All Posts by Jani Ziedins

Another day of sideways trade

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

Markets are stuck again at the 1400 level and struggling to make a move either direction.  This is making for boring blogging because there is nothing new and insightful to report.  We continue to show support at these levels simply because the previous pattern was to sell-off after a run up and we have instead been holding steady.

Institutional buyers are not buying, but they are not selling either.  They are comfortable with their current potions and are not looking to take profits as they would if they expected the markets to head lower from here.  But they are also reluctant to commit new capital to these markets.  Cautiously optimistic is how you might interpret this price action.

The lack of a sell-off as we dipped under 1400 this morning also shows bears are unable to mount a meaningful assault on this rally.  But the thing about the market is it will fall under its own weight if there is not follow on buying soon.  People only buy something when they think it will go up, but they can sell for any number of reasons other than thinking the stock will go down.  A pension fund will sell assets to finance its monthly obligations to retirees or a fund will re-balance part of its portfolio that has had a good quarter to get back into balance with its stated ratios.  This asymmetrical motivations between buying and selling is why stocks will tend to drift lower when nothing else is going on. The challenge for this market is finding a reason to rally after staying flat for the last week.  If we can’t find a reason to breakout, we should expect the market to drift lower for these reasons.

MARKET BEHAVIOR

The last time we saw 6 days of tight, sideways trade was at the end of April, which coincidentally (or not) was also at the 1400 level.  The ominous thing about this comparison is this price action indicated a stall before falling 100 points.  Will we see the same thing here, or will the third assault on 1400 be the charm?

TRADING OPPORTUNITIES

It seems the market has gotten numb to all the negative headlines the bears are shouting about, China slowdown, US recession, Euro collapse, etc.  But since everyone, even non-traders has heard these headlines, they are already fully priced in the market.  We can safely ignore everything in the media; what we need to fear and trade is the news no one is talking about yet.  Maybe that is trading a US and global recover from the long side.  Or trading the global markets will implode 2008-style from the short side.

The lack of bulls makes the contrarian in me favor the upside, but this is nothing more than a game of probabilities because there can never be certainty about the future.  There is always a risk of being wrong and losing money, but the goal is not to always be right, but to make more money than we lose by being disciplined in the way we trade.  Combining unique market insight with savvy money management is the best way to come out ahead over the long-run.

A 5th straight day of tight trade around 1400

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The S&P500 continues to flirt with the 1400 level for the 5th day.  We are not selling off, but we are not surging either.  It seems we have a staring contest between the bulls and bears to see who blinks first.  But the lack of a sell-off from these elevated levels is far more encouraging than the lack of follow on breakout buying is concerning.   It is far easier for the market to fall than it is to climb.  So holding a key level is in fact bullish, especially in the face of all this skepticism.

MARKET BEHAVIOR

This tight sideways trade is not something we’ve seen out of the indexes in quite some time.  We’ve had very small intraday ranges and even tighter closes.  Chances are this is building to something and we’ll probably see a 1%+ move out of this when we get a headline that excites traders either up or down.  An upside move will put pressure on the bears to change their minds or at the very least cover the shorts they’ve laid down the last several days.

TRADING OPPORTUNITIES

With the market hardly budging the last week, there is not much new to add.  This stability supports the bull case and gives us the green light to buy CAN SLIM stocks.

There is always risk in the markets no matter how well things set up, so we need be mindful of our risk and stick with our stop-loss plans just in case the markets get caught off guard by an unexpected headline.

All of the above analysis is getting fairly redundant because we haven’t seen anything new from the markets in the last several days, but that quiet trade continues to support and reinforce the previous bullish analysis.  Maybe next week we’ll see the upside breakout and the surge from short covering and chasing.

Stay safe and have a good weekend

New leaders emerge, old leaders fade

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

Stocks are holding around the 1400 level and volume continues to be below average.  But while many will say low volume shows a lack of buying by institutional investors, the thing to remember is buying and selling is symmetrical, ie for every buyer you must have a seller.  Using that logic, we can flip the previous statement on its head and say that the low volume also indicates not many institutions are interested in selling at these levels either.  The lack of selling at these high levels means holders of stocks are not cashing in.  The low volume also shows bears and swing trades have exhausted themselves because they have nothing left to sell and are unable to lean on the market.  So while many are leery of the light volume, I think it is very bullish.

MARKET BEHAVIOR

This tight trade after a rally is uncharacteristic of previous pullbacks that corrected rather abruptly once they ran out of buyers.  The 1400 price level is holding up well even when buying is slowing down, as indicated by low volume.  Again another change in character from this summer’s pattern.  All this indicates to me we are leaving the volatile swing trading and moving on to something else, so trading strategies that worked over the summer won’t work going into the fall.

