All Posts by Jani Ziedins

PM: Is this the start of something bigger?

By Jani Ziedins | End of Day Analysis

PM Update

Stocks rattled nervers as they slid hard on elevated volume.  Will this one bounce back tomorrow like all the others?  AAPL still has a way to go before the hopeful give up on the stock.

MARKET BEHAVIOR

Stocks crashed through 1560 and closed at 1553.  The most notable development was the strong volume, the highest since mid-March.  An interesting fact is the last time we had above average volume was the final day of a three-day selloff.    Today was the eleventh consecutive day of alternating gains and losses; will a rebound tomorrow make it twelve in a row?

MARKET SENTIMENT

Clearly today’s dip got people’s attention and this was the most enthusiastic trade we’ve seen in a while.  The market rose to 1571 in the first few minutes, but it was all downhill from there.  No doubt today’s weakness triggered automatic stop-losses just under support at 1560 and the relentless slide through the day flushed out weak holders with itchy trigger fingers.  Capitulation bottoms typically occur on large volume after a prolonged decline when stubborn holders can no longer endure the pain any longer.  This happens after prolonged drop where doubt creeps in and consumes formerly confident traders.  Today’s one-day selloff is simply not enough to rattle the nerves of resolute holders.  Without a doubt we could rebound tomorrow, but it will not be a capitulation bottom and enjoy the same clear sailing seen after a more thorough purge of holders.

TRADING OPPORTUNITIES

Expected Outcome:
The question on everyone’s mind is if this is just another dip on the way higher, or the start of something bigger.  Any weakness over the last 4.5 months was a savvy buy, but will we say the same thing about this dip a month from now?

I cannot say if this is the top, but I know the risk/reward shifted in recent weeks and owing stocks here is more risky than at any other point in the rally.  We could easily see the market bounce tomorrow, but just because the market goes higher doesn’t make it a good trade.  This rally leg will top and pullback at some point because it happens to every bull move; two-steps forward, one-step back.  The signs are pointing to this pullback happening sooner rather than later, but I cannot predict exactly when, no one can.  During periods like this, I would rather be out of the market wishing I was in, than in the market wishing I was out.  I don’t mind missing another 10 or 20-points of upside if it means I avoid the risk of a 75-point selloff.

The market failed to hold 1560 today and leaves the door open to further selling.  Falling under 1548 will trigger an avalanche of automatic stop-losses as the rally makes its first lower-low.  Without a doubt this weakness will rattle the nerves of previously confident, complacent, and greedy holders, leading to even more selling.  But we have to break 1548 first.

Alternate Outcome:
A rebound on Thursday shows buyers are still able to support this market.  A close above 1560 Thursday and holding this level Friday likely mean the next move is higher and we will finally break all-time high.  Anything less and it shows this market is running out of buyers.  The big catalyst is Friday’s employment numbers.  An unexpectedly bullish number could stop this selloff in its tracks.

INDIVIDUAL STOCKS

AAPL finished up half a percent, but well off of earlier highs.  This cycle of raising hopes and dashing them is the demoralizing process that is required before this stock will truly bottom.  There are too many holders waiting for the expected rebound.  There are others that have ridden it down this far who keep holding because they figure it cannot go any further.  Only after these groups have given up on AAPL and sold out will the stock finally end the slide. What happens after that is up for debate.  Former market leaders and bellwethers like MSFT and CSCO are still well off of their all-time highs.  Often what is one market cycle’s must have stock becomes the next’s washed-up has-been.

Recent weakness deflated the sails of hot stocks like NFLX, AMZN, and LNKD.  These high flyers often feel the effects of market moves two and three times.  A modest dip in the indexes cold trigger a 10% correction in these popular momentum stock.   Everyone likes to play stock-picker, but the broad market is responsible for at least 50% of a stock’s move.  Know what the market is doing and we have a significant edge.

Stay safe

AM: More volatility

By Jani Ziedins | Intraday Analysis

AM Update

Stocks are keeping the up and down routine going as we are selling off following yesterday’s new highs.  Is this just another buyable dip or the start of something more?  AAPL attempts another rebound, completely oblivious to the market weakness around it.

MARKET BEHAVIOR

Stocks dipped on weaker than expected private employment.  This pushed the marked through recent support at 1560 by late morning. If today’s declines hold through the close, this will be the eleventh consecutive alternating red and green day.  At some point this market will string together two up or down days and that could signal the next near-term move, either a breakout or breakdown.

MARKET SENTIMENT

The jobs data was decent, but fell short of expectations and given how much positive news has already been priced in, the market sold off.  It’s easy for a repressed market to top expectation and trigger a wave of buying, but inflated markets are far more vulnerable to disappointment because everyone bought the market ahead of time.

One concern about this market is the wedging higher.  This sucks in buyers and does not refresh the market by forcing out weak hands.  Dips refresh the market because it sends uncommitted holders running for cover, creating the a new pool of buyers to fuel the next leg higher.  But wedging lets these weak holders hold and actually increases the vulnerability of the market because it encourages even more weak holders to join the party.  Once the level of weak holders reaches critical mass, the market collapses in a rush of panicked selling.  Currently the market is down nearly 15-points and it feels like some of this froth is letting out.

TRADING OPPORTUNITIES

Expected Outcome:
Is today’s weakness just another buyable dip, or the start of something larger?  While I cannot say for sure what will happen next, I am concerned about the sustainability of the Q1 rally and think this is a normal and healthy time for the markets to rest a bit.  A day-trader can play these intraday swings, but there is too little upside left in this move to make it worthwhile for me.

Failing to hold support at 1560 is a concern, as would be a second day of selling on Thursday.  Any weakness is setting up for a buyable dip, we just don’t know if it will bounce off of 1560, 1550, 1500, or 1400.  Given how many shallow, buyable dips we’ve seen recently, I’m wondering how much money the dip-buying crowd has left.  Without dip-buyers and triggering stop-losses at technical support levels will  lead to a larger wave of selling than we’ve seen recently.

Alternate Outcome:
Record highs has all the worrywarts and naysayers out in force.  Many traders are anticipating this top and selling into the strength.  These seller will be the new buyers when the market heads higher.  Today’s weakness is an important turning point for the market.  It makes an interesting shorting opportunity, but if the market rebounds, it shows bears still cannot get the job done and the next move is higher.

INDIVIDUAL STOCKS

AAPL is attempting another rebound and while the stock is in the green, it’s off early highs.  This stock is in a world of its own and is up on a day where the rest of the market is off.  The iPhone has its own ecosystem and so does AAPL’s stock.  AAPL traders are oblivious to the world around them, showing they don’t care about macro fundamentals.  And given the disconnect from AAPL’s earnings data, micro data doesn’t matter either.  What are we left with?  Gamblers.  At this stage traders are just gambling in the stock.  When a stock is completely detached from macro and micro data, fundamentals don’t matter and anyone who is using these to justify their purchase is going to have a bad time.  This is an emotion driven trade and it can only be traded successfully when evaluated from a sentiment analysis.

And for all those “long-term investors” out there who are buying last decades big winner because they know it will come back, I only have one question for you, how many technology market leaders had strong runs 10-years after their initial breakout?  Most tech companies don’t even stay relevant for twenty years, let alone have a runaway stock.  MSFT, CSCO and DELL had great, decade-long runs but have been dead money ever since, even thought the companies are doing great.  Of course AAPL is different from those just like all those were different from the ones that came before them.  The names change, but investor attitudes stay the same.

Stay safe

PM: Hold ’em or Fold ’em?

By Jani Ziedins | End of Day Analysis

PM Update

Another new high as this rally just doesn’t know when to quit.  AAPL on the other hand cannot figure it out and gave back all of its early gains.

MARKET BEHAVIOR

Stocks rebounded from Monday’s selling and set new intraday and closing highs.  Market traded as high as 1573 before giving up a portion of those gains in afternoon trade.  Volume was below average, but the highest in a couple of weeks.  The all-time intraday high is the only old record left standing and sits less than six-points away.  If the market ends in the green on Wednesday, it will be the first back-to-back up days since March 14th.

MARKET SENTIMENT

The whipsaw grind higher on low-volume continues.  Through this sideways trade, buyers are buying and sellers are selling, but more important, who is selling and who is buying?  Is smart money locking-in profits by selling to dumb money?  Or is impatient, dumb money getting nervous and selling to smart, patient money?

Without a doubt we’ve seen profit-taking at these all-time highs as many traders anticipate near-term weakness, but so far that selling has been matched and even exceeded by the appetite for stocks.  Every dip has been a buying opportunity and this pattern clearly lasted longer than I expected.  The thing I need to figure out is if I am just early, or if I am completely wrong.  There are many reasons for the market to pullback here, but the only indicator that matters, price, continues inching higher.

