All Posts by Jani Ziedins

Finding Support

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis:

Volatility crept back into the market as early trade gave back all of Tuesday’s gains. It was a gut-check for bulls when prices slid nearly non-stop through the first two hours. But just like it was supposed to, prior resistance at 2,040 turned into support and we bounced right off of 2,040. While we still finished in the red, the midday rebound was clearly bullish.

With fresh memories of October’s demoralizing plunge, traders still have a hard time warming up to this relentless assault on record highs. The lack of enthusiasm is clearly evident through the low volume rally. Everyone automatically assumes the market has to be wildly bullish as it sets new high after new high, but burned traders remain far more skeptical than they were earlier in the summer. This doubt and worry is the fuel that keeps pushing the market higher.

Big money was patting themselves on the back when they took profits this summer, but countless all-time highs later, these same managers are under intense pressure to buy back in at higher levels, else they risk being left even further behind. It is this pressure to chase that keeps a bid under the rally and why every ten-point dip keeps getting bought. Owners that don’t want to sell and managers that need to buy is a recipe for higher prices.

Jani

Why the Contrarian is Buying

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis:

Stocks smashed through 2,040 resistance and closed above 2,050, setting yet another record high. Volume was more brisk than in recent days as these gains triggered a wave of technical breakout buying and short-covering.

Too often people mistakenly think contrarian investing means going against the trend. They see something they think has gone too-far, too-fast and are convinced the underlying data doesn’t support the move. They see themselves as a savvy contrarian investor when they bet against the move. But all too often this ends up being a costly mistake.

Contrarian trading has nothing to do with the trend or technicals. It is only about the crowd and its mood. It doesn’t matter what the underlying price action is. Sometimes it is contrarian to go against the trend, but more often than not it means betting on the trend no one believes in.

October’s plunge left traders with a cynical hangover. Even at record highs, they continue talking down this market and are certain we are on the verge of crashing lower. Many of these traders bailed out during October’s selloff and were left behind by the subsequent rebound. They are desperately hoping for the breakdown so they don’t feel so foolish for selling last month.

Unfortunately for these cynics, with so many people bashing the market, the contrarian trade is buying the breakout. AAII’s Asset Allocation Survey showed equity allocations are at 14-month lows. Stocktwit’s SPY sentiment gauge is 54% bearish, a full 16% more bearish than when the market peaked in September. All of these doubters will turn into reluctant buyers as the fear of a selloff is replaced by a fear of being left behind. Expect the market’s strength to continue pressuring underweight money managers to chase the rally higher into year-end.

Jani

Where’s the Faith

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

End of Day Analysis:

Stocks shrugged off early weakness and finished a smidge higher, but that is all it took to mark another record close. Overnight we learned Japan unexpectedly slipped into a recession. While that sent their stocks crashing 3%, our market barely noticed, down just a fraction at the open.

The S&P500 has been unable to move past 2,040 resistance. Many traders feel this is stalling and foretells of an imminent collapse. Even though the market keeps making record highs, the Stocktwit’s SPY sentiment gauge keeps making new lows. That shows a material divergence between price and trader’s expectations.

While traders are growing suspicious of this market, it is dangerous to argue with a market that holds strong in the face of bearish news. The headlines out of Japan were more than enough to send a vulnerable market into a tailspin. Fears over global growth triggered October’s 10% selloff. But this time it barely registered as the market clearly shifted from a half-empty outlook on the global economy to one that is half-full.

Source: Stocktwits 11/17/2014

The talking heads have a million reasons why the market is acting this way, but it really comes down to simply supply and demand. October’s selloff shook free most of the available supply. Now when the market runs into bearish economic headlines, there is no one left to sell the news and the market proves amazingly resilient. When no one sells, supply becomes tight, and prices go up. People can invent all the justifications they want, but this market’s strength comes from tight supply.

Increasing cynicism bodes well for continued gains. Even though we are at record highs, traders are selling and shorting this consolidation. Unfortunately for them, they will be the next round of buyers forced to chase the breakout above 2,050. Markets fall from unsustainable levels quickly. Holding near 2,040 for nearly over a week shows these new highs are not unsustainable. Owners can continue holding and shorts need to be very careful.