TRADING OPPORTUNITIES

The market is holding up nicely and everything is indicating it is safe to buy high quality CAN SLIM stocks breaking out of proper bases.  There are several breakouts in today’s Stocks on the Move section of Investors.com.  Many of these are smaller and unfamiliar names.  Always do your background research before blindly buying a breakout just because it has a high composite rating from IBD.

INDIVIDUAL STOCKS

While we are seeing a lot of new names pop up in IBD’s screens, we are also seeing some of the old favorites stumble.  PCLN yesterday, MNST today, LULU this summer.  These old leaders are showing cracks and for many former leaders, these cracks will turn fatal.  We need to be looking out for the next leaders, not chasing the old ones.  Remember WON’s quote, “All stocks are bad unless they go up.”  Don’t let a cheap price or an attractive pullback tempt you into jumping in an old and tired leader.  IBD’s research show the average leaders correct 73% after their run is over, meaning there is a lot more room on the downside no matter how cheap they seem.  A few of these leaders will recover, but wait for the company to form a new base and have a valid breakout before buying.  As I said yesterday, a pullback because of a downgrade can bounce back pretty quickly, but slowing fundamentals is far more terminal for a high P/E stock.

Stay safe

Stock testing 1400

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The S&P500 briefly dipped under the 1400 level as doubters and swing traders challenged yesterday’s breakout.  Given all the cynicism and how little the bears were able dent the rally demonstrates bulls are firmly in control at this point.  Even though bears make up the majority, they have exhausted all their resources fighting this rally and are helpless to stop it.  Little by little the bears will give up, admit defeat, and change sides.  Their buying will add to the rally and the higher it goes, the more pressure there will be on the remaining bears to change sides.

No doubt there could be an unexpected headline that turns the market on its head, but with everything we know and what is expected and feared out of employment, economy, China, and Europe, the trend is clearly higher no matter how dire the world seems to the fundamentalists.  We trade the market we are given and this one is inclined to go higher.  And we should trade it from the long side until everyone has become bullish, at which point we cash in and go short.

MARKET BEHAVIOR

Today’s price action supports yesterday’s breakout.  No doubt we could see a pullback into the trading range, but it seems like the market has broken from the summers trading range and we should not see a retracement back to the lower trend line.  If we do head back to the lower trend line, that would indicate this breakout has failed and we should anticipate breaking through the lower trend line and continuing materially lower.

The interesting thing to watch for is the new personality the market adopts going into the fall.  With the bullishness seen in the charts, we could see a nice rally as all the bears end up chasing the market and are forced to buy every dip.  Their buying of the dips will keep any pullback modest and make it easy to hold stocks.

TRADING OPPORTUNITIES

Plan A:  Buy this breakout and there are lots of high quality stocks to choose from.  But be careful and don’t chase a stock that is already extended from a proper buy point.  There will be some volatility as we try to hold this breakout and try for a new 52-week high.  Skeptics and swing traders will shoot against the breakout and they could have some temporary success holding down the markets.  Given growth stocks will react two to three times as much as the indexes, buying an extended stock could lead to a shakeout if the market pulls back.  Most winning stocks won’t correct more than 5% from its proper buy-point, but if you buy the stock more than 5% from the proper buy poiont you can easily get shaken out on a very normal and healthy test of the breakout.  Remember half of all breakouts test the buy point and we need to buy right so we can sit through that.

Plan B:  A modest dip under 1400 is expected, but if the bears are really as weak as they seem, the market will reverse higher rather quickly.  But if the slide continues deeper, we need to reevaluate our position because the bears are stronger than expected and it also shows bulls lack conviction to hold.  Breaking the mid-point of the trading range will be a key benchmark to watch for.

INDIVIDUAL STOCKS

PCLN is getting crushed today.  It is one thing to have a high-flier pullback due to a downgrade or skepticism.  Professional opinions are no more reliable than amateur ones when it comes to near-term price moves and often the more bearish the pros are, the more upside potential .  But when a company starts reporting real slowdowns in business, that is something an investor cannot ignore.  Opinion is opinion, but fact is fact.  Maybe this is just a single bad quarter for PCLN and they’ll bounce back next quarter, but it could also signal a fundamental shift in growth trends and that can absolutely crush a high P/E stock whose valuation is based entirely on huge growth expectations.  PCLN has had a huge run, but most of these stocks come back down to earth eventually and maybe this could be PCLN’s turn.

