wait for that next entry point.  Reclaiming 1655 in coming days would get me back in, but for the time being I’m just a spectator.

Alternate Outcome:
Every rally ends and this one is no different.  The high a few weeks ago could be a double top that is too much for this aging bull to overcome.  Shorts can continue riding the downward momentum, but keep that trade on a short leash and cover if we reclaim the 50dma.  The bull market is still intact and any counter-trend trade needs to be nimble and capture profits early and often.

Trading Plan:
For the nimble swing-trader, cash or short is the only trade to have here.  The bull should buy 1655 and the bear covers at this level.

INDIVIDUAL STOCKS
AAPL is resting above $500 after sprinting to this level on a combination of less bad than expected earnings, imminent product launch, and Icahn buying a “large” stake.  According to Apple rumor blogs, the iPhone5s and a cheaper iPhone5c are pretty much done deals.  Some expect a fingerprint reader on the more expensive model and there are differing reports on how much the new “c” model will cost, but most fall between $300 and $400.  If that is all we get, expect the stock to fall as traders sell the news.  I’m quite confident this is not the last time we will see $500, so there is little risk to locking in profits and waiting for the stock to consolidate recent gains.  If we continue higher, there is plenty of time to get back in.

TSLA struggles with $150 as the recent earnings release failed to ignite another upside rampage.  The stock is already up 325% for the year and most of the good news and expectations have already been priced in.  I’ll leave it to others to decide how much a car company that in its entire existence only sold two-days of GM sales volume is worth, but from a trading perspective this hot stock needs some cooling off.  Look for a retest of the 50dma in coming weeks.  Two-steps forward, one-step back.

Plan your trade; trade your plan

AM: Unexpected strength

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks bounced following yesterday’s slide.  We traded up to the 50dma as both sides watch intently to see what happens next.  The market remains comfortably inside the summer’s trading range, but every pullback this year stalled shortly after challenging the 50dma.

MARKET SENTIMENT
The market found a floor after briefly violating the 50dma.  The million dollar question is if we bounced because we ran out of sellers, or if all the Johnny-come-lately dip-buyers are temporary propping up the market before the next leg down.   To figure that out we need to see what people think and how they are positioned.

This morning’s bullish sentiment on StockTwits’s fell to a paltry 34%.  While not a scientific sample, it shows many people don’t believe in this market and are expecting lower prices in the near future.  Some could make the argument StockTwits users are more engaged and informed than the average market participant and their opinions are more insightful than contrarian.  While there is plenty of logic in this assertion, it is easily testable.  All we need to do is look back at the last dip in June to see what StockTwits users thought.  Coincidence or not, this low coincided with the last time StockTwit’s SPY bullish sentiment was below 40%.

Obviously the next argument is, this time is different.  While we are down from different headlines, the market participants are all the same.  How they responded to that last selloff will have parallels to how they respond to this one.   The whole reason contrarian trading works is people trade their opinions.  Bears are in cash or short.  Bulls are long and on margin.  When the crowd shares a similar opinion, that means the crowd already acted on those insights.  In this case it means 66% of a group of StockTwits users are underweight or outright short this market.  They already sold and there is little these traders can do to further pressure the market.  Once all the like-minded people with bearish outlooks sell, supply dries up and the market responds “irrationally” by bouncing at the exact moment when everyone expects it to collapse.

No doubt the market could continue lower as other confident holders start to doubt their positions and sell ahead of the impending collapse, but that is the nature of the game.  No one knows what will happen next, but the successful trader looks for opportunities when the risk/reward are in his favor.

TRADING OPPORTUNITIES
Expected Outcome:
Today’s bounce is an excellent buying opportunity with clearly defined risk.  The bear thesis predicted falling under the 50dma would set off a second wave of stop-loss and emotional selling.  That was supposed to be the trigger that accelerated the selloff.  Yet we bounced this morning as the stop-loss and emotional sellers failed to materialize.  When the market doesn’t respond as expected, we need to reevaluate our outlook.  Bears expecting a swift leg down need to be careful when the market refused the perfect setup for one.  I don’t buy bottoms,but I do buy strong moves the opposite direction from what everyone expects.