Jani

Whole Lot of Nothing

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Today’s low-volume gyrations confused traders by sending off multiple false signals. The morning’s breakout convinced us this would be yet another routine, record close. Then the intraday plunge pushed us down to levels we haven’t seen in a week. Early highs fading into a weak close is never a good sign. But afternoon buyers swooped in and bought the 10-point “dip”, pushing us back to break-even. What could have been a very insightful day, instead turned into a whole lot of nothing.

The last few days saw a decent amount of churn with buyers and sellers equally represented near 2,040. Trading sideways typically leads to a continuation because markets retreat from unsustainable levels quickly. Every move to new highs is met with suspicion. Many take profits or short the breakout. These traders make their moves in the first couple of days following a breakout, but if the market can withstand this early wave of selling, then it will resume uptrend once the supply from the doubters dries up. Already four days into this 2,040 consolidation, we can confidently assume the wave of profit-taking and shorting is already behind us. With another supportive day on Friday, 2,050 is all but assured.

But everyone knows markets move in waves, so don’t let a pullback to support catch us by surprise. Maybe the rally fails Friday. Maybe we smash through 2,050 before slowing down. Only time will tell. On the other side, maybe we bounce off of 2,020. Maybe it is 2,000 or 1,980. As long as we see it coming and plan accordingly, we can respond intelligently, deliberately, and most importantly, profitably.

Jani

Embrace Low-Volume

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis:

Stocks finished with another record close. This puts last month’s emotional selloff even further behind us. While prices have rebounded decisively, many traders remain numb from the bitterly painful plunge to 1,820. If anyone is not totally dumbfounded by this market, then clearly they are not paying attention. We went from record highs in September, to a world-is-ending selloff in October, and are right back to making fresh highs in November. This was one of the most abrupt moves in recent history and it did an amazing job of humiliating nearly everyone trying to trade it.

October’s sell off triggered the highest volume we’ve seen all year, but the subsequent rebound has been much more sedate. While many prognosticators claim the low-volume rebound shows lack of conviction, they are misinterpreting this as a bearish phenomena. While the lack of conviction is real, the contrarian investor sees this as a bullish development. It shows a huge number of recent sellers missed this rebound. With every new high, the market is leaving them further and further behind. And the pressure is building for them to jump back in. These regretful sellers are the source of the low-volume buying that will propel us higher into year-end.

While the market is setting up nicely for a chase higher, we need to be mindful of support. A dip back under 2,000 or the 50dma so soon after reclaiming them shows larger problems are lurking under the surface. It is okay to own the market here, and sideways trade that dips back to 2,000 is normal and healthy, but failing to hold support would be a major concern. Trade accordingly.

Jani

Enjoy the Ride

By Jani Ziedins | End of Day Analysis

Source: Stocktwits $SPY Sentiment 11/6/2014

End of Day Analysis:

Today marked another record close. It is amazing how far we’ve come in three-weeks; from the depths of despair to all-time highs.

It’s been a volatile ride and most traders don’t know what to make of it. Stocktwit’s SPY sentiment still shows bears outnumber bulls on their stream, 55% to 45%. This is well below the 58% bullishness we saw the last time we were at these record levels back in September. While stocks have recovered, sentiment clearly has not. And even more interesting is sentiment actually trended lower while the market broke through the 50dma and 2,000. This shows a large number of traders are increasingly skeptical of this rebound.

Since this is a contrarian blog, the more skeptical the crowd is, the more bullish I become. Many traders bailed out during the plunge to 1,820 and these sellers are watching in stunned disbelief as this market keeps setting record highs. In truth, many are hoping for the the rebound to fail so they won’t feel so foolish for selling at much lower levels. But the contrarian sees these regretful sellers for what they really are, the next round of buyers. While they won’t all come rushing to the market at once, their fear of a market selloff is slowly giving way to fear of being left behind.

The risk of sitting out of this rally is especially acute for institutional managers that lightened up in October. Since the market moved so fast without them, they will start feeling the pressure to chase as we get closer to year-end and they face the prospect of yet another year underperforming the “dumb” indexes. They can only wait so long for the market to breakdown before they will be forced to start chasing.

So far the market is acting well and there are no signs we need to take profits yet. This gradual climb higher shows regretful sellers are buying back in and as long as their demand props up the market, we should continue higher. While it would be normal to see some sideways trade, failing to hold 2,000 support will be a concern. If the market continues under the 50dma, then we really need to worry. But as long as the market holds support, relax and enjoy the ride.