For market to continue higher, we need to find new buyers.  These could be premature sellers coming back into the market.  It could be remaining holdouts still watching this rally from the outside.  It could also be reallocation.  As Greg pointed out in the AM post’s comments, small-caps did not enjoy the SPX’s strength.  Are traders selling smaller stocks and rolling that money into safer blue-chips?  Is the market seeing inflows from the bond market as retail investors are chasing all-time high headlines?  If the rally continues, it will be on the back of one or more of these themes.

TRADING OPPORTUNITIES

Expected Outcome:
The market is holding up and we have to respect that.  Another close above support on Wednesday will show there are still more willing buyers than sellers and we should expect the next move to be higher.  That doesn’t make the market an automatic  buy because we have to consider the unfavorable risk/reward at these elevated levels, but it will certainly indicate shorting the market is premature.

Failing to hold 1560 on Wednesday is a bigger deal and shows bulls struggling to find new buyers at these record levels.  The market will return to normal volume in the near future and if buying cannot keep up with selling, that will finally be the start of the long-awaited pullback.

Alternate Outcome:
The market marches higher no matter what the headline or how compelling the bear case is.  This rally outlasted countless pessimistic predictions and there is nothing to say it cannot continue humiliating the next wave of top-pickers.  A slowly improving economy will continue convincing investors light on equities to wade in.  Buying by these late-to-the-party buyers is what will keep this rally going.

INDIVIDUAL STOCKS

AAPL turned a nice bounce into another warning flag as the stock reversed from early gains and finished near flat.  This is a stock where everyone is trying to will it higher on hope and hype, but no one outside of the cult is buying it.  Valuation doesn’t matter, cash hoard is meaningless, and history of innovation is discounted.  No matter what the believers point to, the larger investing world remains skeptical and the stock continues its slide as the faithful start giving up.  When a stock has everything going for it, but still cannot get out of its own way, that is a bad situation to get involved in.  Will AAPL recover its innovation leadership position, or is this the ’80s all over again where AAPL will make a fantastic niche product with 3% market share, like the Mac at the turn of the century?

Stay safe

AM: New highs

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR

Stock’s indecision continues as we rebound from yesterday’s weakness and are making new highs, just a few points shy of the all-time record at 1576.

MARKET SENTIMENT

This back-and-forth has both bears and bulls more vocal as they cheer for their side, but this equality is new and a big reason the market’s behavior has changed in recent weeks.  Bulls are still winning the tug-of-war with each new high, but the rate of gains has tapered from the nearly straight-up market in the first two-months of the year.  This is typical behavior as the best gains occur early in a move and become harder to come by the older a rally gets.  At 4.5 months old, it shouldn’t surprise anyone we are seeing more sideways trade.

The Q1 rally proves traders were overly bearish at the start of the year, and converting former bears into buyers is what propelled us higher.  If this rally fueled itself on pessimism, how much gas is left in the tank?

It is easy to predict the future, the harder part is getting the timing right.  Both bulls and bears could be right if we continue another 30-points higher before falling into a 10% correction, but they could both lose money if the bear shorts too early and the bull holds too long.  That is what makes this game so maddeningly difficult.  I have no doubt this market will top because every rally eventually ends, the harder part is figuring out when.

TRADING OPPORTUNITIES

Expected Outcome:
There are three ways this market will top.  It might simply run out of buyers and rollover.  It can surge higher and exhaust itself before reversing.  Or an unexpected negative headline can send holders rushing for the exits.  Holding 1560 through Wednesday makes the rollover top unlikely because we don’t get that long to sell the top.  We still haven’t seen a powerful exhaustion surge, so the market needs to go higher before it can turn lower under that scenario   And the news driven top requires an external and unpredictable catalyst to move the market.

In the absence of bad news, the market is setting up for higher prices if we hold 1560 through Wednesday.  Just because the market is headed higher over the next few days doesn’t automatically make buying and owning the market a good idea.  We always need to consider the risk/reward of every position and given the age of this rally and the slowing gains, it seems like there is more downside risk than upside potential here.  And of course a material selloff under 1560 today or tomorrow means this market is struggling to find buyers and we need to watch for further weakness.

Alternate Outcome:
A lot of profit taking occurred over the last 4-weeks of sideways trade.  We need buyers to continue higher and these recent sellers could buy back in and keep pushing this market higher.  The longer we hold these levels, the more likely this outcome becomes, especially if we consolidation stretches out and gives the 50 and 200dma time to catch up.

INDIVIDUAL STOCKS

AAPL recovered a large chunk of yesterday’s selloff.  This could simply be a dead-cat bounce as shorts cover for a tidy profits after the recent selloff.  Buying at $430 is less convincing when the stock couldn’t attract support above the 50dma.  Anyone who wanted to buy the dip already bought it, meaning there are few buyers waiting in the wings to prop this name up.  Look for more weakness as hopeful bulls sour on this name.  I don’t see a rebound in this name until everyone has given up on it and stops defending it.

Stay safe

PM: What comes next?

By Jani Ziedins | End of Day Analysis

PM Update

Markets tested support at 1550 and AAPL had its worst day since the post-earnings plunge.

MARKET BEHAVIOR

The up-down pattern continued with Monday’s selloff on the heels of Thursday’s record close.  This was the ninth consecutive day of alternating red and green.  Volume was well below average as traders continue their indifference toward this market.

MARKET SENTIMENT

Buyers are not clamoring for the breakout and holders not are rushing for the exits on weakness as this low-volume trend continues into the 4th week.  This can be both bullish and bearish depending on which side is the first to return in force.  Holders continue holding for larger gains and few are locking in profits at these levels, keeping supply tight.  One the other side buyers are restrained, either because they still don’t believe in this rally or alternately everyone already bought in and there are few left to buy.

The big difference is no one needs to buy, but there will always be sellers.  There is only one reason to buy, to make money either through capital appreciation or dividends.  If traders do not think a stock will go up, there is no reason to buy it.  But selling is a different animal and there are many reasons people sell stocks.  The obvious is they think it will go down, but people also sell to pay living expenses or a pension fund’s distributions to pensioners.  Money managers also sell things that go up a lot and skew their original allocations.  In the latter situations, a money manager can still be bullish on a stock or the market, but they need to sell for other reasons.  This dynamic is why a market needs a catalyst to go up, but will fall under its own weight in the absence of a reason to buy.

TRADING OPPORTUNITIES

Expected Outcome:
Even with the wind at its back, this is a challenging market to own.  Given how far we came over the last 4.5 months, it is hard to project more big gains before a normal and healthy pullback.  We can debate if the pullback will be 5% or will cascade into a 20% bear market, but either way we have at least 75-points of risk (5%).  Some of the more optimistic projections call for a continued rise to 1600 before topping.  That gives 75-points of risk for 38-points of upside.  It is hard to get excited about that trade even before we factor probabilities into the equation.  If we wouldn’t buy the market here, we shouldn’t own it either.

Alternate Outcome:
Momentum is clearly higher.  It is far more profitable to bet on a continuation than a reversal because a market continues countless times, but reverses only once.  Holding support at 1560 through Wednesday, or 1550 through Friday shows buyers are standing behind this market and it is not in imminent danger of imploding.  There is little risk to this rally as long as it holds 1550 and we don’t establish a lower-low until we fall under 1538.  While I am cautious of this market, I am keeping an open mind that this rally still has legs

INDIVIDUAL STOCKS

AAPL was hammered and finished at the lows of the day.  The 3% loss was the worst showing since 12% earnings plunge.  Volume was below average and failed to signal a high-volume capitulation bottom, meaning more weakness is likely.  The stock is within $10 of a new low and if it cannot hold recent support, look for a dip to the $400 level.  The fate of this move likely rests in the quarterly earnings in a few weeks.  This is purely anecdotal on my part, but I’m always on the lookout to see what phones people are using.  I see lots of iPhone4 and 4s, but very few iPhone5.  The other tidbit is few people are curious about my iPhone5 and I’ve only had two people comment about it since I got it on the day it came out.  Again this is purely anecdotal evidence, but it seems unlikely they will report blowout iPhone5 sales numbers based on how few I see in the wild.  Given the widespread bullishness still surrounding this stock, it sure feels like the risk remains to the downside.

Stay safe

AM: Taking a break

By Jani Ziedins | Intraday Analysis

AM Update

Stocks opened weak in what looks like another buying opportunity, or is it?  AAPL’s struggles continue .  What will it take to turn the stock around?

MARKET BEHAVIOR

Stocks are down half-a-percent on the first day of the second quarter.  They found early support at 1560 and are trading sideways through late morning trade.