Some will criticize my call a couple of weeks ago where I expected support at 1700.  Obviously I was wrong, but in the markets every trader must make a critical decision, do they need to be right or do they want to make money?  This is important because these are two very different things.  My goal is making money and I’m actually glad I was wrong.  Like most disciplined traders I was stopped-out at 1695, locking in earlier gains.  From there, the market continued falling, but this is where the magic happens, the selloff allowed me to buy back in this morning at 1655.  Where we go from here is yet to be seen, but I have the opportunity to make 40 points of additional upside simply because I was wrong two weeks ago.  Given outcomes like that, I have no problem being wrong and I hope many readers feel the same way.

Alternate Outcome:
Every dip this year was buyable.  No doubt the crowd is starting to notice and when too many people recognize and trade something, it stops working.  In this case it isn’t the dip buyers that will take us down, but the confident holders that keep holding the dip.  There is nothing that shakes confidence like a screen full of red ink.  Like any dam that bursts, it starts with a crack and accelerates from there.  No matter how confident owners are and what the fundamental outlook is, once panic grips the markets, people sell first and ask questions later.  The best protection is disciplined use of stops.  When we stick to our rules, we can take calculated risks.

On the other side, anyone short the market needs to be careful.  I would take profits, not add new shorts.  The market is flirting with reclaiming the 50dma and that will trigger a short squeeze.  Remember, the goal isn’t to make all the money, just the easy stuff.  If we nose over, there will be time to jump on the short bandwagon again.

Trading Plan:
This morning’s bounce makes for a low risk, high reward entry.  Buy the bounce with a stop under 1650 or 1645.  We are risking 10-points with a potential upside of at least 50.  Even if the odds are against us, this highly asymmetrical trade is attractive.  When we combine other factors such as the sentiment skew and lack of a plunge following yesterday’s selloff, the odds are actually on our side too.  At some point this rally will end and we must be ready for it, but when in doubt, stick with the trend.

INDIVIDUAL STOCKS
AAPL gave back yesterday’s gains and is retesting $500.  This was key support last year and is an important round number to watch here.  While my preference taking profits after a strong run, traders can use a trailing-stop under $500 to protect recent gains.  There are a lot of Johnny-come-latelys following Icahn’s tweet and in anticipation of the iPhone refresh.  Is the ‘cheap’ iPhone already priced in, or will it catch a lot of people by surprise?  My guess is most already expects it and thus already priced in.  Unless AAPL shocks us with something new and unexpected in Sept, this feels like a buy the rumor, sell the news trade.

Plan your trade; trade your plan

AM: Is the rally over?

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks remain a hair under the 50dma, but so far have not triggered a second wave of stop-loss selling after violating this widely followed moving average.  The summer season is coming to a close and expect more meaningful portfolio adjustments by the big guys in coming months as they prepare for year-end.  Many times this means directional trade as opposed to this summer’s sideways moves.

MARKET SENTIMENT
Aside from a couple of brief excursions, the market remained between 1600 and 1700 since May.  Currently we are in the middle of this range as traders continue arguing between buying the dip and shorting the impending collapse.  The market price is the exact balance point between bulls and bears and as of today, that puts us exactly in the middle of the summer’s trading range.  By itself this is neither bullish nor bearish because both sides have equally valid arguments, so we have to peel back the layers to uncover more meaningful insights.

We know selloffs are typically swift as selling begets more selling.  Halting the slide and holding this level into Tuesday will largely end last week’s selloff and it will take a new catalyst to reignite it.  Maybe that is new earnings data to further pile on WMT, M, and CSCO’s disappointments.  Maybe it is more technical selling as we slip under the next tranche of stop-losses.  And of course both of those could set off another round of emotional selling, pushing us down to 1600.  But barring those outcomes, this slide triggered a mountain of selling and any sustainable rally is two-steps forward, one-step back.  We should expect dips, not fear them.  Reactive traders buy high and sell low.  Proactive traders lock-in profits and buy dips.