Jani

Why the Election Doesn’t Matter.

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

A little weakness on election day, but this was expected. We’ve come a long way in a short period of time. Resting here is normal and healthy.

Uncertainty on election day is also fairly typical as those who wanted to trade their predicted outcome have already made their bets and those that are not sure will wait until tomorrow to trade the result. This creates a lull in trade on the day of.

If the GOP wins the Senate, or doesn’t win the Senate, it doesn’t really matter to the market. After a few days of volatility and partisan pouting, it will move on to whatever comes next, like November’s economic and jobs data.

If anyone doubts this, just consider the last election cycle. The market initially cratered off on Obama’s reelection as emotional partisan traders sold in droves. But they missed out when the market rallied 42% over the next 2-years. This caught the partisan biased traders flat-footed when they assumed another four years of “socialist rule” would ruin the economy.

In truth, a divided federal government is good for markets because that leads to gridlock, status quo, and predictability. No matter what happens with the Senate, not much will get done with Obama’s veto stifling the Republican agenda so we should have a fairly predictable two-years left until the more meaningful presidential election cycle.

Jani

Misfortune

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis:

Stocks ended flat following Friday’s record close. The lack of profit-taking and defensive selling is encouraging, especially if it continues through Wednesday.

The market feels dramatically different than it did two-weeks ago. The fear that consumed it and lead to a series of dramatic down-days largely disappeared. Traders shifted from fixating on negative headlines to cheering every nugget of good news. But it is wrong to say sentiment made a U-turn this quickly. Much of the anxiety remains, the difference is those who are sacred no longer own stocks. After they finished jumping out of windows, we ran out of sellers and the resulting tight supply launched us higher. Basic supply and demand at work.

What makes this a bullish setup is we have confident owners that either held the 10% dip, or had the courage to jump in and buy the plunge. This is both a brave and stubborn group, meaning they are extremely reluctant sellers. That tight supply is why prices have risen as quickly as they have. On the demand side, there is a huge number of regretful sellers that bailed out during October’s panicked move lower. Many of these sellers will come crawling back to the market in the next few weeks and months as the fear of a market crash is replaced with the fear of being left behind. Their misfortune selling low and buying high is what will keep this old bull market going even longer.

It is unreasonable to expect the market to continue the recent rate of gains, so plan on a sideways consolidation. A dip back to 2,000 or even 1,990 is healthy and constructive given how fast the rebound moved. If selling spirals out of control and undercuts the 50dma, then all bets are off and there is a good chance October’s selloff was only a preview of worse things to come. But for the time being, the outlook remains cautiously optimistic.

Jani

Round Trip

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis:

Despite its detractors, the rebound continues, this time pushing up to 2,000.

October has been one of the most painful months in years. Obviously the 10% plunge to 1,820 crushed bulls’ spirits, convincing many to sell reactively at steep discounts. But just as shocking was bouncing as quick as we fell. It started as the selloff bears have been predicting for years and they jumped on the short bandwagon with reckless abandon. Unfortunately, rather than take quick profits, most bears were whacked by this historically powerful short-squeeze. They climbed over each other to buy back their shorts and provided the bulk of the lift from 1,875 to 1,975. But as we return to record highs, most bears have already covered for a loss. Without their buying, what keeps pushing us higher? Now the market switched back to humiliating bulls, this time piling on a mountain of regret for anyone who sold the dip. Two-weeks ago they sold defensively, fearing catastrophic losses, now they are buying, fearing being left behind.

The ironic thing is despite the towering losses many traders took this month, October will be a fairly good month, setting up for a very respectable 1% gain. There is a huge swath of investors wishing they were up 1% for the month. But their pain is someone else’s gain.

But enough reflection, where do we go from here? Expect the rate of gains to slow as the market struggles with 2,000 resistance. This consolidation could last days or weeks, but plan for an eventual upside breakout. The recent plunge flushed out almost all the available supply. Anyone that held through a 10% selloff demonstrated an iron stomach and won’t be selling any time soon. That keeps supply tight and makes it easy for the market to continue rallying on low volume into year-end as regretful sellers crawl back into the market.

Jani

The Fed Speaks

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

Another volatile, but ultimately uneventful session. While the spread between the day’s high and low exceeded 20-points, we ended down less than three.