PCLN could sell off for a few days, but most of these sell offs don’t go straight down.  They’ll sell off hard, but then rebound and look like they are recovering.  It could even retake the 50dma, but if the stock really is broken, that would be a great opportunity time to place a short.

Or this could just be temporary growing pains and PCLN is forming another base that will eventually breakout to new highs in a few months.  But don’t buy until you get a legitimate breakout.  Bottom fishing and hoping for a recovery is not a high probability trading strategy.  If growth really is slowing, that could cut the P/E and thus the price in half, meaning there could be a lot more room on the downside.

Stay safe

Cleared 1400

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

After some reluctance yesterday, the market finally reclaimed the 1400 level.  There is more psychological significance to this round number than anything else, but since the market is all about what other traders think, it is just as important as any other technical level.  Back in the spring the rally stalled out after hitting the 1400 level in March and late April.  But the market often works in forward steps and retracements; ie two steps forward, one step back.  If that is the case here, then we have the opportunity to hold and then move past 1400.

The low volume continues to show a lack of support by major players, but if these big money guys are wrong, their performance will suffer and they will have to chase the market this Fall.  This desperation to catch the market will lead to big money buying regardless of price or fundamentals.  Remember, the market tries to humiliate the greatest number of traders at any given time.  With the abundance of bearishness and skepticism, it is little wonder why the market is rallying.

The reason the market moves opposite of the crowd is because the crowd has already made their move, either buying or selling, and are now simply along for the ride.  All the bears are out of the market, or short, and if all their selling couldn’t push the market lower, then there is good support and it will rally once the bears have completed all their selling.  And that is what we are seeing here.  The bears and swing traders have leaned on this market with all their strength to no avail.  So even though bears out number bulls, the bears are exhausted and have little left continue the fight.

MARKET BEHAVIOR

Today’s rally above 1400 is pushing us through the upper end of the summer trading channel.  This is showing another break of pattern.  There have been a number of hints at a changing character, meaning we need to keep our eyes peeled for what comes next.  The best way to profit in the market is to identify and trade new trends early while they still work.  It is too early to identify a new pattern because we are in the middle of the transition, but we can use sentiment and history to guess at what is ahead.

Summer is typically listless and we get more directional moves in the Fall as all the senior traders come back from vacation and get serious about meeting year-end performance benchmarks.  And lets not forget Fall is a popular time for major market sell-offs.  At this point we could go either way, but we should expect some movement out of this trading channel.   This should be good news for most breakout traders who have been getting jerked around by this summers volatility.

TRADING OPPORTUNITIES

The best opportunities continue being on the long side as many leading stocks are breaking out or finishing their bases.  We are still late in a bull market so don’t be expecting everything to double and triple.  Most of the time take your 20% gain and move on except in the most rare of circumstances where a stock is showing exceptional strength.  If we see a rally, it will probably peter out late in the year after the election and Euro stabilization are priced in.  Remember, bulls make money, bears make money, and pigs get slaughtered.  We’re in this to make money, so always be prepared to take your worthwhile profits.

Stay safe

Market holds up

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The stock market held Friday’s big gains, all-be-it in lower volume.  Lower volume will scare off a lot of investors because they think it shows lack of commitment by institutional buyers.  But if people remember, we saw the same thing last fall and that lead to the phenomenal “light volume” rally.  Like anything else in the stock market, the volume rule is only right about 1/2 the time.

The reason any stock market rule is only right 1/2 the time is because if it were more reliable than that, some savvy hedge fund manager would make an absolute killing arbitraging it.  He would buy high-volume breakouts and short just as many low-volume ones.  This means he is long just as much as he is short, so his net market exposure is zero.  The market goes down he loses on his longs, but makes it back on his shorts.  Same applies if the market goes up.  In theory if his broad market exposure is zero, then his risk is zero.  But where he makes his money is the performance difference between the high-volume breakouts and low-volume breakouts.  If high volume breakouts really did perform better than low volume breakouts, then he would make lots of money with this strategy with very low risk.  Now maybe it is just me, but trading breakouts with zero risk sounds too good to be true, and that’s because it is.  Now don’t get me wrong, there are legitimate arbitrage opportunities in the market that have very little risk, but they are few and far between, and trading volume is not one of them.

That was a very long way of saying low-volume can be a warning sign some times and other times it can be encouraging.  In today’s environment I actually find this low volume encouraging because indicates bearishness by big money.  Their reluctance to buy at these levels is setting up a situation where money managers will yet again find themselves behind the curve if this market continues to rise.  And just like last year, they will get panicked and start chasing the market higher if it doesn’t pullback like they are anticipating.  Their pain becomes your gain.