Last Thursday’s plunge rattled traders and StockTwits’ SPY sentiment fell 25-points over a couple of weeks.  This is the lowest it’s been in recent history.  (The last time was mid-June and we know how that turned out.)  This somewhat contradicts Friday’s Yahoo Finance poll that shows many believe this is just a routine dip.  Timeframe is everything in the markets and Yahoo Finance readers could very well be different from StockTwits users.  I have nothing to back this up other than my intuition, but I expect Yahoo readers skew toward buy-and-hold where StockTwits skews heavily toward day-trading.  Both pieces are valuable insights into what comes next.  Likely we are getting closer to the end of this near-term dip, but the larger rally is at tad overdone and at risk of breaking down in the medium-term.  Timing is everything in the markets and hopefully these insights give us an edge.

TRADING OPPORTUNITIES
Expected Outcome:
Holding this 1650ish level through Tuesday shows we ran out of sellers and there are enough value buyers snapping up discounted shares to halt last week’s slide.  It is dangerous to catch a falling knife, but a four-day bottom is often long enough to end a downward move, allowing us to buy the dip.  Those that wanted to sell and short have already done so, relieving much of the selling pressure on the market.  Once that supply dries up, it is easier for the market to rebound.

Alternate Outcome:
Many holders remain nervous and uncertain.  They are watching the market intently and on the verge of selling either when the market crosses their stop-loss, or cutting bait when pain from losses gets too intense.  Hope is a poor strategy and everyone has their breaking point.  Nothing turns confident holders into emotional sellers faster than a tidal wave of red ink.

Trading Plan:
Wait for support and strength on Tuesday before jumping in.   Shorts have nice profits and can continue holding, but they need to protect these gains.  If the selloff doesn’t take another leg down after violating the 50dma, it signals most of the selling is already behind us and they need to take profits.

Plan your trade; trade your plan

AM: Testing the 50dma

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks traded sideways at the 50dma following yesterday’s 1.4% selloff.  Volume for the dip was only a few percent above average, surprisingly light for the largest loss in months.  This shows many money managers remain on vacation and the lighter volume exacerbates volatility.  Light volume can also be explained by confident holders unwilling to sell dips and few are rushing for the exits.

MARKET SENTIMENT
Yesterday’s one-way selling is taking a break as most wait to see what happens next.  This pause alleviates some of the anxiety and gives traders time to make rational and deliberate decisions.  That doesn’t mean the selloff is over, only that the initial wave of emotional selling came and went.

Ironically the most bullish move is more selling.  Dipping under the 50dma triggers a second wave of stop-loss and emotional selling, setting the stage for a capitulation bottom.  This is exactly what happened in June, leading to our recent 140-point surge, but that is only one possibility.

Yahoo Finance had another insightful poll this morning.  Over 60% of respondents are either not worried about the dip or buying this weakness.  That shows complacency creeping in, not surprising since every other selloff this year ended in a rebound to new highs.  The challenge with sentiment is figuring out how far this will go before toppling over.  We certainly have a majority, but do we need 80% before it becomes unsustainable?  Just like everything in the market, there is no clear answer and it largely depends on how quickly sentiment shifts as the market dips.  A rapid selloff accompanied by a sharp reversal in sentiment will find a bottom quickly.  That is what happened in June.  A slower grind lower as stubborn owners refuse to sell will take longer and is typical of an erosive bear market that takes us down a few points at a time.  Plunges are scary, but bounce quickly.  Grinds lower don’t scare us, but they do more damage as the series of lower highs drains our accounts under our noses.

TRADING OPPORTUNITIES
Expected Outcome:
The market is at a critical juncture and the best place is cash until we have more clarity.  While this could be another buyable bounce, we want to see the market hold these levels for a few more days before we assume the market found a bottom.  Temporary dip-buying can prop up a market for a couple of days, but holding for four days demonstrates real support.

Shorts can stay short, but should move their trailing stop down to 1670 to protect recent gains.  In the choppy summer market, we are best served by taking profits early and often.  That has been the best counter-trend trade this summer and is not a bad decision here.

The most bullish signal will be a violation of the 50dma followed by a strong reversal.  That shows stop-loss, emotional, and short selling exhausted itself in a capitulation bottom.  Bears expect us to crash through the 50dma but if that doesn’t happen, they have to be flexible enough to recognize further emotional selling is not happening and they need to lock in profits.

