All Posts by Jani Ziedins

Extending bounce

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

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

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

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

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

Source: Stocktwits SPY stream 7/14/2014

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

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

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

Plan your trade; trade your plan

A bullish loss

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

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

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

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

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

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

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

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

Plan your trade; trade your plan

Finding support

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks found support above 1,960 and recovered most of Tuesday’s decline, but today’s up-volume was significantly lower than the selloff.

MARKET SENTIMENT
Confident owners chose not to not join the short-term traders pushing the market down the last couple days.  The lack of follow-on selling by a wider group of owners cut off supply and the market bounced as we ran out of sellers.

While the wave of selling ended rather quickly, we need buyers to push us back up to record highs and it often takes several days of support for prospective buyers to regain their confidence.  This period of no one selling and no one buying is what gives us the sideways chop that shows up as a base on the chart.

TRADING OPPORTUNITIES
Expected Outcome:
Baring a catastrophic open Thursday, the selloff died rather quickly.  But that isn’t a surprise.  In a complacent market, confident owners don’t want to sell, keeping supply tight and preventing downside moves from building momentum.  While it is easy to say the selloff is dead, if buying dips were easy, everyone would be rich.  We should expect the market to bounce around for a couple of days, even undercutting Tuesday’s 1,960 lows, before resuming the push to 2,000.

Alternate Outcome:
Today’s bounce could appear to be be the obvious buy-the-dip trade.  The problem with obvious trades is they rarely work.  If this was a false bottom, expect the selling to resume in short-order.

Trading Plan:
Closing above 1,960 Thursday and Friday tells us this market is headed higher.  If selling accelerates after breaking 1,960, expect the slide to continue.  Trade accordingly.

Plan your trade; Trade your plan

Testing 1,960

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks sold off for a second day, testing prior resistance at 1,960.

MARKET SENTIMENT
As dramatic as a 1% selloff from all-time highs feels, it is an indication of just how complacent we have become.  Times have been a little too easy when two down-days make us feel like the sky is falling.

While conventional wisdom says complacency is bearish, that is the long-term prognosis.  In the near-term it is highly bullish because confident owners refuse to sell their stock no matter what the headlines say.  The resulting tight supply drives prices up to dizzying heights.

Weakness over the last two-days was driven by short-term traders trying to time the market.  They saw last week’s pop to record highs as a little too much and decided to sell it this week.  Some of these are swing traders locking-in profits, others are bears shorting a market that’s gone too high.  While these short-term traders are very active, they have shallow pockets.  They can move markets for a few days, but after that it takes follow-on trading by big money to extend a move.  Here short-term traders are afraid of an imminent market pullback, but the vast majority of shareholders are comfortable with these dips because they learned long ago that they always bounce back.  And so far they have been right.  Without a fundamental catalyst to shatter the market’s confidence, there is little reason to expect this time will be any different.

This market will breakdown like every other one before it, but it will take some unsettling news that sends fear through the hearts of previously confident owners.  While that could happen at any moment, these last few days have been little more than short-term traders selling stock since no one can point to any one thing driving this selling.  Without that, there is nothing to send the larger herd rushing for the exits.

TRADING OPPORTUNITIES
Expected Outcome:
The market has only been down more than two days in a row four times this year and all but one of those one of those streaks included a down day of less than 0.1%.  This is a complacent market and the dips keep getting smaller before the selling stalls and the dip-buyers rush to the rescue.  We found support at 1,960 Tuesday and if we hold this level over the next couple days, the selloff is dead and the market will likely bounce to 2,000 in coming weeks.

Alternate Outcome:
While complacent owners are extremely bullish, running out of buyers is just as bearish.  If buyers are afraid of these record highs, they will let prices slip to more attractive levels before coming to the rescue.

Trading Plan:
Long-term holders should keep holding.  Nimble swing-traders can buy support at 1,960 if we continue holding it.  Shorts should lock-in profits if we don’t crash through 1,960 Wednesday.  If we slice through 1,960 and cannot find a bottom, we will likely fall to 1,640.  Fail that and we are headed to 1,620.  But rather than be the start of a bigger correction, this is just another buyable dip and shorts should lock-in profits instead of get greedy.

Plan your trade; Trade your plan.

One step back

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks pulled back from record highs, giving up a fraction of a percent, but are still holding above recent resistance near 1,960.  The market continues to levitate 50+ points above the 50dma, something it last tested back in mid-May.

MARKET SENTIMENT
Noting boosts investor optimism like a long string of new highs.  Fear of heights and calls for a correction have been drowned out by frenzied dip-buying.  In the first six-months of the year the S&P500 has only experienced three occurrences with three down-days, two of those barely qualify with losses of 0.1% or less.  And we  still have yet to string together more than three down-days.

While that is a worrying sign, the good times continue until they don’t.  So far owners remain reluctant to sell shares no matter what headline pops up.  Their conviction that every dip is buyable prevents us from having a dip.  While we all know this cannot last forever, it almost always goes on longer than anyone dreams possible.