MARKET SENTIMENT

Is this just another routine dip on the way higher?  In a rally, far more dips are buyable because they all bounce until the one that doesn’t.  We could see twenty buyable dips before coming to the one that doesn’t bounce.  I’m just making up numbers here, but without additional information, it is far smarter to buy a dip because 95% of the time it will bounce.  This shows why picking tops is often a fools game because tops happen so infrequently.  But that is in the absence of other information.  The last few months has seen countless buying opportunities, but each one brings us one step closer to the end.    If we had eighteen consecutive rebounds, then the odds of a top become far more likely, going from 5% to 50% in the hypothetical example.  When combined with the limited upside and material downside after a large move, buying the dip becomes a poor trade, even if it does bounce.  Success in the markets isn’t about predicting the future, but understanding probabilities and weighing that against risk versus reward.

Taking a deeper look at both sides of the argument here.

Bull Case:  The momentum is clearly higher and the trend of higher-highs and higher-lows remains intact.  The economy continues improving; the pace is slower than anyone wants, but the direction remains positive. Corporate earnings and balance sheets are as strong as they’ve ever been and valuations are far more reasonable than the two previous times we traded these levels.

Bear Case:  Every rally comes to an end and this one is 4.5 months old.  Further the market’s personality often changes with each new quarter.  A lot of optimism is already priced in the market as sentiment shifted from paranoid pessimism in January and February to near complacency because everyone expects Uncle Ben will take care of us.

These arguments are equally compelling and is why both sides have passionate supporters.  But this is always the case.  If the answer was obvious, market participants would make the easy trade and buy/sell stocks until the price changed enough to bring opposing views back in balance.  The legitimacy of both points of view is what makes it so difficult to trade the market.

TRADING OPPORTUNITIES

Expected Outcome:
While the trend is higher, we don’t need to hold out for those last few dollars of upside.  Its been a good run and everyone know this cannot go on forever.  It is often better to get out while everyone else is oblivious to the risks because it gets ugly when everyone rushes for the exits at the same time.  I don’t know which dip will not bounce, but I know it gets closer by the day.

Alternate Outcome:
A dip to support at 1560 is hardly a breakdown and simply resting after setting a new closing high last week.  At this point the market needs to fall past 1538 to start a new trend of lower-lows and that is still twenty-points away.  Momentum is clearly higher and continued support at 1560 shows buyers are still willing and able to step in at these levels.  The pullback case rests on running out of buyers and as long as we have buyers, we will continue higher.

INDIVIDUAL STOCKS

AAPL is having another ugly day and this is the fourth consecutive down-day.  The stock fell $35 from the recent break above the 50dam.  Obviously the stock was unable to attract wider follow-on buying after clearing this technical milestone and the stock collapsed after the “choir” ran out of money buying the dip.   The question any AAPL bull needs to ask is who is the next buyer?  All the faithful already own as much as they can hold and the wider market doesn’t seem interested in the outstanding valuation, margins, cash hoard, or history of innovation.  If AAPL cannot find buyers at a forward P/E of 8 ex-cash, is falling to 7 really going to make everyone wake up and rush to buy the stock?  AAPL might make great products, but the stock is clearly broken and the trend of lower-lows remains intact until it can attract new buyers.

Stay safe

LA: Time to leave the party?

By Jani Ziedins | Weekly Analysis

Look Ahead

We made all-time closing highs, but how much is left in this 4.5 month old bull?

MARKET BEHAVIOR

Stocks are trading at the highest levels in history.  As far as the market is concerned, the Great Recession is ancient history and it’s embracing the expected recovery.  Volume remains chronically low since we broke above 1550 three-weeks ago, showing a lack of engagement by both bulls and bears.  Thursday’s all-time closing high was a momentous achievement and  time will tell if this was the start of the end, or just another step in the steady march higher.

The next significant milestone is 1576, the all-time intraday high set in late 2007.  We are seven-points shy of this target and in easy striking distance if buyers support this breakout.  The other noteworthy event is the end of the first quarter.  Big money managers closed their books on Thursday and are starting fresh Monday.  Will they pursue the same strategy from Q1, or shift gears?

MARKET SENTIMENT

The rally that Ben built.  It seems everyone knows the Fed created this invincible market and “don’t fight the Fed” is the rallying cry of bulls.  But as readers of this blog know, only two things move markets, supply and demand.  Stock certificates are like baseball cards and primarily derive their value from what other people are willing to pay for them.   The only real tool the Fed has is indirectly influencing interest rates and they have been successful at driving them to historic lows.  Low interest rates make it less expensive for businesses and individuals to borrow money, but this also make it less attractive to invest in safe, fixed-income instruments.  The pathetic interest rate on Treasuries and savings accounts persuaded many to search for return in riskier assets, and to a large degree this worked as the stock market has been a large beneficiary.

Last year there was concern about diminishing returns and inflation from QE3 and QEfinity, but the market continued rallying and  inflation remains constrained.  Some will point to rising prices at the grocery story as proof of inflation, but to have real inflation we also need wage inflation, and given the employment situation, it seems unlikely we will experience runaway inflation any time soon.  While we might experience a decrease in standard of living as the dollar falls and we compete with an exploding global middle-class for resources and products, that is completely different from out of control inflation.

But back to the markets, easy money has propped up the stocks, but now everyone expects it to keep working, will it?  Going back to the supply and demand argument, where are the next buyers coming from?  Some point to an over-inflated bond market, but most bond holders are not in bonds for profit, but security.  After 2008 ROI has a new meaning, Return OF Investment.  Many investors saw their retirement plans shatter over a period of months and it will take many years to recover from that trauma.  The eventual move out of bonds into equities will happen at a glacial pace and while it will provide lift to the secular bull market, it is not enough to overcome intermediate market weakness.

The current rally is 4.5 months old, fueled by a nearly nonstop wave of buying since the November lows.  The question any bull needs to answer is who is the next buyer?  Everyone trusts Uncle Ben’s safety net and is buying with little regard to the risks, but if everyone is in, who is left to buy?  Its been a long time since the markets felt this safe, making it one of the most dangerous time in years.

TRADING OPPORTUNITIES

Expected Outcome:
The easy money has already been made.  Any profits going forward will be hard fought and involve some gut wrenching volatility.  Every rally leg eventually comes to an end and given the size of the September’s modest selloff and recent rebound, this rally has come a long way.  Given the recent strength, we should be looking for places to lock in profits not initiate or add to positions.

Momentum is clearly higher, and shorting the market here is picking a top, but there is a huge difference in risk/reward between locking in profits and going short.    The market could top on Monday, next week, or next month.  The truth is no one knows exactly when the market will top, but we can identify situations where it is more likely to top.  The key to success in the markets is not selling too soon and not holding too long.  Given we are 4.5 months into this, that doesn’t seem too soon, and holding for more gains is pushing our luck.  If we were to pick the sweet spot between too quick and too long, this seems to be it.

Alternate Outcome:
The market has experienced year-long rallies before, the most recent following 2009’s generational market bottom.  But we have to ask ourselves if the events leading up to March 2009 bottom are materially different from our most recent November 2012 lows?  Is there anything in common between the two?

Markets often act like springs, the harder we push one way, the bigger the reaction in the opposite direction will be.  We see major moves following crashes and euphoric bubbles, but current conditions don’t conform to these extreme scenarios, so more likely this rally will be of the vanilla verity.  6-months is not out of the question, meaning we could have another few weeks of upside left and that is what we have to watch for.  Continued support above 1560 next week shows the market can still find buyers and will likely continue higher.  The thing we need to be most careful of is weakness that doesn’t bounce back.  There are only so many time dip-buyers can prop up the market and we are testing that limit.

Stay safe

WR: We finally did it

By Jani Ziedins | Weekly Analysis

Weekly Review

All-time highs, but what comes next?  AAPL finished weak and inability to find follow-on buyers after breaking above the 50dma is a concern.

MARKET BEHAVIOR

Stocks gained 0.8% in a week where we finally set the all-time closing high.  While volume was extremely light due to the holiday shortened week, it still fell 8% below average when prorated to account for the missing day.  The 10wma is closing the gap with our sideways market and is just 37-points behind.  The 40wma is also making gains, trailing by 125-points.

Market Cycle:
This rally is 19-weeks old and covered 16.8% since the November low.  This already exceeded the 15-week, 16.4%, June-September 2012 gains, but is short of the 25-week, 32.2%, rally between October 2011 – April 2012.

The most notable difference between these previous rallies was the prior decline.  The 2011 market corrected 20%, the 2012 Spring selloff was 11%, and the most recent pullback leading to our current rally leg was 9%.  The bigger the selloff, the larger the rebound.  The last decline was the smallest and likely means we are living on borrowed time.