Alternate Outcome:
Without a doubt the market is becoming more and more complacent as proven by the Yahoo Finance poll.  All these confident holders are a few points from becoming panicked sellers.  Recent economic concerns over earnings from WMT, CSCO, and M are giving some money managers doubt and their lightening up could be the start of something more.  Remember, markets only move when people change their minds and adjusting outlooks based on these bellwether companies could be the straw that broke this rally’s back.

Trading Plan:
Patience is the name of the game.  While we come to this with biases and expectations, let the market make its move first.  It is better to be a little late than a lot early.  A bounce off the 50dma early next week is buyable.  Breaking the 50dma by itself is not automatically bearish.  We need to see an acceleration that shows previously confident holders are rushing for the exits.  If a dip under the 50dma quickly stalls, that means selling is drying up and we can buy the rebound above the 50dma.

INDIVIDUAL STOCKS
TSLA closed the earnings gap and is down 10% from the post-earnings high.  A lot of people bought the earings breakout and shorts covered, but since then few have been willing to pay top dollar and are waiting for better prices.    This stock has a history of strong surges followed by month-long consolidations, so even under best conditions we should expect sideways trade here.  The bigger test will be when the 50dma catches up in coming weeks.  Will we get another bounce, or will that be an excuse for people to lock-in profits?  The next greater fool theory applies to all momentum stocks no matter how sound the underlying fundamentals.  TSLA will top when there is no one left to buy.  Just ask anyone who held AAPL through the record-setting iPhone5 launch last year.

Speaking of AAPL, it is pausing at $500 following the Icahn pop.  While a lot of retail investors are excited to ride on his coattails, it is fairly safe to assume he waited until after he bought his entire position before promoting it to the world.  That means his buying will no longer prop up the stock and he is simply along for the ride like everyone else.  In fact, depending on how much he bought, he could be responsible for the some of the recent rally up to the 200dma.  We will soon learn what happens without his massive war chest bidding up the price.

The market is eagerly awaiting AAPL’s “low-cost” phone so it can stem the market share losses to cheaper Android phones.  The thing investors need to worry about is if this iPhone5c is too successful and actually becomes AAPL’s leading seller at the expense of its more profitable big brother.  There is precedence in the iPod lineup.  Soon after launching the smaller and less expensive iPod mini, it quickly became AAPL’s best seller.  The Mini was eventually replaced with the Nano and now the larger and more expensive full size iPod is on life support.  If the iPhone5c’s price and profits are half that of the iPhone5s, AAPL will eventually need to double sales just to stay where they are at.  This is why many are concerned about hardware price wars catching up to AAPL’s stellar profit margins.

Plan your trade; trade your plan

AM: Crashing through support

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks sliced through 1680 and fell to the 50dma before finding support.  Since the start of the year every dip to the 50dma was a buying opportunity.  Is the market giving us another gift, or is this a preview of bigger things to come?  It largely depends on if we assume the sideway summer trade continues or if this is the start of a new directional move.

MARKET SENTIMENT
It is late in the earnings cycle, but poor outlooks from CSCO, WMT, and M stoked fears about economic slowing.  Add in upbeat weekly employment numbers that threaten QE and we have the perfect recipe for selling.  At least that is what the financial press wants us to believe.

While today’s 1.5% decline is dramatic, anyone paying attention expected it as we crashed through all the stop-losses littered under obvious support at 1680.  No matter the reason, many disciplined traders hit the sell button when the market crossed their stops.  Once that wave of autopilot selling ran its course, we saw further weakness as fearful and emotional holders bailed out.  Currently the slide is pausing at the 50dma as some traders buy the dip and nervous holders wait to see if support will hold.  The new level everyone is watching is the 50dma and this creates an all new tranche of stop-losses clustered under this level.

Two days ago the media claimed we bounced on some Fed member’s bullish comments, yet today we tank on renewed Tapering fears.  Really?!?!?  The only way these claimed events are moving markets is if they cause traders to change their mind.  Markets only move when people buy and sell, and people only buy and sell when they change their outlook.  Did Tuesday’s Fed comments turn Tapering bears into QE bulls?  Did today’s strong weekly employment numbers turn QE bulls into Tapering bears?  Of course not, traders are far more stubborn than that!  We all come to the markets with beliefs and biases.  One headline here or there is not going to change anyone’s mind on popular issues, and thus it is not moving the market.