The biggest prop behind this market is the sheer size of all the money on the outside the market looking in.  These regretful investors made a hasty decision to bail out during the financial crisis and now that everyone around them is making money, the pressure is on to overcome their fears and pick up some of this easy money.

TRADING OPPORTUNITIES
Expected Outcome:
Finding support above 1,960 for a couple more days suggests this market is headed to 2,000.  Breakdowns happen quickly and holding these levels shows buyers are willing to continue buying these levels and few are selling and locking in gains.

Alternate Outcome:
It’s been a good run since they May breakout and swing-traders will likely lock-in profits if we dip under technical support.  That selling could trigger wider selling and push us back down to the 50dma.

Trading Plan:
It is waaaay too late to buy this strength.  Anyone out of this market should wait for a pullback.  Bears should also avoid jumping too aggressively on any weakness since every other dip this years has been enthusiastically bought.  At this point we just wait for the complacency to pass and allow the next wave of emotion to create a trading opportunity.

Plan your trade; trade your plan

Disaster Averted

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks plummeted out of the gate, but recovered most of those losses by the close.  Early weakness pushed us under prior support at 1,950, but the selling stalled minutes later as we bounced off 1,945.  Volume was surprisingly light for such a wild ride.

MARKET SENTIMENT
Bears who claim this market is complacent are 100% correct, unfortunately for them that complacency is working to the bull’s advantage.  After a horrific open, bears had the perfect setup for an extended and bloody two or three percent selloff.  What happened instead?  Owners shrugged and continued holding, abruptly stymying the wave of selling.  What was supposed to result in a mad rush for the exits was met with a yawn as complacent owners stayed put.  Without supply flooding the market, it was inevitable we would bounce and that is exactly what happened.  The notion of complacent owners is further evidenced by the low volume that showed how few people reacted to Thursday’s dramatic open.

Conventional wisdom says complacency is bearish, but as we saw first hand today, in the near-term complacency is quite bullish.  Only over time does complacency become a problem after most prospective buyers are already fully invested and there is no one left to buy.  As we keep making new highs, clearly that is not the case yet.

TRADING OPPORTUNITIES
Expected Outcome:
Holding 1,950 through Friday will show bulls are still in control of this market.  Failing to maintain this level means we are quickly running out of dip-buyers.  While no one knows for sure which way this will go, the market will tell us real quick what its intentions are.  Breakdowns happen shockingly fast, so if this pause stretches across multiple days, that tells us Wednesday’s selloff was little more than a head fake.

Trading Plan:
1,950 is quickly shaping up as the line in the sand for both bulls and bears.  Hold above this level, then bears should cover their shorts.  Break under it and bulls should take some profits off the table.

Plan your trade; trade your plan

What’s the next move?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks bounced from yesterday’s selloff after finding support near 1,950.  This rebound recovered two-thirds of Tuesday’s decline on average volume and puts us within a few points of all-time highs.

MARKET SENTIMENT
Bulls are breathing a sigh of relief as dip-buyers rush in after only a single day of selling.  It sure feels like this is the easiest market ever.  Anytime stocks go down, buy more.  Repeat over and over until obscenely wealthy.  The problem with obvious trades is they rarely work for long.

If we looked strictly at active market participants, they are for the most part invested in this market and under normal conditions we would be setting up for a normal and healthy down-wave.  The wildcard is investors still sitting out following the 2008 carnage.  Are they finally warming up to this stock market that does nothing but go up?  While these participants are usually the last to the party and suggest we are getting closer to a top, their buying in the near-term keeps the good times rolling.

Since buy-the-dip has become such an obvious trade, it is not surprising we bounced Wednesday.  The bigger question is if this bounce is sustainable or just one last gasp of hope before returning to the 50dma.  While no one knows for sure, the market will let us know which way it wants to go real quick.  An absence of buyers on Thursday tells us to expect more selling in the near-term.  But if we hold 1,950 into Friday, it means owners are not selling and without excess supply, prices will hold steady.

TRADING OPPORTUNITIES
Expected Outcome:
While this buy-the-dip trade is getting a bit too obvious, as long as people are willing to throw money at record highs, we’ll keep marching higher.  Picking tops is tricky business, but if 1,950 support barely lasts 24-hours, that shows demand is weak and we have lower prices in our future.

Alternate Outcome:
If this were easy, everyone would be rich.  Markets move higher as they turn cynics into believers.  There are still a lot of people who don’t believe in this market and those are the next round of buyers when they become more afraid of being left behind than they fear heights.

Trading Plan:
If bulls cannot defend 1,950, owners should consider locking in profits and bears can jump on the short side.  Use recent highs as a stop-loss.

Plan your trade; trade your plan

Is it time to panic?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Today brought a fairly substantial reversal in fortunes as we tagged a record high in early trade before collapsing nearly 20-points to 1,950 support.  The 50dma is still 50-points underneath us and the 200dma is way back near 1,825.