If there are any Elliot Wave fans out there, we are in the 5-wave across three-different time-frames.   See the accompanying chart.  Combine this with the potential head-and-shoulder formation, technically this is a good time to tread lightly.

This late in the rally we would expect the rate of gains to slow.  The best profit opportunities follow the reversal and we are four-months removed from those easy buy-and-hold gains.  The later stages of a rally are typified by volatility and limited progress; exactly what we’ve seen over the last three-week, 15-points gain.  Technicals and history say this market is running on fumes and we closer to the end of this run.

MARKET SENTIMENT

All-time highs typically bring cynics out of the woodwork as they cry unsustainable and point to the secular-bear tripple-top.  While I count myself as a long-term bull, there are enough warning signs to make me cautious here.  It is not uncommon for rally legs to last longer than 4-months, but so far everything is lining up for a near-term top.  Indifference to negative news, lack of short-squeezes, and widespread enthusiasm show market sentiment has changed dramatically from the fear and pessimism that dominated December and January.

TRADING OPPORTUNITIES

Expected Outcome:
This is a place to take profits, not establish new positions.  We are in this to make money and can only do that by selling our winners.  I started growing more cautious three-weeks ago when we first broke 1560.  Anyone selling into that strength missed all the recent volatility and gave up less than 10-points of upside.  Without a doubt there is a break-even between profits and nerves.  In my book a fraction of a percent is not worth being jerked around.  Amateur traders hate selling early, but it is one of the easiest ways to keep our sanity and avoid making dumb mistakes.

Alternate Outcome:
Continued strength shows the market is not ready to breakdown.  Markets typically selloff shortly after making news highs.  If we don’t encounter weakness next week, we will likely see higher prices before topping.

INDIVIDUAL STOCKS

AAPL had a disappointing finish to the week after showing such promise closing above the 50dma for the first time since September.  The stock lost 4% for the week and gave back virtually all the previous week’s gains.  Bulls claim this is just a temporary setback on the way higher, but failing to find new buyers after such a significant technical breakthrough should give anyone pause.  The down-trend was not broken by recent strength and any buying here is catching a falling knife.  There is nothing wrong with playing a game of bottom picking, but make sure to use tight stops and appropriately sized positions.  Until the stock starts making higher-highs and higher lows, expect the trend of lower-highs and lower-lows to continue.  That means we likely have a date with $400 in the near future.  Reclaiming the 50dma this week is bullish and look for a retest of $485.

Stay safe

PM: We did it!

By Jani Ziedins | Intraday Analysis

PM Update

It took a while, but the market final set the all-time closing high.  Is this the end of the run, or are we just getting started?  AAPL missed the party and plunged 2% as is struggles to find buyers.

MARKET BEHAVIOR

Stocks finally did it, they set the all-time closing high Thursday.  Volume was extremely light given the breakout, end of quarter, and option expiration trading activity.  The all-time intraday high is the only record left and is just 7-points away.  It’s amazing how far we’ve come since the 2009 lows.

MARKET SENTIMENT

Friday’s 0.4% breakout is nothing to write home about.  Shorts and momentum buyers are nowhere to be found and Thursday’s move was fairly uninspiring.  Without a doubt the holiday played a role in the light volume and lack of enthusiastic follow-on buying.   We are left to determine if these new levels are here to stay and if buying will keep pace when volume returns to normal.

Sentiment came a long way from the post-election and Fiscal Cliff lows last November.  Even two-months ago the tone was very cynical.  There are still bears abound, but the pessimism doesn’t seem nearly as pervasive and universal.  Without a doubt momentum can carry us a dozen points higher, but are there enough buyers left to continue past 1600 without a material pullback?

The biggest risk the market faces is if bulls bought the breakout ahead of time and swing-traders will use the new high to lock in profits.  Few buyers and lots of sellers is a recipe for declining prices.

TRADING OPPORTUNITIES

Expected Outcome:
This rally deserves a lot of credit.  Its did what no one thought was possible and matched the go-go record highs set long before most knew what a mortgage-backed security or credit default swap was.  The lesson is never doubt our determination to overcome anything thrown in our way.  This rally has long legs and the secular bull will easily pass 2,000 in coming years.  I don’t believe in the tripple-top theories being thrown around.  This market has gone nowhere in thirteen years, how can people possibly claim that is unsustainable and too-far, too-fast?  But that is the long-range view, we are traders and want to know what is around the next corner.

The market continues holding 1550 and every bout of selling is conquered, resulting in yet another higher-high.  Any bear knows how dangerous it is challenging this bull, but every move must come to an end.  As much as I believe in the longer-term trend, I don’t feel comfortable owning stocks on the heels of a four-month rally.  Markets go up and they go down, it is normal, healthy, and expected to run into a little resistance after coming this far.

Alternate Outcome:
The one thing this market does best is prove doubters wrong and it continued doing that on Thursday.  Markets always pullback, but they never do it when people expect it.  When markets top, they tend to roll over fairly quickly.  The last few weeks of support at 1550 is what enabled this breakout to all-time highs.  If this market holds up through Tuesday, look for more gains out of this bull.

INDIVIDUAL STOCKS

AAPL is living in bizarro world.  When the broad market sets all time highs, AAPL plunges 2%.  AAPL clearly has a demand problem and cannot find follow on buyers to keep it above the 50dma.  Even more scary is all the recent momentum buyers are fleeing in droves.  The stock fell short of setting a new high above $485 and the trend of lower-highs continues.  Without buyers, expect the stock to test $400.

Stay safe

AM: Holding for the record

By Jani Ziedins | Intraday Analysis

AM Update

The market set a new high and is in a position to break the all-time closing highs.  AAPL’s struggles continue as buyers are staying away.

MARKET BEHAVIOR

Stocks finally broke the 1565 barrier, but they need to hold it to set the all-time closing high.

MARKET SENTIMENT

How the market trades above 1565 will be insightful.  Will the market continue higher on breakout buying and short-covering?  Or was the new high already priced in and there are few left to buy the breakout?  How the market goes into the close will tell us a lot about people’s positioning and views.

This is the last day of a rough quarter for many money managers.  Anyone who was underweight the market had a bad time, but fortunately for them, most clients simply look at the bottom line to see if they made or lost money, neglecting to compare their expensive money managers against dumb and cheap index funds.  Everyone starts fresh next quarter and has the flexibility to trade their view of the market instead of scrambling to keep up with a strong rally.  Will this change the way big money approaches the markets?  Will they stop buying?  Will they start taking profits?  Or will they double-down on this teflon rally?

TRADING OPPORTUNITIES

Expected Outcome:
A lot of questions will be answered the next couple of weeks.  Can we hold these highs?  Will big money keep chasing?  Are there enough buyers left to continue the rally?  Right now we simply wait for those signs.

I remain reluctant to own the market because we always see step-backs and its been a while.  The February dip was three-percent and while noticeable, we will see much larger pullbacks this year.  No matter what we expect, we need to keep an open mind to what they market is telling us.  If the market doesn’t do what we expect, then our analysis is flawed and we need to adjust it.

Alternate Outcome:
This sideways trade emboldened bears and it is easier to find bearish commentary as compared to a couple of weeks ago.  These whipsaws refreshed the market by flushing out weak holders and reminding traders that the market is a risky place.  If we continue higher, this consolidation is where the new buyers will come from.   Of course we need to remember minor corrections and consolidations lead to minor moves, so even if we continue higher, don’t expect another 100-point, non-stop move without

Recent support is impressive and more suggestive of a continuation than an imminent pullback and that is why we are seeing new highs today.   Moving into next week will put quarter-end shenanigans behind us, giving us a clearer view on what the market is thinking.   Market tops tend to roll over quickly after the cracks develop, continued strength shows we are not there yet.

INDIVIDUAL STOCKS

AAPL’s bad luck continues as few are willing to buy the dip under the 50dma. All the buying happened in the run-up to the breakout and no one was left to continue the move.  This is a trading stock now and should be treated as such. Any strength is a selling opportunity because until it proves otherwise the trend remains lower.  Buying dips is okay as long as a trader is disciplined and uses hard stops for protection and to lock in gains.  AAPL’s next earnings release is nearly a month away and it seems unlikely Cook will surprise shareholders with good news in the meantime.

There is still a lot of bullishness left in this stock and it is not done humiliating bulls yet.

PM: One way or the other

By Jani Ziedins | End of Day Analysis

PM Update

Indecision continues as the market remains stuck in its trading range.

MARKET BEHAVIOR

Stocks sold off early, but recovered lost ground and finished practically flat.  Volume remains light as few are trading the holiday shortened week. The struggle with 1565 continues and today was the sixth-day in the last two-weeks where the market traded north of 1560 but failed to capture a record close.