But that only applies to hotly discussed issues where people already made up their minds.  Things are completely different when it comes to new, unexpected headlines.  Weak outlooks from WMT, M, and CSCO caught some investors off guard.  We saw cracks in the retail and economic story earlier in earnings, but most wrote this off as company specific stories.  That is harder to do when the weakness is confirmed by industry leading companies.  Those disappointments caused some traders to reevaluate their outlook and lightening up on portions of their portfolio.  That is the true seed of this selloff.

While QE and Tapering is ancient history in a forward-looking market, we always need to pay close attention to new and unexpected developments.  Right now some traders are starting to worry about economic strength and we need to see if this concern spreads and leads to further selling.

TRADING OPPORTUNITIES
Expected Outcome:
Buy the dip or sell the weakness?  That is the million dollar question.  Any disciplined bull is long out of the market as we crashed through their stop-losses, while many bears used this weakness to add to their short positions.  All good trades, but where we go from here largely depends on if this is more of the same, or the start of something different.

Until further notice all dips are buying opportunities and we have to give the benefit of the doubt to the trend.  Trends continue countless times but only reverse once.  It doesn’t take a mathematician to figure out the high probability trade is sticking with the trend, but knowing what will happen and trading it successfully are two totally different things.

Alternate Outcome:
Even if the market eventually bounces, would could still see more near-term weakness.  Catching falling knives is always a dangerous hobby and we need to wait to see how traders respond to these levels before stepping back in.  As for shorts, there is a good chance the 50dma will provide support like it has every other time this year, but expect another leg down if we dip under this widely followed technical level and trigger another wave of stop-loss selling.

Trading Plan:
More likely than not we are still stuck in the summer sideways chop and the better trade for bears is locking in recent profits.  If we slip under the 50dma we can press our shorts, but there is nothing more frustrating than watching a bounce gobble up all our profits.  As for the bull, there is no reason to catch the falling knife.  Wait for support to build at the 50dma.  That likely means holding this level for another three days.  It is better to be a little late than a lot early.

Plan your trade; trade your plan

AM: More of the same

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
More of the same as the market remains stuck between 1680 and 1700.  Aside from a couple short excursions, the market traded between these levels for the last month.  Traditionally the longer a market consolidates, the bigger the resulting move.  Every sideways consolidation this year ended in an upside breakout and when it doubt, stick with the trend.

MARKET SENTIMENT
We are in the final weeks of summer and shouldn’t expect much.  The big decision makers are returning from summer vacation and just getting settled.  Look for larger moves in September and October as big money takes their portfolios off autopilot and starts buying and selling in larger quantities.

Consolidations typically favor a continuation and most reversals end in an exhaustion surge.  Traders are notoriously afraid of heights and more comfortable buying dips than breakouts.  That’s why many distrusts the market at all-time highs, yet love AAPL under $500.  The thing we need to remember is people already traded what they talk about.  If someone loves AAPL, they are fully invested.  If they claim this market’s gone too far, they already moved to cash.  The ideas people talk about and promote tells us how they are positioned.  If the chorus claims the market is ready to top, it means the crowd already sold.  If everyone says AAPL is going higher, they already own as much as they can hold.  The reason contrarian investing works so well is markets only respond to changes in supply and demand and people only trade when they change their mind.  If the crowd loves something, there are few left to buy and a large group of potential sellers.  If the crowd dislikes something, there are few left to sell and plenty of buyers available.  This is one of the best years in market history because no one trusted it and AAPL slumped 40% because everyone loved it.  Go against the crowd, not the trend.

TRADING OPPORTUNITIES
Expected Outcome:
These things go longer and further than anyone expects and that is clearly the case here.  No matter how high this feels, there is still more upside left.  Markets decline faster than they rally.  Holding 1680 for a month is the opposite of a swift selloff and suggest the high probability trade remains higher.

Alternate Outcome:
Hundreds of millions of shares changed hands over the last month.  Many new buyers are using 1680 as support and will sell a dip under this level.  Once the selling starts, it has a tendency to cascade as more stops are hit and the wider pool of owners become nervous.  Selling begets selling and before we know it we find ourselves down fifty points.  While I don’t expect that, hard stops keep us out of trouble.