MARKET SENTIMENT
Today served as a wakeup call for laxidasical bears who were growing accustomed to a never-ending climb higher.  There was no obvious catalyst to this selloff and the biggest piece of the news showed the housing sector improving more than expected.  Seeing the market reverse from fresh highs on good news is rarely encouraging and enough to give us pause.  The big question is if this is the start of something larger or just another buyable dip on the way higher.  As we find ourselves in the middle of summer vacation trade, these lighter volumes can lead to increased volatility due to smaller trades carrying more influence.

Anyone who thinks bulls will panic and rush for the exits is going to be disappointed.  Complacent owners expect this weakness to bounce like it has every other time.  The greatest trade of the last two-years has been buying the dips and the masses are finally waking up to this trend.  This is how a paranoid market that flinched at every mention of Sequester, Fiscal Cliff, Cyprus, and Taper transitions to one that barely budges as war breaks out in Eastern Europe and the Middle East.  Reactive selling at any point over the last two-years invariably lead to regret as those sellers watched the rally leave them behind.  There are only so many times you can fool a person before they wise up.  The problem for many is the more popular something becomes in the market, the less likely it is to keep working.  While everyone’s been calling for a correction since early 2013, eventually they will be right and we are closer to that day than ever before.  While no one can predict where this market will top, it is riskier to own when everyone feels safe and with the market near record highs and the VIX near record lows, it is hard to claim this market is fearful.

TRADING OPPORTUNITIES
Expected Outcome:
Trends continue until they don’t.  While it is clearly premature to call the bull market dead, we all know markets go up and down.  With 20 of the last 27 trading days ending in the green, it isn’t unusual for us to pause and see a few days of distribution.  We have support back at 1,925, 1,900 and the 50dma.  It wouldn’t surprise anyone to see us retest these levels.  And a bull should be hoping for this since a little backfilling makes a continued rally more sustainable.

Alternate Outcome:
Every dip has been a buying opportunity and will continue to be a buying opportunity as long as chasers have money to throw at the market.  We already know owners no longer flinch at headlines or weakness, so it will take an exhaustion of demand to defeat this bull.  Figuring out when everyone has bought in and there are no more buyers left is one of the hardest things to do in the market.  Since a trend continues countless times but only reverses once, it is more likely this dip will bounce like all the others before it.

Trading Plan:
While today’s reversal felt dramatic, we are only 1% from the highs and a long way above the 50 and 200dma.  Given markets move two-steps forward, one-step back, even a bull should wait a couple of days to see how far this step back goes.

Plan your trade; trade your plan

Holding the highs

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
An uneventful day with only 5-points separating the highs from the lows, ultimately finishing unchanged.  The market is 60-points above the 50dma and aside from Friday’s elevated quadruple witching, volumes have been below average.

MARKET SENTIMENT
Stocks are at record highs and the VIX near record lows.  There has never been a more comfortable time to own stocks and this complacency has many owners holding regardless of headline risk.  This lack of interest in selling keeps a lid on volatility and every five- or ten-point selloff stalls and bounces when no one joins in the selling.  With so little supply hitting the market, it is extremely easy for the market to continue climbing higher.

But the lack of concern means we are closer to the end of this move than at the start of a new leg higher.  Sustainable rallies are built on the back of fear as they climb the proverbial wall of worry.  When no one wants to own the market, it allows the bold trader to buy stock at steep discounts.  But as the masses become comfortable owning stock, they will only sell if someone offers them a premium price.  This bouncing between discount and premium is what gives us the typical gyrations in the market.

Given where we are and where we came from, it is hard to claim sellers are dumping shares at a discount here.  Since humans naturally look at the recent past and expect the trend to continue, many traders are sitting on their stocks expecting the good times to continue well into the future.  And they will be right as long as we keep finding new buyers willing to pay even higher prices for stocks.  This is the basis for the “next greater fool theory”.  Many people continue holding stocks even when they know they are too high because they assume someone else will come along shortly who will pay even more money than they did, and so far they’ve been right.  But how long will the music keep playing?

TRADING OPPORTUNITIES
Expected Outcome:  Keep inching higher until something catches the market by surprise.
Everyone knows the VIX will not stay at 11.  What no one knows is why it will spike or when that will happen.  Will insurgents blow up a key pipeline in Iraq?  Will economic indicators start heading south?  Will a geopolitical event thrust uncertainty into western economies?  Will it be a natural disaster?  I have no idea what it will be or if it will happen next week, next month or next year. Knowing what will happen is easy, all the money is made getting the timing right.

Alternate Outcome:
There is no reason we cannot have another 30% year before the inevitable fall.  So far the right trade has been ignoring all the calls for a pullback and it will likely continue this way…..until it doesn’t.

Trading Plan:
It is more profitable to buy discounted stock and sell it at a premium than the other way around.  While buy-high, sell-higher can work in individual momentum stocks, the broad market is so large it rarely gets as carried away by the momentum trade.  We go a little too high and then we go a little too low and then we go a little too high again.  Repeat until either rich, broke, or confused.