MARKET SENTIMENT

This is a hard post to write.  Over the last three-weeks we have been stuck in a volatile, tight rut.  It is hard to find fresh insight when the market keeps doing the same thing over and over and over.  Without a doubt, doing nothing means something, I’m just less sure of what that is.  I remain cautious of near-term weakness, but holding together is giving me second thoughts.  It’s not that my earlier analysis is flawed, it just seems early.  (in the markets early is the same thing as wrong)

The market has two options Thursday, finally set a record high, or breakdown.  We are so close to an all-time high that if we don’t finally do it, there are structural problems preventing the market from gaining those last few points.  At no point in the rally has two-points been so difficult and this signals a shift in personality.

The sideways trade is creating through churn what normally happens with a pullback.  Even though the market has been flat, a lot of buying and selling continues taking place.  A bullish interpretation is weak hands are selling to the strong.  The bearish view is smart money is selling to dumb.    In a couple of weeks we will have our answer.

TRADING OPPORTUNITIES

Expected Outcome:
When in doubt, sit it out.  There is no reason to always have a trade on.  Some opportunities are better than others and the savvy trader recognizes the difference.  This is about exploiting the best setups and this market is being stingy.  I remain cautious of near-term weakness, but holding 1550 shows a meaningful depth of buyers willing to prop us up.  This has worked through abnormally light volume, but can the market continue finding support when the normal volume of selling resumes next week?

Alternate Outcome:
Stocks are stuck in this tight range between 1550 and 1565.  We will breakout/breakdown soon, the question is which way.  I am reluctant to own this market here, but recognize the next move could be higher.  There is a good chance we finally close above 1565 on Thursday and put this whole “all-time closing high” behind us.  If the last three-weeks of churn flushed out weak holders and seduced bears to short the market, we could see a decent breakout above 1565.

Stay safe

AM: Comeback kid

By Jani Ziedins | Intraday Analysis

AM Update

Stocks dipped at the open, but are making a comeback.  AAPL gapped under the 50dma and is struggling to find buyers as it remains at the lows of the day.

MARKET BEHAVIOR

Stocks gapped lower at the open on Euro concerns, but rallied through the morning, reclaiming a large chunk of early losses.  The market remains stuck in the 1545/1565 range and without a strong close, it seems unlikely we will reach record levels today.

MARKET SENTIMENT

Early rebound strength looked like dip-buying and short-squeezing was keeping a steady bid under the market and fueling the one way move.  Are there enough buyers remaining to keep this phenomenon going through the close and beyond?

This is potentially the seventh-consecutive alternating up/down day we’ve seen as volatility is picking up.  Over the last four-months it was easy for the market to rally when we were making new highs every few days.  Even the nasty dips bounced back after just a couple of days of weakness.  Our current three-week consolidation is the longest yet and is a shift away from easy buy-and-hold.  This is just another example of the right trade being the hard trade.  The easy money was made in the middle of the Fiscal Cliff hype, now that everything finally looks good, the rally stalled.

TRADING OPPORTUNITIES

Expected Outcome:
I still find it hard to be constructive on this market, but the longer it holds these levels, the more likely a continuation is.  If we hold 1550 through next Monday look for an upside breakout and all-time highs.  But a breakdown the next couple days and all bets are off.  I’m still waiting for a dip under 1545 that doesn’t bounce, but so far the market is holding up and I have to respect that.

Even if the market pops next week and sets all time highs, that will be a selling opportunity, not a buying one.  Every rally needs a break and this one came a long way in four-months.  Given the limited upside and large downside, this is a poor place to own stocks.

But don’t get me wrong, I’m not a bear, just an opportunist.  We have plenty of room for a five-percent pullback before resuming the longer-term uptrend.  Two-steps forward, one-back.  I’m still constructive on the economic rebound and believe in the longer-term secular reallocation away from bonds and into equities.

Alternate Outcome:
No only could the rally poke its head above all-time highs, it could continue higher for a few more months.  The market hates being predictable and a summer rally would be unexpected.  Big money trading strategies often change from quarter to quarter, but often is not the same thing as always.  Strong economic improvement could delay the expected step-back, but the higher we go, the harder we fall.

INDIVIDUAL STOCKS

AAPL ran out of buyers and gapped under the 50dma, a big warning flag for bulls.  This could simply be a step-back on the way higher, but no one is buying the dip this morning as the stock trades at the lows of the day.  Anyone with a profit might look to lock in at least a portion until the stock reclaims the 50dma.

Stay safe

PM: Here we go again

By Jani Ziedins | End of Day Analysis

PM Update

The market challenges all-time highs, but comes up short again.  Will tomorrow finally be the day?  AAPL’s pause appears constructive.

MARKET BEHAVIOR

Stocks made a new 52-week closing high and are less than two-points from the all-time closing high.  Today was the sixth-consecutive alternating up-and-down day.  Volume continues declining between the holiday shortened week, spring break, and the last week of the quarter.  It seems like many traders already checked out for the week.

MARKET SENTIMENT

The all-time closing high continues eluding this market, will tomorrow be the day?  It was nearly two-weeks ago the first time we asked that question.  Will if finally happen Wednesday, or will the alternating pattern continue?

Volatility is humiliating both bulls and bears as it sucks in and spits out any reactive and impulsive traders.  The key to surviving periods like this is trading proactively by selling strength and buying weakness.  Often that means going against our gut, but that is precisely why it works.  Evolution wired all of us the same and what we feel is also experienced by most market participants.  To thrive we need to break free from the herd and chart our own course.

Volatility and turmoil is a key sign of market tops, but it also signals consolidation and continuation.  If this were easy everyone would be rich.  It seems some of the bullishness is wearing off as we stall at these levels and the bears coming out of the woodwork again.  By itself that does not signal a continuation because at some point bears will eventually be right.  The question is if there are still too many bears out there?  We will have our answer soon enough.

TRADING OPPORTUNITIES

Expected Outcome:
I keep asking questions because the market is giving us few answers.  The battle between bulls and bears is fairly even here.  My bias is with the bears, but I could easily see bulls pulling this off one more time.  We can talk about this stuff until we are blue in the face, but the truth is we are simply killing time until the market reveals which way it wants to go.  At this point it seems just as likely we finally set the all-time high as break down.  But there are different consequences for each.  Rebuffed by 1565 one more time is far more damaging for bulls than finally closing above this level will be for bears.  Bears have lost this fight for a while and one more setback is not a big deal, but the first bull loss is far more significant and signals a potential change in personality.

Alternate Outcome:
Markets rarely give us this long to sell the top.  Holding these levels thorough Monday clearly shows bulls are still in control.  If the market doesn’t break down over the next couple days, look for the continuation.  Maybe the continuation is one last push through all-time highs at 1576 and only lasts a couple of days, or maybe we rally through the summer before resting.  All we can do is follow the markets lead and pick up the clues it gives us.

INDIVIDUAL STOCKS

AAPL took a break, but is still above the 50dma.  There was a lot of chasing as it finally broke above this widely followed moving average for the first time in five-months.  This is healthy and constructive as long as we continue holding.  The if stock is still finding support, it will hold the 50dma.  A dip so soon after reclaiming this level is a warning flag that it is struggling to find new buyers.

Stay safe

AM: Bouncing back

By Jani Ziedins | Intraday Analysis

AM Update

Stocks bounced back on positive data, but are still shy of all-time closing highs.  AAPL is resting, but this is supportive of the recent bounce.

MARKET BEHAVIOR

Stocks gapped higher at the open following encouraging data, but traded sideways around 1560 all morning.  The extents of the current trading range fall between 1538 and 1565.  Today’s strength brings us closer to the upper end of the range, but the market still struggles to find buyers willing to push it above all-time highs.

MARKET SENTIMENT

Given the rise in homebuilder stocks, strength in home prices shouldn’t surprise anyone and the market saw this coming for a while.  Same goes for gradually improving manufacturing data.  These do discredit bears’ claims the economy is slowing, but given the market’s strength the last few months, this negative opinion is increasingly in the minority.

Sideways trade here is constructive, but it will likely be a quiet week due to the holiday and quarter end.  Big money is largely positioned how they want to end the quarter (window dressing) and are just coasting this last week.  Next week is when they get back to business and look at the market with a clean slate.  Without pressure to chase, will they keep buying?  We’re days away from learning the answer.