Trading Plan:
It is hard to make money in this lethargic, sideways market and the risk/reward is not on our side.  Waiting for the resolution of this consolidation will provide quicker and safer profits.  A sustained break of 1700 is our signal to go long and failing to hold 1680 is our chance to short the market.  Expect the real fireworks in September and October as we either continue this rally into year-end, or finally start the correction everyone’s been waiting for.

INDIVIDUAL STOCKS
It really felt like the overly bullish fever in AAPL broke.  It was no longer the overwhelmingly most talked about stock on StockTwits and I largely stopped getting hate mail every time I criticized the company.  No doubt that shift in sentiment allowed for this $100 move higher, but how much upside is left?  There was a revealing, if not downright scary poll on Yahoo Finance today.  Well over 50% of the respondents are not simply bullish on AAPL, but they said they are willing to “bet the farm” it will recover old highs.  It is shocking how excited people are about a stock that is 30% off its 52-week high.  The bullish arrogance is also back in the StockTwits AAPL stream.  No doubt these people have a lot of be excited about, but I wonder what level most of these people bought?  Rather than making a lot of money, I suspect many are excited about losing less.

While there is a lot of upside momentum, for the company to truly make a comeback we need to see a return to strong growth and a decisive reversal of the nonstop market share losses.  It’s been a great trade for those that bought the breakout following earnings, but we only make money when we sell our winners.  Every AAPL bull needs to have their price that is good enough.  Many rode this down from $700 and hopefully they learned their lesson about using trailing stops.

Plan your trade; trade your plan

AM: Bears get whacked again

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks sunk in early trade, but bounced off support at 1680 and turned green by mid-afternoon.

MARKET SENTIMENT
Bears have been in control as we declined in five of the last six sessions, but the best they could muster was a 1.3% “selloff” from all-time highs.  Even with the wind at their back they still couldn’t shake confident holders and this Teflon rally continues levitating on tight supply.

Recent weakness emboldened bears, convincing them this was finally their moment, but today’s bounce shows they are early yet again.  This market will suffer a material decline at some point, there is no disputing that, but early is the same thing as wrong and many bears have been wrong for eight months and counting.  They will be right at some point, but because of the dynamics in the markets, it won’t happen until the crowd gives up on calling a top.

This has been one of the best and easiest years in market history, yet people still don’t trust it.  This is the very reason we keep going higher.  Many blame our strength on irrational exuberance, but it is in fact a product of the exact opposite, irrational pessimism keeps this rally alive.  Most traders were battered and scarred by the damage in 2008 and early 2009 and like anyone suffering from PTSD (post-traumatic stress disorder), they keep reliving those events in their mind and normal and ordinary events trigger acute flashbacks.   How this supports the rally is it keeps the worrywarts with an itchy trigger finger on the sidelines.  Without skittish traders, there are few in the markets to trigger a stampede rush for the exits.  Without that exaggerated volatility, the market rallies nicely on a steadily improving economy.

TRADING OPPORTUNITIES
Expected Outcome:
Today’s bounce off the lows has all the hallmarks of a short-squeeze.    The one-way rebound is driven by the pain of shorts forced to cover as the market relentlessly moves against them.  We’ve been talking all summer about taking profits early and often because this market will take them away days later.  Rather than collect profits, many bears turned greedy and are getting forced out for a loss today.  But they are not the only ones.  Bulls who held on too long were recently squeezed out in recent weakness.  Choppy markets favor the nimble and that’s been the best call this summer.

Alternate Outcome:
Keep watching 1680.  The sideways churn brought in a lot of new owners with a stop under this obvious technical level.  Break that and we will see a wave of selling, possibly triggering a follow-up cascade of emotional selling.  The next widely followed level is the 50dma and is where we are headed if we cannot hold 1680.

Trading Plan:
The bears just cannot get the job done and this gives the edge to bulls.  Expect short covering to push us through 1700, but be mindful of slipping under 1680.  After spending a few weeks inside this tight range, be prepared for a strong move either way.