It is hard to find discounts up here to justify the risk/reward of initiating new positions, but those sitting on profits can use a trailing-stop to protect their profits if things start to break down.  As for the shorts, you will be right at some point, the key is not getting killed between now and then.

Plan your trade; trade your plan

What bad news?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:55 EDT

Intraday Update

MARKET BEHAVIOR
Stocks are holding the recent breakout following a modest test of 1,925 support last week.  Volume remains light in the traditionally slow summer vacation months.

MARKET SENTIMENT
We are holding record highs in spite of negative headlines coming out of Iran and the potential for more political gridlock in DC.  With multiple days to digest these headlines, they are largely priced in and we shouldn’t expect further selling based on what we already know.  Markets crashes typically arrive with a sell first, ask questions later reaction to spooky headlines and the fact we held 1,925 support for a 4th day suggests this market is indifferent toward these concerning headlines.  Barring an unexpected deterioration in the situation, we should expect the uptrend to continue.

These headlines rattled nerves, but didn’t cause many people to hit the sell button.  Five-years into this bull market and nearly three-years since we’ve seen anything resemble market panic, investors have become very complacent.  While we all know this cannot last, in the near-term complacency is bullish because it means most owners are unwilling to sell no matter what is going on around them.  Their confidence keeps supply tight and makes this death-defying really possible.

TRADING OPPORTUNITIES
Expected Outcome: Higher in the near-term
Confounding the skeptics and finding support tells us there is little that will rattle this market.  While history reminds us this cannot last forever, in the near-term this “hold no matter what” attitude among stock owners keeps pushing us higher.  At this point it doesn’t seem like we will find a headline that sends owners running for the exits and instead this market will only top when we run out of optimistic buyers.

Alternate Outcome:
Markets rarely get things right the first time and this leads to over and undershooting.  Fears of Sequester and Fiscal Cliffs were clearly overblown.  This time we are largely ignoring civil war in Eastern Europe and the Middle East.  Under appreciating the risks involved in these situations leaves us vulnerable to a worse than expected outcome.  The higher we go, the harder we fall.

Trading Plan:
Anyone sitting on profits should have an exit plan.  Maybe that is proactive selling into strength or it is a trailing stop, but don’t let complacency cause you to let these profits evaporate when the market rolls over.  Bears waiting for this market to crack need to be patient.  These headlines out of the Middle East were the perfect catalyst, but since the weakness already bounced back, admit defeat and wait for something bigger.

Plan you trade; trade your plan

Holding support

By Jani Ziedins | Intraday Analysis

S&P500 daily at 3:32 EDT

Intraday Update

MARKET BEHAVIOR
Stocks are bouncing around today as they digest overseas headlines.  We are one percent from recent highs and nearly 50-points above the 50dma.  Prior resistance near 1,925 is acting as support and we are holding this technical level for a 3rd day.  Volume has been below average every day for nearly a month, but this is typical of light summer vacation trade.

MARKET SENTIMENT
Without big money’s steady hand, summer can be volatile as smaller traders have more influence.  This is especially true when the market is trying to digest worrisome headlines coming out of Iraq and a potential flare up of political discord in DC.  While we are only a few points from all-time highs, the market is anything but relaxed.

Ignore the headlines and buy the dip has been the rally call of last couple years and many are sticking to that game plan here.  Buyers showed up to defend 1,925 and so far are preventing any further selling.  Their cause is aided by confident owners unwilling to sell fearful headlines, keeping supply tight.  Last year the market jumped at the sight of its own shadow as we had temporary selloffs on headlines of sequester, fiscal cliffs, Arab spring, and taper to name a few.  This year prospects of war in Ukraine and Iraq are met with cautious optimism.

While it is encouraging to see the market hold up in the face of these headlines, the best profit opportunities come from irrational market moves.  While participants are nervous over these geopolitical headlines, no one is fearful enough to sell their stock at a discount.  After nearly two years of watching every dip bounce back to new highs has trained owners to hold no matter what.  With so few sellers, the future of this market rests on the buy side.  As long as buyers keep soaking up what little selling we have, the market will continue higher.  But every rally reaches a point where everyone who wants stock already has all they can hold and the market stalls on a lack of new money.

TRADING OPPORTUNITIES
Expected Outcome:
The longer we hold up in the face of these headlines, the less likely they will take us down.  Markets tend to roll over quickly and avoiding a precipitous drop as these headlines break means they are well on their way to being priced in.

Alternate Outcome:
Owners are demonstrating comfort with the risk/reward at these levels.  With such a little discount being offered to hold this risk, the market is telling us it doesn’t expect these events to deteriorate in any appreciable way.  That leaves buyers vulnerable to a worse than expected outcome that is clearly not priced in.