If the market is running out of buyers, it should happen pretty quick.  Continued sideways trade shows buyers are stepping up and supporting prices.    1545 is the level to watch.  A dip under here is more worrisome for bulls than a pop above 1565 is for bears.  This far into the rally gains are harder and harder to come by and dips are increasingly more likely.  No one has a crystal ball, but we can trade probabilities.  History tells us we should expect multiple 5% pullbacks each year, each quarter often has a different personality, and every rally must end.  On the other side, it also tells us rallies often go far longer than anyone expects.

TRADING OPPORTUNITIES

Expected Outcome:
The challenge for a savvy trader is not selling too early, and at the same time not holding on too long.  We aim for the sweet spot between these two common made mistakes.  Hold when everyone is talking profits and sell when everyone is holding for larger gains.  This sweet spot is a region, not a point and we need to decide what is good enough.  We cannot sell the top, so either we are late or we are early.  Many retail investors try to sell late because the logic goes holding past the top lets a trader continue riding prolonged rallies higher.  And it makes a lot of sense, but I’ve never seen an interview with a successful trader who uses this strategy and almost all say they sell on the way up.  Do we want to model ourselves after the average retail investor, or the elite trader?

Either way, the market is looking for direction here.  We cannot trade between 1550 and 1560 indefinitely and a resolution is imminent.  The trend is higher and it is often smart to stick with what is working.  Of course every rally ends and this one has been around the block a few times, putting it closer to the eventual pullback.  If a trader doesn’t have conviction here, the best trade is no trade.  Simply sit this one out and wait for a better setup.

Alternate Outcome:
Everyone continues holding on for new highs.  This limits supply and is propping up the market.  As long as supply remains tight, the market can continue higher.  The bigger question is how much higher.  20-points on a 200-point rally is fairly trivial.  100-points is a major continuation.  Between the changing quarter and lack of short-squeezes, sentiment is changing.  Bearish expectations over the last three-months enabled this rally, but if people come into the second quarter with a different outlook and portfolio, should we still expect the market to keep acting the same way?  The alternate outcome is a continued rally, but it has to prove itself.  Making and holding all-time highs through next week will do a lot to prove the sustainability of this rally.

INDIVIDUAL STOCKS

AAPL is taking a break after a strong performance early Monday morning where the stock traded up to $470.  There was a lot of momentum and short-covering in that move, but that demand quickly evaporated and the stock retreated back to the low $460s.  Finding support at $460 suggests this near-term up-trend will likely continue for a little while longer.  $485 remains the level to watch, but the $500 is even more significant since that provided rock solid support for three-months.  The stronger a support level, the more challenging resistance it poses.  This is because many traders had the opportunity to “buy the dip” around $500 and most of these traders are simply looking to get out at break-even when the stock returns to their purchase price.  Traders selling to get their money back will keep a lid on prices once the stock challenges previous levels of congestion

Stay safe

PM: Running out of buyers

By Jani Ziedins | End of Day Analysis

PM Update

MARKET BEHAVIOR

Stocks ran up  at the open on encouraging developments out of Europe, rising to the increasingly important 1565, but quickly lost steam and slid nearly 20-points by late morning.  Volume was again below average and continues the recent pattern of restrained trade.

MARKET SENTIMENT

Today’s selloff was reminiscent of a market disappointed by bad news, not on the receiving end of good news.  We had a Cyprus resolution and over the weekend and many predicted all-time highs were a done deal.  After the first few minutes of trade, it looked like they were right, but then buying completely dried up and stocks tumbled.  The news will try to explain it as this or that, but the truth is we simply ran out of new buyers.

So far Cyprus is setting up a sell the news trade.  We didn’t get a short-squeeze or momentum buying on the heels of early strength and encouraging news.  The market simply stalled and rolled over.  This is a big flag for bulls.  The market bounced countless times over the last three-months, each rebound consuming a chunk of available buyers.  After a certain point, no matter how great the news, the market will top when it runs out of buyers  I can’t say for certain this is what happened, but it seems more likely than not.

TRADING OPPORTUNITIES

Expected Outcome:
There is a lot of risk in this market.  Without a doubt we could continue higher, but before placing a trade we have to understand the risk/reward.  The market might have another 25-points of upside here, clearing all-time highs at 1576, but we could also be on the verge of a very typical, normal, and healthy 5 to 10% dip.  Typically we will see three 5% dips and one 10% pullback in any given year.  (20% dips are less common, occurring once every 3.5 years on average)  Even if this is a garden variety 5% dip, that is 75-points.  Making trades with 75-point risk for 25-points profit will send a trader to the poor house pretty quick.

Alternate Outcome:
No matter what the signals say, we are still within 1% of the highs and the up-trend remains in tact.  Predicting anything but a continuation is going against the trend and is often the low-probability trade.  Picking tops is risky, and not many people do it well.  But there is a difference between picking a top and taking the chips off the table.  It is very aggressive to short this market, but taking profits after such a nice run is extremely conservative and is what successful traders do with worthwhile profits.  We are in this to make money and the only way we can do that is selling our winners.

Stay safe

 

AM: New highs, but……..

By Jani Ziedins | Intraday Analysis

AM Update

Stocks still struggle with all-time highs even on good news out of Europe.  AAPL is holing up as momentum traders buy the break above the 50dma.  How much further can this go?

MARKET BEHAVIOR

Stocks set a new high, but turned back just shy of 1565 and fell nearly 20-points from the high to the low.

MARKET SENTIMENT

So much for the pop and all-time highs on Cyprus.  It’s lunchtime and the market already moved on.  More interesting is the struggle with 1550.  The last few dips to this level have been buying opportunities, but are there enough buyers left to do it one more time?

Markets only move when people buy or sell.  Anyone already positioned for a move can do nothing but watch.  If everyone bought in  anticipation of a Cyprus resolution, when that resolution becomes reality, the market stalls because no one is left to buy the news.  The same goes for all-time highs.  If everyone bought early, anticipating an all-time high breakout, the market stalls because no one is buying the breakout.

The only thing that matters is what people think and how they are positioned.  Technicals, fundamentals, and news only play a supporting role in moving markets.  They only matter when they cause people to change their outlook and adjust their portfolio. If the greatest and most loved company in the world comes out with a cure for cancer, its price will surge when people buy more shares.  The problem arises when everyone loves it so much they already own all they can hold.  Then the life saving news goes unnoticed in the stock because it doesn’t trigger new buying.  This is why understanding how people are positioned is far more important than knowing what is in tomorrow’s newspaper.  We cannot predict the news, but we can predict people’s reaction to it.

TRADING OPPORTUNITIES

Expected Outcome:
This dip is a buying opportunity only if there are more buyers left to keep pushing prices higher.  This is what happened a couple of months ago.  The widespread cynicism provided plenty of fuel for a sustained move higher.  But here we are, another 100-points higher and it took a lot of buying to get here.  Do we still have gas in the tank, or are we running on fumes?

Today’s reversal from all-time highs is concerning.  There was zero short-squeeze from breakout buyers as we set new highs and cynical bears did not cover on a constructive news out of Europe.  The most likely explanation is people are no longer short this invincible market.  Bears and shorts are often the last on board the rally bandwagon, so we need to be extra careful here.  There will be more zigzagging as the fight between bulls and bears is evening up.  That in of itself is a warning sign as the formerly dominant bull is losing strength and the beaten down bear is fighting back.

I see nothing in today’s price action that is bullish and we could be on the verge of more selling if dip-buyers fail to show up in meaningful numbers.  While the market could continue higher, this is finally time to start thinking about shorting the market.

Alternate Outcome:
The bull isn’t dead yet and we are only a fraction off of 52-week and all-time highs.  .  If this market holds 1550 for a couple more days, it shows buyers are still willing to get in at these levels.  That bodes well for a continuation.  With today’s failure to break above 1565, that is quickly turning into a psychological barrier.  We need to close above it to put this whole all-time high thing behind us and start focusing on something else.

INDIVIDUAL STOCKS

AAPL is holding up nicely on a day when the market is in the red.  With the 50dma behind us, the biggest technical milestone is $485.  This will be a far larger hurdle to clear than the 50dma.  The moving average is simply a line on a chart that people follow.  Support and resistance are areas where people bought and sold stock and are far more meaningful for influencing individual investors.  These are levels that represent profits and losses.  This is where people can get their money back.  This is where people promised they would sell if the market would only give them a second chance.  That has real meaning and it will be a challenge to overcome.  Swing and momentum trading can get us to$485, but only follow on buying from a wider pool of investors can move us beyond it.  The nimble trader should consider locking in along side all the other short-term traders.

Stay safe

LA: New highs, or not

By Jani Ziedins | Intraday Analysis

Look Ahead

MARKET BEHAVIOR

Stocks dipped modestly last week as they struggle to capture those last few points needed to push through all-time highs.  Either this pause is building support for a sustained move higher, or it signals exhaustion just before the market rolls over.