INDIVIDUAL STOCKS
AAPL is on fire between breaking the 200dma, the impending product event, and most recently Carl Icahn announcing a large stake on Twitter.  Those sent shorts running for cover, but this strength looks like a better selling opportunity than buying one.

Apple has great products if we still lived in 2010, the last year AAPL really surprised anyone with real innovation, the Retina Display in the iPhone4.  No one uses Siri, iMaps was a disaster, the iPad Mini was simply playing catch up to Android, and iTV’s been a dud since it came out in 2006.  If you go to Best Buy, the Apple table is the most boring section of computer/phone department.    Surprisingly enough, the most interesting products are all Windows computers, laptops, and tablets.  While a 20″ all-in-one Windows desktop is boring enough, they go and make the monitor into a giant, removable tablet with its own battery!  That’s far cooler than anything we’ve seen out of AAPL recently.  Even the laptop/tablet hybrids are getting innovative and exciting.

The last decade saw a relentless consolidation of digital devices.  Phones, PDAs, cameras, GPSs, and MP3 players have all been rolled into a single device, making many once dominant companies obsolete.  When is the last time anyone bought a Palm Pilot, iPod, GPS, or point and shoot camera?  What is the one stand-alone device left?  Our computer.  Soon we will no longer choose between taking our tablet or laptop computer because they are merging into a single device.  Unfortunately for GOOG, AAPL, and ARM, only MSFT and INTC are hard at work on the next generation of full powered devices.  As investors we need to look for the next big thing and the blending of computers and handheld devices is the next logical step.  Who wants a neutered mobile device with a mobile processor, mobile OS, and mobile apps when they can have a full powered computer in their hand that run anything and everything they need.  In five years our phones will be our computers as we plug them into docking stations on our desks or wirelessly connect them to a dumb-terminal tablets.  Invest in the companies downsizing full powered devices, not the ones entrenched in keeping the mobile market alive.

But that is the long-term view.  In the near term, AAPL might seem some strength in anticipation of their product launch, but this is more likely setting up a buy the rumor, sell the news trade.  We can hold the 200dma, but be prepared to sell strength because this is a relief rally, not a return to the glory days of market beating innovation and dominant market share.

As for the surge on Icahn’s announcement of his stake, that is simply one man’s opinion and has nothing to do with the larger fundamental story.  Look for this surge to reverse in coming days as the euphoria and herd buying wears off.

Plan your trade; trade your plan

AM: Is sideways good or bad?

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks stumbled at the open, slipping to 1683 as the lethargic summer trade continues.

MARKET SENTIMENT
Everyone knows markets fall faster than they climb.  A few day selloff can wipe out months of profits and is why we fear them so much, but can we use this typical behavior to figure out this market’s next move?  We spent most of the last month above 1680.  If selloffs occur over a few days, holding these levels for so long strongly suggests this market is not on the verge of crumbling.  In fact, if we look at the other side where rallies take time and are drawn out, a month-long consolidation suggests a continuation is more likely.

Over the last four-weeks we’ve seen plenty of profit-taking, defensive selling, and aggressive shorting, yet the market continues holding near all-time highs.  We’ve gone through modest weakness and had countless ominous headlines regarding QE, yet most holders refuse to sell and that tight supply is propping up prices.  Once we exhaust the supply of proactive sellers, the market will continue higher like it has every other time this year following widespread calls of a top.

TRADING OPPORTUNITIES
Expected Outcome:
There are no guarantees in the market and successful trading is a game of probabilities.  Without a doubt the market could implode any moment, but the fact it resisted selling off for so long suggests the next move is still higher.  We are still stuck in the listless summer trade and should continue taking profits early and often.  Most big money institutions are in a holding pattern until the senior decision makers come back from vacation.  Seeing how strong the year’s been, this fall could be interesting.  Will this be another brutal September, or is the least expected trade, a 12-month rally, the most likely outcome?

Alternate Outcome:
While it is encouraging the market is holding near all-time highs, where are the buyers needed to breakout to new highs?  Markets top for one of two reasons, panic selling following an unexpected development, or exhausting the supply of buyers on bullish headlines.  The clearest sign the market is breaking down is violating key support levels.  Right now 1680 is the level to watch.  Beyond that is the 50dma, quickly approaching 1660.