Trading Plan:
The best profit opportunities arise from emotional and irrational moves in the market.  Since no one is offering us a discount to hold this risk, there is little reason for us to own these headlines.  The same goes for shorting the market.  We had the scary headlines and the market didn’t flinch, meaning it will take something larger to crack this market.  At this point it seems we are in no-man’s land and where the market goes from here is a coin-flip.  If I were forced to pick sides, holding these levels suggests we will continue higher, but any degradation of the situation in Iraq could set of a mad rush for the exits.  With such a poor risk/reward, the best trade is to wait and see what comes next.

Plan your trade; trade your plan

Consolidating Gains

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:54 EDT

Intraday Update

MARKET BEHAVIOR
Stocks slipped modestly as they consolidate near the 1,950 level.  Early weakness brought us down to the low 1,940s, but dip buyers propped up the market and are defending these levels.

MARKET SENTIMENT
Unsustainable breakouts tend to rollover quickly when follow-on buying fails to materialize.  If we continue holding 1,940 for a fourth day, that suggests buyers still see value at these levels.  Of course we need to be extra cautious during the summer’s low-volume since smaller trades have a larger impact and we often see increased volatility.

Recent strength defies the skeptics but from a sentiment POV it makes perfect sense.  We’ve transitioned from a fearful market in 2013 to a greedy one in 2014.  While this rarely ends well, these moves go higher than anyone expects before breaking down.  By itself complacency is bullish because it means most owners are unwilling to sell no matter what the headline or price action.  They refuse to sell because they are confident any dip will bounce and so far they have been proven right.  In a self-fulfilling prophecy, lack of selling keeps supply tight and makes it easy for the rally to continue.

TRADING OPPORTUNITIES
Expected Outcome:
Markets move in waves and the risk of a pullback are highest following a strong move higher.  At best we digest these gains and trade sideways, at worst we retest recent support back near 1,900.  Either way the risk/reward to initiating a new position here is stacked against us.  Give the market a couple more days before rushing in.

Alternate Outcome:
Anything can happen during summer’s light volumes.  The pain trade has clearly been higher as everyone expecting near-term weakness is either out of the market or short.  These bears and cynics are scrambling to buy a piece of this market before it gets away from them and that reactive buying keeps pushing us higher.

Trading Plan:
We trade when the odds are in our favor and buying up here is little more than chasing performance. While this move could easily run toward 2,000 over the next few weeks, the market needs to catch its breath and we will have the opportunity to buy in a few days after the risk of a pullback fades.  If we cannot hold 1,940, then things get interesting.

Plan your trade; trade your plan

Another record high

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks surged into record territory, smashing resistance near 1,925.  Volume was below average, but the highest in a week as today’s gains gives us 12 winners out of the last 14 sessions.

MARKET SENTIMENT
Last year we had a laundry list of reasons to avoid this market, but this year people are struggling to find excuses to stay out.  While that has been bullish as the last of the holdouts buy in, market rallies are typically built on fear and uncertainty not calm and confidence.  After years of fearing a financial collapse around every corner, we’ve reached the point where most are more worried more about being left behind than the sky falling.  While that sentiment reversal pushed us to record territory, a lot of good news has already been priced in and there is little, if any, discount being offered to hold market risk.  While we can skate on thin ice all day long and never fall in, the lack of a risk discount leaves us more vulnerable the next time something rattles the market.

The higher we go, the harder we fall and is why periodic pullbacks are a critical part of every sustainable rally.  While we’ve had modest dips and consolidations along the way, most owners have grown accustomed to buying dips and have forgotten how scary and painful the market’s dark side can be.  While I was expecting summer weakness to refresh this market, it appears like we might climb through the summer, leaving us vulnerable to an even larger pullback in the fall.

2013 was the year of the half-empty market as everyone focused on the risks.  At the end of last year we transitioned to 2014’s half-full market where we embraced the nuggets of optimism and shunned any negativity.  Today we cheered the most aggressive rate policy in ECB history without pausing to ask why such dramatic actions are needed.

TRADING OPPORTUNITIES
Expected Outcome:
We will keep heading higher as long as buyers are willing to throw money at record highs.  This will continue as long as the fear of missing profits trumps fear of losing money.  But once that other shoe drops, the exits will be crowded.  While we all know this market will pullback at some point, no one knows when or why it will happen.  This is simply a waiting game and as long as the market continues heading higher, all is well with the world.

Alternate Outcome:
We are in a secular bull market and we can go many years without a meaningful pullback as long as there is new money waiting to come in.  Given how deep the 2008/2009 market crash was, there is still plenty of money sitting out of this rally.

Trading Plan:
Chasing record highs is the riskiest time to jump in and anyone not already in the market will be better served waiting for the inevitable pullback to at least 1,925.  Those lucky enough to be sitting on profits should move up their trailing stop and be ready to take profits if cracks start appearing.

Plan your trade; trade your plan

Holding gains

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:14 EDT

Intraday Update

MARKET BEHAVIOR
Stocks are mostly flat in midday trade following yesterday’s breakout.