The headline event was the Fed’s policy statement and ending of QE. This was widely expected, but they also removed language about considerable slack in the labor market. To many this implies a sooner increase in interest rates and was enough to send the market into a quick, 10-point selloff. But rather than cascade lower, supply dried up near 1,970 and the market bounced, nearly recovering all the day’s losses by the close.

The dip tested 1,970 support and the 50dma, but we held both. This is encouraging and gives credibility to the young rebound. If the market was teetering on the edge of another emotional plunge, this weakness more than enough of an excuse to set it off. But instead of rushing for the exits, most owners were indifferent and that apathy tightened supply, leading to the late bounce.

While holding 1,970 is encouraging, we need to keep a close eye on these levels in coming days. If we slip under 1,950 by Friday, things could get ugly in a hurry. But close the week above 1,970 and the market is moving past the fear and uncertainty that gripped us in the first half of October.

Jani

A little giveback

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

End of Day Update:

Stocks snapped a powerful, three-day win streak, giving back nearly 25-points from the intraday high. Under normal circumstances this would qualify as a wild ride, but given recent volatility, this was a fairly benign pullback. And we shouldn’t be surprised to see the market run into some headwind as traders lock-in a 130-point bounce off recent lows.

1,950 has been a meaningful technical level going all the way back to June, and it was again today. We rallied up to this level early in the day, but couldn’t break through and that is when the liquidation began. There was no real headline driving either buying or the selling, meaning most traders are still reacting to last week’s emotional rollercoaster.

Right now we find ourselves stuck between the 200dma and the 50dma and will likely remain here for a bit longer. Today’s weakness will rekindle anxiety in those that regretfully held through the dip to 1,820, compelling them to sell proactively before they risk going through that pain again. That doubt and fear could easily push us back to the 200dma, but the real test comes next. Does the market panic and plunge through the 200dma on its way to undercutting the 1,820 lows. Or will calmer and more confident value investors shrug off the volatility and take advantage of emotional selling to buy their favorite companies at a discount?

While the bounce remains fragile, a dip to the 200dma and 1,900 is a normal and healthy part of building a sustainable rebound. The time to worry is if we fail to hold support so soon after reclaiming it.

Jani

Another sigh of relief

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Stocks continued last weeks rebound and closed just shy of the 200dma. Quite a reversal of fortune from the breathtaking plunge to 1,820 only days ago. Today’s strength is especially encouraging since it came on the heels of another European selloff. This shows many in the US are coming to terms with global weakness and they feel it is already baked into current US equity prices.

Getting to the technicals, 1,900 and the 200dma are significant resistance levels and seeing the market struggle with them in coming days will be no surprise. But ultimately they should only be speed bumps on our way to the 50dma. How the market trades when we return to 1,950 will be far more insightful in determining what comes next.

The big concern is if 1,950 forms the right shoulder in a much larger head-and-shoulders topping pattern. Failing near 1,950 and then undercutting the 1,820 lows means we have a lot further to fall and this could be the 20%+ correction many have been waiting for. But don’t worry too much about this since it is the worst case scenario. Most likely recent volatility flushed out any would be sellers and anyone who held through the plunge showed they are married to their positions. While this is a reckless attitude for traders to take, if we know they won’t sell, then we also know supply will be tight and that supports prices in the near-term.

A down-day or two is nothing to get excited about as long as the selling is rational and orderly. Some people who were paralyzed by fear during the dip to 1,820 will naturally sell the bounce they were praying for. But once these regretful owners finish selling, look for a surge of buying to follow a break above 1,900.

Jani

Don’t Panic

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Today’s modest up-day halted a three-day, 100-point rout. The question everyone is asking is if this signaled the end of selling, or is just another temporary reprieve on our way lower. Volume was off the chart, even exceeding the pace of the last few days of free-fall. While we are only 7% from all-time highs, it sure feels a lot worse than that.

The disappointing thing about today’s price-action is we were 20-points higher before another late-day collapse pushed us back near break-even. But maybe this isn’t a bad thing. The last few strong bounces turned out of be sucker’s rallies. A more measured response to the selling could be a welcome alternative to this month’s wild volatility.

The tone we set on Wednesday will go a long way to letting us know what happens next. Another free-fall day and who knows where this thing will stop. But a sideways day could indicate buying is finally catching up with selling. There always comes a point in every correction where prices become so attractive, deep-pocketed value investors can no longer resist the urge to snap up discounted shares from desperate sellers.