Trading Plan
There is not a lot to do while we hide out in this 1680 to 1700 range.  A bull can keep holding and bear can stay short, but at this point they are fighting over loose change.  Often the hardest trade is to sit on cash and wait for a better opportunity.  We come to the market to trade and it gets boring real quick when we don’t have money at risk.  (I’m as guilty of this as the next guy)  The real money will be made waiting for the market’s next directional move.  The longer we consolidate, the larger the resulting move will be.

Plan your trade; trade your plan

AM: Selling stalls

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks bounced between 1690 and 1700 as the indecision continues.  While we haven’t recovered 1700, today’s strength looks to end the streak of down-days.

MARKET SENTIMENT
The recent dip opened the door to further selling, but the market didn’t take the bait.  Even with all the QE fear mongering, the best bears could manage so far is a trivial 1.5% slip from all-time highs.  For context, the previous two QE initiated selloffs started with intraday plunges of 2% and 1.4%.  Clearly the last three-day “selloff” was nothing like May 22nd’s and June 19th’s breakdowns and the resulting trade will also look different.  We trade the market, not our biases, and so far the uptrend is holding up nicely.

QE driven selling in May, June, and over the last three-days flushed out most traders afraid of an impending Tapering correction.  It is foolish to expect a major market selloff, yet continue holding stocks, so common sense tells us most Tapering worrywarts are long gone. This proactive trading phenomena gives the market its forward-looking behavior.  Back to QE, at this point even the baristas at Starbucks know tapering is just around the corner, so there is no QE trade other than ignoring all the hype.  Forget QE and move on to the next thing.

Without a doubt ignoring what everyone is talking about is one of the hardest parts of contrarian trading.  (The other is not confusing trend with sentiment.)  When we break it down and look at it rationally, it is fairly obvious everyone predicting doom and gloom is already out of the market.  When most are expecting the worst, the bulk of the selling is already behind us and without new supply, markets often rally.  This single idea drove us from November’s 1340 lows and continues pushing us higher as long as the cynics keep fighting this rally.

TRADING OPPORTUNITIES
Expected Outcome:
If this market was going to break wide open, it would have happened by now.  Today’s support is constructive and suggests we are not done making new highs.  The previous three days of selling was all on recycled headlines and was only temporary.  This rally will end at some point, but it will be on new and unexpected developments, not the stuff everyone is already talking about.

Alternate Outcome:
Markets top for one of two reasons, bad news or good news.  The bad news is fairly obvious so I won’t get into it, but good news selloffs lead to longer and deeper corrections.  Good news selloffs happen when everyone is bullish and fully invested.  At that point there is no one left to buy and nowhere to go but down.    We could see either of these bearish outcomes in the near future and need to keep an eye on both.  The first and most obvious sign the market is breaking down is seeing it fail to hold previous support.  We can continue buying dips, but we must always respect our stops.

Trading Plan:
The modest selloff and recent strength doesn’t support the bear case.  It is better to get out early when losses are small, then push our luck and wait for the pain of mounting losses to force us out.  If a bigger selloff is in front of us, there is plenty of time to jump on that bandwagon when it finally shows up.

Bulls can buy/continue holding a break of 1700.  The recent low of 1685 makes a decent stop.

INDIVIDUAL STOCKS
TSLA is holding post earnings gains nicely, but every sustainable rally needs basing and consolidation.  Without that foundation and pruning of irrational exuberance, the stock is setting up for a bubble style of collapse.  To remain sustainable, the stock needs to check back to the 50dma at some point in coming months.  Maybe we trade sideways until it catches up, or we dip down to it.  I hope it does one of those two because the alternative is a bubble style collapse to $50 over a period of weeks.  That isn’t bad if we get out early, but that is easier said than done.  Just ask anyone who owned AAPL at $700.

Speaking of AAPL, the stock is on track for its third down-day following a brush with the 200dma.  This is a nice place to take profits and maybe that is all this weakness is, but we could also be slipping as few large investors are willing to chase the stock up to recent highs.  Its been a nice run and the only trade on AAPL this year has been buying weakness and selling strength.  Since this is the highest we’ve been since January, this might be a good time to lock in profits.

Plan your trade; trade your plan