MARKET SENTIMENT
Those with cash aren’t buying and those with stock aren’t selling.  Contrary to popular opinion, complacency is bullish because confident owners don’t sell and that keeps supply tight.  It only becomes a problem when we run out of buyers needed to sustain these levels.  So far this year market participants have been unwilling to chase stocks above 1,900 and we drifted sideways the first five months of the year.  Here we are again at the top of the trading range and asking ourselves if this is finally the real breakout, or yet another stall near the highs.

Last year’s relentless rally forced fund managers to buy a market they didn’t trust because they were more afraid of being left behind.  This year the market is only up 3% over the first five months and there is very little pressure on managers to chase performance.  In fact we are seeing the opposite in speculative names as everyone is trying to get them off their books.  But while tech stocks stumbled, the S&P500 and Dow are making new highs.  The biggest reason for the disconnect is few of these new issues are old or large enough to have been added to these broad indexes, so their selloffs doesn’t affect them.  But are these canaries in the coal mine and foretell doom and gloom for the rest of us?

It is easy to find bulls and bears in this market.  Depending on who you talk to, things are either great or about to implode.  The most scarce opinion is indifference toward this market.  In 2014, both bulls and bears have been wrong at every turn and the traditional summer doldrums are an unlikely place to break this logjam.

TRADING OPPORTUNITIES
Expected Outcome: At the upper end of an extended trading range
Buying weakness and selling strength has been the trade of the year and there are no signals this will change as we move into summer’s traditionally slow trade.  With the markets largely flat for the year, there is little pressure on managers to buy record highs and this gives them time to wait and see what happens.  Without big money getting behind this breakout, it is hard to see what else will propel us higher.

Alternate Outcome:
If this market continues rallying, that will pressure managers to chase.  While this is a more likely outcome this fall, it could happen earlier if we keep making new highs.

Trading Plan:
Buy weakness and sell strength.

Plan your trade; trade your plan

Finally a breakout

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
The S&P500 surged to new highs, decisively breaking the 1,900 barrier.  Volume was below average, but above last week’s lethargic pre-holiday levels.

MARKET SENTIMENT
Either this is the start of the next rally leg, or one last gasp before demand dries up and we slip into the traditional summer doldrums.  Today’s breakout was largely derived from European strength following expectations of more monetary easing by the European Central Bank.  While easy money is drying up in this hemisphere, the party continues on the other side of the globe.  In reality, this is a half-empty/half-full development.  Markets are addicted to cheap money, but central bankers reliance on stimulus shows these experts don’t have confidence in the underlying economic fundamentals.

Supply and demand wise, lighter holiday volumes make it easier for smaller trades to move the market.  Today we broke through well-defined technical levels, causing many traders to buy the breakout and/or cover their shorts.  Every other time we approached these levels, demand dried up as few buyers were willing to chase these prices.  Will this time be any different?

Market rallies are built on stocks recovering from oversold levels following a bout of irrational pessimism, or they coast higher on complacency and the assumption good times will continue indefinitely.  Its been a long time since trade was dominated by fear and pessimism, meanings this strength comes from the assumption of good things to come.  The best trading opportunities come from going against the herd.  If the herd believes we have nothing to worry about, then we should be worried.  Expectations of clear sailing mean most are fully invested and the lack of fear means there is ample capacity for a wave of panic to take hold.

TRADING OPPORTUNITIES
Expected Outcome: At the upper end of a summer trading range.
Big money managers often take time off in the summer and the junior associates rarely have the authority to initiate new positions.  This lack of demand is why summer volumes are often light and we typically trade sideways.  With so many managers dreaming of the beach, it seems unlikely they will chase this market, especially since we are mostly flat for the year and there is no pressure to keep up.

Alternate Outcome:
Traders have an intrinsic fear of heights and while they are not fretting over headlines, these record highs make them nervous.  That reluctance to own makes the market under owned and will be the catalyst for the second half of the year rally.

Trading Plan:
Buying breakouts and selling weakness has been the surest way to financial ruin in this choppy, sideways market and so far we haven’t seen anything to suggest this breakout will turn out any different.  Until proven otherwise, buy weakness and sell strength.

Plan your trade; trade your plan

Gyrations continue

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks took it on the chin as they crashed through the 50dma in early trade, but just managed reclaim this widely followed technical level by the close.  Thursday broke the string of apathetic trade and finished in above average volume.  This is the third time we tested the 50dma in recent weeks and up to this point buyers have come to the market’s rescue.

MARKET SENTIMENT
The 1,850/1,900 trading range is alive and kicking despite repeated attempts to depart it.  Neither bulls nor bears built the critical mass necessary to sustain a move out of this range.  Every time demand evaporated near 1,900 and supply vanished near 1,850.  Today’s move pushed us into the lower half of the range where dip buyers snapped up shares and stopped the selloff just under the 50dma.  For bulls it is encouraging to see selling stall instead of accelerate after violating an important moving average.  That shows many traders are more willing to buy and hold these levels and few were rushing for the exits.  But selling pressure is only half the equation.