But that is the rational response and recently the market’s been anything but. In the wild, our ancestors were well served by adopting emotional cues from others in the clan. When everyone else was running, they started running too because those that stuck around to see what all the fuss was about quickly became lunch. And the same thing happens in the market. Few sellers over the last few days could clearly articulate why they were selling, which means they were selling primarily because everyone else was selling.

The VIX is at the highest level in over 2-years. Every other time we approached this level, that signaled an imminent bottom and is likely the case here too. But imminent can mean different things. Obviously that includes a bounce tomorrow. But 48-hours from now also qualifies as imminent, even if it means falling another 75-points.

The thing most investors need to keep in perspective is those with a longer-term outlook, this weakness is a blessing. While it always feels good to watch our accounts swell in value, there are only two prices that matter; what we paid and what we got when we sold. We want prices to be lower when we buy. Anyone who continued to invest in their 401k during the 2008 meltdown has seen those contributions more than double in value. They would be poorer today if we didn’t have that market crash. Markets go up and markets go down. The most successful are the ones who don’t let it get to them.

Jani

Easy Come, Easy Go

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Again the market bumped it’s head on the 50dma, giving back all of Wednesday’s gains and then some on exceptionally heavy volume. This is the most volatile trade since 2011 and it is doing a fantastic job of shaking off the summer’s complacency. We are a hair above recent lows at 1,925 and within easy striking distance of 1,900 and the 200dma. Given how volatile we are trading, we could easily tag these levels within the first hour of trade on Friday.

While every dip over the last several years presented a great buying opportunity, the lack of a tangible headline driver and huge volatility make this time feel different from the Taper Tantrum, Fiscal Cliff, Greece, and other recent selloffs. But this back-and-forth also feels different from previous runaway selloffs like the 2011 S&P Downgrade correction that collapsed over consecutive days. Given the lack of recent precedent, it is harder to anticipate what comes next.

While the financial press and talking heads blame the generic catch-all “global slowdown” for this selloff, weakness in Europe and a slowing Asia are nothing new. So why is it all of a sudden are recycled headlines causing owners to sell en mass?

First we need to segregate traders by timeframe to identify who is prone to sell this weakness. Since we are less than 5% from all-time highs and virtually every buy-and-hold investor is sitting on huge profits, few of them are hitting the panic button and we shouldn’t expect the average 401k investor to panic. Next come the medium-termed investors who still think the economy is on the rebound and expects prices to be higher over the next couple years. These guys are not likely to sell and are probably looking at this weakness as an opportunity to buy stocks at a discount. The final group is the shorter time-framed swing-traders who try to time each gyration. These are the guys buying and selling each 50-point move. And while they are exceptionally active, they are also the smallest segment of the money in market.

Long- and medium-term investors are unlikely to change their three- and five-year economic outlook based on these ambiguous headlines, so we should expect them to continue holding. Shorter-term investors are reacting to these moves and given recent volatility, the market has already tripped up a large number of them, reducing the number of them left to sell.

While a dip under 1,900 and the 200dma seems highly likely at this point, both bulls and bears should expect a bounce shortly after. The bull is looking for a decisive rebound to new-highs while the bear is expecting the right-shoulder of a head-and-shoulder pattern. Trading is never easy and the answer will only be obvious in hindsight.

Jani

Fed Saves the Day

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Stocks surged to one of the largest gains of the year following accommodative language from the Fed. But it wasn’t all smooth sailing when early trade saw us slip to 1,925, ever so slightly undercutting last week’s lows. If this holds, that counts as a double-bottom, one of the most common bottoming patterns.

While journalists and talking heads credit today’s strength to the Fed, the news was actually quite bearish. The Fed is concerned about weak global growth and how a strong dollar will adversely affect the domestic recovery. But the half-full crowd cheered because that delays the inevitable rate hikes and who doesn’t like cheap money?

But regardless of the headlines, there were only so many people left to sell following the last several weeks of gut-wrenching volatility. Once the pessimists sell, they no longer have a vote in what the market does next. Those that held through the weakness and those that bought it exhibited confidence and their conviction kept supply tight and propped up prices. While the dip was unnerving, it is very Chicken-Little like to let a 4% pullback make us think about jumping out of windows. But that is the nature of markets; dips only work when they convince everyone the world is imploding.