MARKET SENTIMENT

A big part of why it is so difficult to predict the market is any setup ALWAYS gives contradictory signals.  If the answer was obvious, everyone would make the easy trade and this one-way buying/selling brings the market back into perfect contradiction.  Balance is the law of free markets and always makes sure both bull and bear views are equally represented.

To figure out where we are going, we need to search beyond widely followed technicals and fundamentals and uncover what the market is thinking and how it is positioned.  This gives us the best insight into what comes next.  Markets only move when people buy or sell, so obviously we need to figure out what will induce them to buy or sell.

In late-January/early-February we saw a similar consolidation and volatility around 1500, but the mood was completely different.  Traders were still afraid and the popular expectation was an imminent pullback from over-bought conditions.  That was six-weeks and 50-points ago.  Now we see the same technical setup, but sentiment changed.  Everyone feels good about the market’s strength and is looking forward to new all-time highs. This means most chasers are already in the market and few are left on the sidelines.  Value investors sold to these momentum traders as prices climbed, but after the chaser, it is hard to figure out who is the next in line to buy.

Obviously markets can coast higher on momentum alone, but just because there is more upside doesn’t make it a good trade.  This far into the rally there is limited profit potential and lots of downside risk, making a poor risk/reward.  Day-traders can grab those last few dollars, but overnight traders need to be more cautious.

TRADING OPPORTUNITIES

Expected Outcome:
There is little concern left in the market.  Cyprus dominated the headlines, but we are trading within 3-points of the pre-Cyprus close, demonstrating apathy from the market over these headlines.  But it shouldn’t surprise anyone when a market that didn’t flinch on a negative GDP report last month, effortlessly ignores the struggles of a tiny Mediterranean island.

This upcoming week will be a key one for the markets.  Holding level for a week is supportive, holding level for a few weeks becomes stalling and shows the market cannot get the job done.  This is also the last week of the quarter and most quarter-end buying is behind us.  For the time being, the chase is taking a break as money managers have a clean slate starting in April.  Chasing could continue, but managers feel far less pressure to buy reactively when the finish line is three-months away.

The market needs to continue higher after this pause to prove it still has an ample supply of buyers.  It doesn’t need to be a lot, but a healthy rally would finally reach 1565 and hold it this week.  If a modest gain is constructive, then anything else is destructive.  A dip under 1550 will likely continue because most of the dip-buyers came in last week and used up all their capital.  A strong surge higher signals a potential climax and exhaustion of remaining buyers.

As of this writing, there is some kind of resolution regarding Cyprus that avoids a disorganized bankruptcy.  This doesn’t do anything to save wealthy account holders, but it does protect the integrity of the banking system by upholding the guaranteed 100k safeguard.  The market could rally on this, but Cyprus never posed much of a risk to the wider banking sector and the market never sold off on the news, so any relief rally will be short-lived and this story forgotten before lunchtime.

Alternate Outcome:

This is the rally that just won’t quit.  When everything else is equal, stick with the rally because a rally can continue countless times, but it only reverses once.  Every call for a market top the last three months has been premature and I have no doubt I am early here too, the biggest question is if that is 10 or 100-points early.  Time will tell and we will continue watching the market for signs of strength and sustainability

Stay safe

WR: Stuck on 1550

By Jani Ziedins | Weekly Analysis

Weekly Review

Stocks are holding near recent highs, but how much buying is left in this rally?  AAPL’s selloff turned 6-months old this week.  Is it finally a buy again?

MARKET BEHAVIOR

Stocks dipped a modest quarter percent this week, but fell as far as 1538 following a three-day losing streak before recovering.  Volume was a tad below average and we closed the week 31-points above the 10wma, while the 40wma is 118-points behind. Both moving averages are headed higher and closing the gap as we consolidate recent gains.

MARKET SENTIMENT

The market is attracted to 1550 and recovered this level three-different times after dipping under it.  The big dip under 1540 triggered all the technical stop-losses in the area, relieving potential selling pressure on a subsequent dip.  Think of it like avalanche control.  This week’s dip set off a slide, making conditions less risky next week.  But this only protects us from selling and there is more than one way for a market to top.

Tops also occur from lack of buying.  No matter how confident holders are, they can do nothing to defend against an absence of demand. Traders most often fear a catastrophic headline that takes the legs out from under the market, but they also need to fear an overly bullish one too because that is the stealth top that sneaks up on us.  At least with horrible news, it is obvious and we are only left guessing how low will it go.  Bullish tops creep up on us because the outlook is great and everyone is confidently buying the dip.

Bullish tops are harder to trade because sentiment and demand are such squishy things.  Rallies typically go further than anyone expects, so holding longer than we are comfortable is usually the right trade.  But there also comes a point where holding is easy and we don’t want to sell because everyone knows the market is headed higher.  To me it feels like we are in the fuzzy area between these two.  I cannot say with any conviction the market already put in its top, but I can say its gone far enough for me and I’m ready for the next trade.

The thing about dip buyers is there is a fixed number of them and they will run out at some point.  We had a couple dips under 1550 this week and buyers came in and propped up the market, but how much new money is still out there if we dip under a 3rd time?  There is a reason double-bottoms are a popular reversal pattern, but tripple-bottoms not so much.  The third test of support is far less likely to bounce because dip buyers already spent most of their money on the first two dips.  Without dip buyers, who is left to prop up the market?  Value buyers eventually step in but they usually wait until prices are so attractive they cannot resist any longer.

Again, this is all just speculation on my part, but in spite of what all the gurus say about predicting the market, we are in the business of prediction.  Trading by its very nature is making predictions about future prices because lets be honest, there is no reason to buy most stocks unless we confidently predict they will be higher in the future.  At this juncture, I cannot predict the market going higher with any confidence, so I’ll wait this one out.  And more than wait it out, I’m looking to short this market because it just looks like its time.

TRADING OPPORTUNITIES

Expected Outcome:
We came a long way and there are only so many consolidations and dips that can occur before we come to the one that doesn’t bounce.  Holding on for more bounces here is getting a tad greedy.  I’m happy to sit on the sidelines, watching the market rally higher without me here because I know the odds are not in my favor.  One of the most difficult things for me to learn as a trader was being okay with leaving profits on the table.  It is never easy, but over the long-term it works out better this way.

Alternate Outcome:
Most of the time I get out too early.  I don’t mind missing another 20-ponts of upside, but I don’t want to miss the next 50 or 100-points, so I will continue watching for signs of sustainable strength.  Minor dips that find support and consolidate for 4+ days shows buying at those levels and signals a likely resumption of the rally.   We will keep looking for signs of strength and are always ready to jump back in.  The greatest advantage of the individual trader is the ease with which we can move around the market.  Of course this is a double-edged sword and many fall into the trap of over-trading every bump in the market.

INDIVIDUAL STOCKS

AAPL finally did it, it closed above the 50dma for the first time in over 5-months.  I actually find it surprising the selloff just celebrated its 6-month birthday this week.  AAPL’s weakness feels like a new thing, no doubt due to the fact no one realized it was a material selloff until several months into it.

The stock is almost 10% higher than the recent lows.  Is this enough to conclusively say the bottom is in?    Many bulls are hoping so, but the pervasive bullishness in AAPL gives the natural cynic in me something argue with.  No one is saying the stock is going to zero.  No is saying the company is failing.  No one says the products cannot compete.  Everyone believes it is a great company whose stock simply fell on tough times.  If it was a good buy at $700, then it is a steal at $450.

But what’s the other side of the argument?  What would the contrarian point out?  Some people say AAPL is a software company.  Well if that’t the case, it’s a pretty lousy software company.  The current user interface is identical to the iPhone1 that debuted five years ago.  When compared to the dynamic app icons and lock screen widgets on Android, iOS looks prehistoric.  As someone who checks my iPhone5 for stock quotes every 30 minutes, it sure would be nice if it wasn’t a six-step process.  (wake, swipe, lock-code, home button to exit last app, swipe to second icon page, click on stock app)  But since Steve Jobs didn’t check the stock market from his phone on a regular basis, AAPL sees no reason to make it easy for those of us that do.  That is the typical AAPL hubris.

Without a doubt AAPL has some of the sexiest and most desirable hardware out there, but they are miles behind the competition on the software side.  As an iPhone user, I only hope firing the head of iOS and promoting the guy in charge of hardware design means new things are coming down the pipe and we will finally have a modern OS to match our sleek hardware.

Stay safe

PM: Down-Up-Down-Up

By Jani Ziedins | End of Day Analysis

PM Update

Markets bounced back, but will it last?  AAPL finally broke above the 50dma for the first time in nearly 6-months, does this mean the worst is behind us?