While most owners are content holding stocks at these levels and their confidence prevents days like today from turning into a stampede for the exits, the bigger concern is those with cash remain reluctant to buy 1,900.  Tight supply is always helpful, but lack of demand trumps it every time.  If bulls cannot persuade those with cash to buy these highs, eventually the market will crumble under its own weight.

TRADING OPPORTUNITIES
Expected Outcome:  Falling back into the heart of 2014’s trading range.
While stocks might bounce temporarily off the 50dma as a small contingent of eager dip-buyers dive in, larger pools of money remains reluctant to chase these record highs.  This is further compounded as we move into the slower summer season.  Without buyers, expect this dip to continue.  But don’t mistake these normal market gyrations for a crash.  So far there is nothing to suggest this is the 10 or 20% correction bears have been calling for.  If we cannot hold 1,850 we will likely test the 200dma, but that would be a better place to buy stocks than press a short.

Alternate Outcome:
Every dip this year has been a buying opportunity and each time the size of the selloff shrinks as buyers rush in sooner and sooner.  It was a 100-point dip in January.  April saw a 75-point selloff.  And so far this one has gone 40-points.  If the selloffs continue getting smaller, we likely saw the worst of this move.

Trading Plan:
Expect dip buyers to temporarily prop up the market near the 50dma, but few value investors will be seduced by a 1.6% discount from all-time highs.  We likely need to fall further before those with cash find deals too good to resist.  If the market bounces Friday, it is a better place to close out long positions than buy the dip.

Plan your trade; trade your plan

Struggling with 1,900 again

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks slipped from record highs on ever decreasing volume.  The market closed under 1,890 after topping 1,900 for the first time on Monday.  But just as interesting is how this was the fifth consecutive day of declining volume and finished as one of the lowest volume days of the year.  The market is at the upper end of the recent trading range and still well above prior support at the 50dma.

MARKET SENTIMENT
Stocks continued 2014’s trend of stalling as we push toward 1,900.  The market is clearly attracted to these levels as it keeps coming back to them, but it never mustered the follow through necessary to break past this milestone.

Monday’s historic trade was all the excuses a tightly coiled market needed to explode higher in a frenzy of breakout buying and short covering.  The fact that we stalled and pulled back shows us that the market is not in the mood to explode higher.  This is valuable information for any trader that trades risk/reward.  If we eliminate explode higher, that leaves us with grind higher, grind lower, and collapse lower.  Two of the three are negative and one is extremely negative.  Given the outcome skew to the downside, this is a less favorable place to own stocks, let alone buy them.

Volume remains exceptionally light as few are changing their mind.  Those that own stocks keep holding and those with cash remain disinterested in chasing.  While it is encouraging to see the market continue holding these levels, if we cannot find buyers soon, the market will fall under its own weight.

TRADING OPPORTUNITIES
Expected Outcome:  Stalling at the upper end of a trading range in a traditionally slow time of year
Bulls had the perfect setup to extend the rally, but the market failed to take the bait.  Without explosive upside, at best the market will grind higher and it only gets worse from there.  It is hard to justify owning risk here with such limited upside.  The most bullish outcome will be trading sideways until the rally resumes in the fall.  If that’s the case, we don’t get paid to own risk (ie stocks) over the summer.

Alternate Outcome:
When in doubt stick with the trend.  This is the bull that just won’t die and it is far more likely to continue than reverse.

Trading Plan:
The best trade of 2014 has been buying strength and selling weakness and this market is not giving off signals this is changing here.  Anyone sitting on profits should lock them in and for the aggressive, this is the best shorting opportunity in some time.  But don’t mistake a normal and routine dip back into a trading range for a market collapse.  Counter trend trading is the hardest way to make money in the markets and bears should take profits early and often.

Plan your trade; trade your plan

1,900

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stock broke 1,900 for the first time in history, but only held that level for an hour before settling back into the high 1,890s.  Volume was again lower as fewer people are trading these levels.

MARKET SENTIMENT
The breakout to record highs failed to trigger a surge of buying and the day largely passed with a yawn.  Venturing into social media shows how married people are to their outlook and unwilling to change regardless of the evidence.  There is nothing thoughtful or insightful coming from most people, but the intelligent trader can use these clues to look under the surface.

Markets move when people change their mind.  They adjust their portfolio to reflect their new outlook and this buying and selling moves markets.  But when market participants are so stubbornly entrenched, we trade sideways because no one is changing their mind.  Threats of war in Eastern Europe don’t give bulls pause just like the strongest hiring binge in two years doesn’t sway bears.  This behavior means headlines no longer matter since both sides refuse to acknowledge anything that contradicts their preconceived bias.