Thursday is an important day for both technicals and sentiment. While today’s rebound was impressive, it still left us shy of the 50dma, something that acted as resistance over the last week. Stall again and there is little doubt we are headed back to 1,900. But if we break through, look for a continuation to all-time highs in coming weeks as bears scramble over each other to buy back their short positions. At the same time, don’t expect fireworks since moves tend to be fairly symmetrical. A 75-point dip typically only leads to a 75-point breakout, but that would push us close to 2,100 by year-end.

The bigger concern is if the rebound stalls and the selloff spirals out of control, shattering the nerves of previously confident owners, turning them into fearful sellers. There is no doubt we have a date with a larger correction, the only question is if happens this fall, or waits until next year. But, rather than guess, we will let the market show us.

Jani

A painful, but productive swing

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

The relentless selling continued in the first half of the day, but in typical fashion, the market overdid it and snapped back to breakeven by the close. It was a fairly dramatic reversal, covering nearly 50-points combined. Volume was brisk for the third-day in a row as traders both bailed out as the pain got too great and chased the ensuing afternoon rebound.

Again there wasn’t an individual headline driving the selling and the weakness felt more herd-like when many traders dumped shares simply because everyone else was. But there always comes a point where we run out of sellers. When no one is left to sell, supply dries up and prices rebound. No matter what the headlines, tight supply props up prices and that was the case this afternoon. If today’s low holds, the bull market remains intact because this is a higher-low than August’s 1,900 dip. While pullbacks always feel like the world is ending, as long as we keep stepping higher, all is well with the market.

But what are the chances this low will hold? Markets move for one of two reasons. New information causes the majority of traders to adjust their forward-looking outlook. Whey they change their mind, they buy or sell stock to reflect their new expectations and this one-sided trade moves markets long distances. The other source of volatility is normal fluctuations in supply and demand. The former is what big market moves are made of because the new information converts bulls into bears or bears into bulls. It takes a fundamental shift in the underlying economics to drive these major changes in sentiment and so far the economic data we keep getting points to a slow, but steady recovery in the US and a struggling recovery in Europe. None of this is new and unlikely to change anyone’s mind. When bulls stay bulls and bears stay bears, what we are left with is the market’s normal gyrations due to minor imbalances in supply and demand. This is when we go a little too high and then turn around and go a little too low. Obviously the push to 2,020 a few weeks ago was a little too high and now it appears like 1,925 is a little too low. During these typical gyrations it is most profitable to buy weakness and sell strength. If this bounce holds, we should not violate today’s low. The best trade is buying the dip with a stop under 1,925.

Jani

Capitulation bottom

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

It was another brutal day, smashing through prior support at 1,965 and ultimately closing under 1,950. Volume was some of the highest we’ve seen all year as traders reacted to both headlines and technical weakness. But the thing we must remember is routine dips only happen when everyone thinks the market is on the verge of plunging even lower. If everyone was confident this was little more than a buyable dip, they wouldn’t sell. If no one sells, prices don’t dip. Therefore by rule, to get the dip, we always need to scare a large number of people into selling. And clearly we’ve done that here. But what comes next? Is this really just another vanilla dip? Or the start of a larger correction?

Despite all the prognostications of the bull’s demise, we haven’t done any real technical damage yet and the up-trend remains comfortably intact. The real threat won’t come until we undercut August’s dip to 1,900, making a new lower-low. Bouncing anytime in the next 40-points still counts as a higher-low and extends this resilient bull market.

The real test will come in the next few days. Capitulation bottoms typically smash through support on huge volume. This is the point of maximum pain where previously confident owners cannot bear the mounting regret of not selling earlier and reactively pull the plug. Unfortunately for many, this breaking point typically happens near the bottom of the move. Once the last wave of impulsive selling washes through the market, supply dries up and we bounce. Today’s dip had all the hallmarks of a traditional capitulation bottom.

But nothing in the market is ever clear-cut and one-sided. Rather than bounce, there is the real possibility today’s weakness will convince even more owners to sell in coming days, once they are pushed to their breaking point. Nothing rattles confidence like seeing everyone else running for cover and a bad open could lead to another bloodbath.

This appears like another cookie cutter dip and capitulation bottom, but we will know the answer for sure in a couple of days. A decent trade is buying the dip and using recent lows as a stop.