MARKET BEHAVIOR

Stocks bounced back on Friday, completing a four-day pattern of down-up-down-up.  We finished nearly where we started and this volatility did nothing but humiliate bulls and bears who reacted to these gyrations.  Volume was the lightest in over a month and 17% below normal.

MARKET SENTIMENT

The market is within ten-points of all-time closing highs and many pundits predict a Cyprus resolution will finally push us over the top.  They will only be right if that is the unexpected outcome.  If it is widely expected, it is already be priced in and the market will quickly move on to the next obsession.

The frustrating thing about meeting expectations is it doesn’t move the market.  People position their portfolio based on their expectations of the future.  If everyone expected Cyprus will be a non-issue, they already looked past Cyprus when positioning their portfolio this week.  When the Cyprus issue is resolved, since it was widely expected, no one will adjust their holdings based on this news, and without new buying and selling, the market will not react.  This single concept is the bane of fundamental and news traders because they expect news or data will cause the market to move one direction, but it often moves another simply because that news and data was already priced in.

If we take Cyprus out of the picture, what are we left with?  A fairly bullish market.  No one is talking about Sequester, Debt Ceiling, or slowing growth anymore.  Even these Euro fears are isolated to an island of 800,000 people and the PIIGS hardly get a mention (Portugal, Ireland, Italy  Greece, and Spain).  If you followed the news the last few weeks, you wouldn’t even know Asia exists because they don’t get any coverage.  Where did all the worrywarts go?  If everyone is positive, should the contrarian be worried?

TRADING OPPORTUNITIES

Expected Outcome
I have a hard time coming up with a good reason to own this market other than momentum.  Without a doubt trends are more likely to continue than reverse, but at the same time, every rally must top.  I embrace cynicism with open arms and have been bullish this entire rally from the November lows.  Here is a quote from my November 15th post, the last down-day before the market bounced for good:

“The selloff has coiled the spring for an upside move pretty darn tight and the smallest bit of good news is bound to set of a gigantic bear trap.  On the other side, a huge number of skittish sellers have already sold, meaning the  potential supply is dwindling by the day.  This is setting up for a fairly asymmetrical trade where the upside potential is larger than the downside risk.  There is no reason to jump out in front of this meat grinder, but wait patiently for the right opportunity to snap up heavily discounted shares from emotional sellers and their pain will be your gain.”

I am not a bear, I am not a bull, I’m an opportunist.  I am not perfect, but I am pretty good at this stuff, and right now I am nervous.  That doesn’t mean this market cannot go higher, and in fact my I was fairly constructive of the market on November 14th, just before we had one last selloff, but hopefully no one is going to nit-pick missing the bottom by a couple of days.

I don’t have a crystal ball and many of my earlier calls have been aided by a healthy dose of luck, but this market just makes me nervous.  Maybe I am early here, but I’m okay with that.  I would rather be out of the market wishing I was in, than in the market wishing I was out.

Alternate Outcome:
The conservative trade is always to get out early and that is what I did.  I pulled the plug over a week ago at 1555 and the market rallied higher after I sold, but I also missed out on the last week of volatile swings and have been looking for my next trade ever since.  My goal is to get out early and I clearly did that here, the question is just how early.  Did we already put in the top on the 14th?  Will we set a new all-time closing high?  How about the all-time intraday high?  What about 1600?  All of those are possible and I sacrificed profit by selling too early, but it is impossible to get the top, so either we sell too early or we sell too late.  I like selling too early because I am in a better position to identify the next high-probability trade when I am sitting on cash instead of worrying if I should sell or hold weakness.  Obviously the alternate outcome is a continuation from here and I am watching closely for signals that I should get back in.

INDIVIDUAL STOCK

AAPL finally did it, it traded above the 50dam for the first time since October 5th.  For such a momentous occasion, volume was suspiciously light.  Without a doubt low-volume could be a positive signal because it shows a huge pool of cynical buyers waiting in the wings to buy this stock.  But that ignores the fact it is downright difficult to find an AAPL bear among the throngs of AAPL defenders.  If I am reading sentiment correctly, the bullish attitude in the stock indicates the low-volume breakout is already running short of buyers before it even makes its first breakout.  Clearly I am biased here, but I have serious doubts about the sustainability of the rebound and view the next $20 as an opportunity to sell strength.

How to trade this, the momentum is clearly higher and a nimble speculator could ride this higher for another $20.  But if buying is coming from short-term traders buying the breakout, expect the move to be short-term as they quickly lock in profits.   A bigger concern is failing to hold the 50dma shows a lack of follow on buying and likely means we are headed lower.

Stay safe

AM: Tug-of-war

By Jani Ziedins | Intraday Analysis

AM Update

Markets are higher as the back and forth continues.  AAPL is challenging the 50dma and is presenting a trading opportunity.

MARKET BEHAVIOR

Stocks are higher as the tug-of-war continues.

MARKET SENTIMENT

The battle between bears and bulls is heating up.  We saw a similar back-and-forth in early February.  That time the bulls prevailed, can the pull off another victory here too?

Complacency is the norm as every dip is just another buying opportunity.  All the fear from early in the year is long forgotten.  If the market will continue higher, who will be next buyer?  That is a tough question.  Shorts are avoiding this market, making it unlikely a short-squeeze will propel us higher.  If shorts are away, it probably also signals many former cynics have changed sides and joined the bandwagon.  There is money flowing out of bonds and into equities, but this is just a trickle and not enough to affect short-term volatility.  With the quarter end just days away, most money managers have already adjusted their portfolios and are ready to start fresh in April.

The news is obsessing over Cyprus, but it is an isolated event unless you live on the island or are a crooked Russian hiding your money there.  Other than those two groups, there is little exposure for the rest of the world and the risk of contagion is nil.  The worst is it could highlight weakness in the European banking system, but someone had to be living under a rock the last three-years if this is news to them.  The market is trading near pre-Cyprus levels, meaning little risk premium has been priced in, thus there will be little bounce when the crisis is resolved.

Right now we still don’t know who will buy the market going into the second quarter and that is why I remain wary of the market.  Without a doubt momentum could carry us another 10 or 20-points higher, but the next 50-point move is lower, not higher.

TRADING OPPORTUNITIES

Expected Outcome:
When everyone is buying the dip, we should sell the strength.  Contrarian investing works because when everyone is bullish and owns stock, there is no one left to buy and keep pushing prices higher.  It has nothing to do with fundamentals and everything to do with supply and demand.  Without demand, prices cannot continue higher no matter how good the news.

I am really tempted to short today’s strength.  Three is often the magic number in the markets.  The first peak usually bounces back because everyone is still excited by the rally.  The second peak also bounces, but less enthusiastically.  By the time we get around to the third dip, most of the buyers bought the first two dips and there is little left to prop up this dip.  Over a very short time-frame, we have that with last Thursday’s peak, this Wednesday’s rebound, and now today’s strength.  If we cannot hold these levels, there are few buyers left to buy the dip and the slide will start shaking free previously confident holders.

Alternate Outcome:
We continued past February’s volatility and there is no reason we can’t do it again.  But just because something is possible doesn’t make it a good trade.  Success in this game comes from understanding probabilities.   Of course we could continue higher, but given how far we’ve come and all the other warning signs, we should be more fearful of this market than enthusiastic.  Most of my bearish thesis rests on weakness after the first quarter chase ends.  If the market holds up and builds constructive support in April, that signals the rally is still on.  These things always come to an end at some point, but they often surprise us by lasting longer than we ever imagined.  I expect near-term weakness, but am open-minded to a continuation.

INDIVIDUAL STOCKS

AAPL is up to the 50dma.  Reclaiming this moving average is significant because it hasn’t been above it since early October.  The biggest question is if people are buying in anticipation of this event and that leave few buyers to buy the actual breakout.  We often see this with expected news events and is where the axiom “Buy the rumor, sell the news” comes from.

AAPL remains one of the most followed and loved stocks in the market.  This technical milestone will be shouted from the hilltops everyone will know about it.   It will be interesting to see how traders respond.  Anyone out of the stock could use this signal to buy the dip.  But how far will this dip-buying carry the stock without a fundamental catalyst to bring in a wider pool of buyers?

The easy trade here is buying the break above the 50dma and using a stop $5 under the MA.  If the stock doesn’t explode to the upside, then most of the buying happened ahead of time and there will be little new demand, making this a sell-the-news trade.  If the stock cannot hold the 50dma and crashes back through, it will likely continue sliding to new lows.  If a trader’s thesis is to profit on the strength from a 50dma breakout, if that surge doesn’t happen, they need to sell ASAP because their original analysis is flawed and invalid.  Long-term success in the markets is all about defense, not offense.

Stay safe