If news won’t sway traders, what will move this market?  Boring old supply and demand.  Everyone knows markets go up and down, but most people identify with bulls or bears and assume any move in their direction will keep going.  But the truth is the market trades sideways far more often than it makes directional moves.  While tight supply driven by owners’ confidence and unwillingness to sell pushed us to record highs, dwindling volume suggests few are willing to buy the breakout and this market will likely stall on weak demand.  Summer is a historically lethargic season and the market will likely continue trading sideways for months to come.

TRADING OPPORTUNITIES
Expected Outcome: Running out of steam at the upper end of a trading range. 
Markets broke 1,900, but it didn’t trigger a frenzy of breakout buying or short covering.  At the same time it didn’t set off a wave of profit taking and shorting.  Most likely the market will continue trading sideways until something comes along to shake this gridlock.  Either that will be panic over some kind of economic calamity or buyers will venture back in when nothing bad happens for an extended period of time.  Until then, the best trade remains buying weakness and selling strength.  The move to record highs makes this a better place to lock in profits than initiate new positions.

Alternate Outcome:
Consolidations clear the way for moves higher.  Most often they are pullbacks, but often sideways trade is all it takes to refresh a market.

Trading Plan:
Buy weakness and sell strength.

Plan your trade; trade your plan

Record Close

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks had a good day as the S&P500 made a record close and the NASDAQ continued its bounce off the 200dma.  Volume was restrained and the lowest we’ve seen in recent days.

MARKET SENTIMENT
This move to record highs dumbfounded bears who remain convinced this market should have imploded months ago.  Where does this strength come from when so many distrust this market and Eastern Europe is on the verge of war?  The answer pretty straightforward, confident owners.  Contrary to popular opinion, complacency is bullish because confident owners don’t sell and that keeps supply tight.  We’ve seen a bloodbath in the most speculative stocks, but a 30% pullback in many of these names only drops us back to levels from a few months ago.  When a stock goes up 50% in a short period, 30% pullbacks are normal and should be expected.

While I don’t buy into the doom and gloom scenarios flying around, it is hard to get excited about this market.  We are approaching the summer lull and it will struggle to find strong demand when big money managers are on summer vacation..  The most likely outcome is the market will remain range bound until fall, but since we are at the upper end of the range, we could easily see a 50 or 100-point selloff and still be within it.

TRADING OPPORTUNITIES
Expected Outcome:  At the upper end of a trading range
While we could easily break 1,900 on Tuesday or later this week, how we trade after is what matters.  The most bearish scenario is a frenzy of breakout buying and short covering that launches us through 1,900, but those gains quickly evaporate as wider demand dries up.  Failing to hold the breakout likely means we will retreat back into the heart of the trading range.

Alternate Outcome:
The more people distrust this market, the more bullish a contrarian is.  While there are plenty of reasons for this market to sell off, we cannot ignore its strength.  When the market disagrees with us, we are the ones who are wrong.

Trading Plan:
This market struggled with 1,900 all year and this time will likely not be any different.  Given the limited upside during the traditionally slow summer months and the material downside if we slip back into the heart of the trading range, it is hard to justify the risk/reward of owning here.  This is a safer place to be taking profits than buying the breakout.  If we hold 1,900 I’ll reevaluate, but if it fails to hold this level, I’ll look closely at shorting the move back into the trading range.

Plan your trade; trade your plan

Deja Vu

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks took investors on another wild ride.  This time we surged higher midday but gave it all back by the close.  We are seeing enthusiastic moves, but few last more than a couple of hours as we remain stuck between 1,860 and 1,890.  So far the market is holding above the 50dma, but there are only so many times we can test it before it gives way.

MARKET SENTIMENT
This market has everyone chasing their tails and reactive traders are getting carried out in body bags.  The problem is most of the market is trading with a bias.  Bears sell every dip and bulls buy every rally.  With these whips, that guarantees buying high and selling low.

The reason we are stuck in this range is each side is so entrenched that war with the worlds largest energy producer or the best employment report in years is enough to convince people to change their stubborn outlook.  Bulls are bullish and bears are bearish regardless of what is going on around them.  Why this matters to the rest of us is markets only move when people change their mind and start buying or selling to reflect that new outlook.  I have no idea what will break this logjam, but it needs to be bigger than war or the strongest hiring binge in years.

TRADING OPPORTUNITIES
Expected Outcome: Stalling near the upper end of the trading range
Summer is often a slow time of year because most big-money decision makers are on vacation and the junior traders don’t have the authority to initiate large positions.  Expect the sideways trade to last until everyone comes back in the fall.  But since we are at the upper end of the recent trading range, sideways could include a 100-point dip to the 200dma.

Alternate Outcome:
As turbulent as recent trade has been, the longer we hold these levels, the more likely it is the resolution will be to the upside.

Trading Plan:
Anyone who’s been reacting to these swings has been getting chewed up.  Without an exploitable edge, the best trade is to not trade.  Unless buyers step in to save this market, expect it to fall back into the heart of the trading range, but without a fundamental catalyst this won’t lead to the larger correction many are calling for.

Plan your trade; trade your plan