Jani

Contradiction

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Stocks slipped on the final trading day of the third quarter, but remain inside the recent consolidation. 1,965 has been support over the last four days as the market struggles to reclaim the 50dma. But the problem for the optimist is markets usually snap back decisively from oversold levels, meaning we are not at oversold levels here. But that is only half the story.

Most of the headlines filling the front page have been bearish. There is so much political discord in the world it takes more than one hand to count all the active hotspots. We also have persistent signs of economic sluggishness. And just tonight, the potential of a spreading pandemic. But for all the negativity, the market is only a couple percent from all-time highs. Is the market being naive, or does it know something the rest of us don’t?

It is too easy to assume the market doesn’t have a clue and will eventually wake up to what is so obvious to the rest of us, but unfortunately beating the market isn’t that easy. More often than not, when we disagree with the market, we are the ones who have missed something. By default the market already knows everything we know since it is made up of people who have all the same information we do. Taper, rate hikes, Ukraine, Syria, etc. These stories have been around so long we can no longer call them news. Anyone afraid of these headlines sold long ago to someone who wasn’t afraid to own this risk. When there is no one left to sell a widely expected headline, it becomes fully priced in. When markets hold up the face of bad news and refuses countless legitimate excuses to sell off, it shows us it doesn’t want to go down. No matter what we think should happen, we have to respect the market’s resilience.

Now it’s time to resolve the contradiction between a market that doesn’t want to go down with one that isn’t oversold yet. It all comes down to timing. In the near-term, the inability to bounce decisively and put the 50dma behind us means there is a good chance this selloff is not complete. Be prepared for one more dip under recent lows and testing support at 1,950 is a very real possibility. But rather than signal the start of a larger selloff, this will be the capitulation point before rebounding to fresh highs. Expect more near-term weakness, but this is yet another buyable dip.

Jani

Higher-Lows

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update: 

Stocks took it on the chin for a third day following Friday’s early surge to record highs. This dip leaves us less than 10-points from the 50dma and just above recent support at 1,980. The primary catalyst for this weakness appears to be a selloff in small-cap stocks. While the S&P500 is less than 2% from all-time highs, the Russell 2000 is off 8% and continues the shift from high-flying, speculation stocks to blue chips.

Wednesday will be an important day for the markets with a looming challenge of 1,980 support. This technical level stretches back to early July when it acted as resistance. But as we often see, resistance became support and we bounced decisively off this level a couple of weeks ago. Will selling stall and buyers step in at this level again? We will know the answer in a few short hours.

If stocks stop sliding, look for a rebound to record highs. On the other hand, failing to find support means we should expect the selling to continue to 1,950. While this sounds easy, the real challenge is not falling for the head-fake where the market dips under support, flushing out the reactive traders, before reversing and finishing the day higher. If this were easy, everyone would be rich.

Market sentiment is cooling off slightly, but it remains at bullish levels. While overconfidence could ultimately cause the demise of this bull market, contrary to popular opinion, confidence and complacency is bullish in the short-term. Confident owners don’t flinch in the face of a 2% dip to support. The lack of nervous owners keeps supply tight and props up prices. This has been the story for the last 12+ months and there is no reason to assume the tide is changing here. We continue making higher-highs and higher-lows and the best trade is sticking with what works.

Jani

When is Bad Good?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update:

Stocks fell further on Monday following Friday’s reversal from all-time highs. Volume was well above average as we broke under prior support/resistance at 2k. While the daily chart gives the impression the market sold-off through the day and finished weak, the intraday chart shows we found a floor in late-morning trade and moved sideways the rest of the day. While this seems like a minor nuance, it is actually fairly significant.

The market gapped lower at the open and continued sliding fairly aggressively until just after 11am Eastern. This pushed us under the psychologically important 2k level and set off a wave of automatic stop-losses littered under support. But rather that accelerate the selloff, these stop-loss orders were the last of the selling before we found a bottom above 1,990. This weak price-action dared owners to join the selling, but most resisted the temptation and stood confidently by their positions. If this selloff chased off the weak, then all we are left with is the strong.

While I’m not super bullish on this market, the stalled selloff shows supply dried up fairly quickly and that bodes well for a bounce to new highs in coming days. If the market finds support Tuesday, then the selling is done and we are headed higher. If we breach 1,990 and continue lower, then Monday afternoon’s support was a false bottom and the 50dma is in play. Trade accordingly.

Jani