MARKET BEHAVIOR

Our most recent pullback did not come back to the lower channel line before rebounding, showing the bears losing even more control than they had in the previous failed attempts to push the market lower.  The series of higher-lows and now the quicker reversal show the bulls clearly have the upper hand.  Chances are this is indicating a move to a new character for the markets.  I expect we’ll probably get away from this choppiness and that will make it easier to hold stocks without getting shaken out.  We probably won’t see a powerful rally like we saw in Q1, but a gentle run up into the election will be nice.

The interesting thing to note is market is up over 10% for the year, not something you’d expect if you were simply reading headlines and sampling investor sentiment.  As long as investors remain reluctant to buy this market, we’ll continue to have plenty of fuel to push this market higher.

TRADING OPPORTUNITIES

Plan A:  It should get easier to hold stocks for larger gains.  Over the last few months the best trade was cashing in any gains as soon as you made them because they were likely to disappear within a few days.  But this choppiness should be easing and holds of multiple weeks should be possible and profitable.

Many of the former leaders are struggling, so look for leadership in new names.  Maybe those old names will come back a little further along in the rally, or maybe it is time for new leadership.  Let the price action be your guide and buy what is hot, not what was hot.

Plan B:  The market continues to be vulnerable to a major complication out of Europe since we are within 2% of a 52-week high.  But don’t confuse major complication with the typical bickering and threats of doom-and-gloom that the market has grown immune to.  Major complication would be something like a PIIGS nation actually refusing to service its debt.  If something happens that is dramatically worse than what the market is expecting, that could crater prices in a hurry and we should be prepared to cut bait quickly.  In a situation like that don’t be tempted to play that “lets see if stocks come back tomorrow” game.

Stay safe

Employment numbers crush bears

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

Big gains in the market after employment numbers smashed expectations. This blew all the bears and swing traders out of the water and this run up was due in part to a huge short squeeze. When too many market participants are on one side of the market, this sets up an explosive move in the opposite direction. And that is exactly what we’ve seen over the last month and a half as all the biggest moves have been to the upside.

This explosive upside behavior is a departure from the way the market traditionally acts where downside moves are bigger. But while this recent pattern is contradictory to market convention, the sentiment causing these large pops is exactly the same.

Large moves are almost always driven by fear of loss. Most often we see this to the downside, but over the last month the upside moves have been most dramatic because the large short interest. This sets up for a short squeeze where bears are sent rushing for the exits when the market moves against them. To close out their short positions, bears must buy stock, adding fuel to the rally. And as of recent, these powerful short squeezes show just how bearish this market is.

MARKET BEHAVIOR

The market made another new high without the market falling to the low of the trading range, showing we are moving out of this channel. So far this move seems to be breaking out to the upside. Now the challenge will be to figure out what the next pattern will be while there is still lots of time to trade it. A bull rally into the election would be nice, fingers crossed.

TRADING OPPORTUNITIES

Today’s strength furthers the case for a bull rally. It won’t be an easy buy because they never are, but hopefully we’re transitioning past the 40 point swings we’ve been living with all summer. Find the best growth stocks and stick to your trading plan. Buying right is what will keep you from getting shaken out and if we the market continues to find support, we can start holding for larger gains instead of selling for quick profits like what was required over the summer.

Stay safe

ECB lets down the markets

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The stock market foolishly expected fireworks out of the ECB today, but all they got was lip service.  This disappointment lead to today’s sell-off.  We’ve given up most of last Friday’s stellar gains, but the silver lining is the market clawed back some of those losses in the last hours of trade.

So where does this leave the markets?  There continues to be a bearish overtone as a large number of traders are anticipating a major sell-off due to the sagging global economy and the fiscal disaster in both the US and Europe.  But if this is a widely held view, then it is already priced in the market.  No doubt we could see a panic driven slide if some ruinous headline crosses the news-wire, but baring that, I expect the market will find its footing quickly given the large amount of bearish sentiment already baked in at this point.  For this reason the contrarian in me continues to be bullish over the medium and long term.  But the near-term volatility is a tougher nut to crack.

If the Europeans continue to play nice, we’ll see a rally into the US elections regardless of which party is polling the strongest.  No matter what the partisans tell you, the market is agnostic when it comes to politics and political parties.  We’ve hade massive rallies under Democrats and bone crushing crashes under Republicans.  What the market really can’t stand is uncertainty, that is why the closer we get to the election, the more positive the market will be.  At this point it will be able to anticipate the eventual winner and thus extrapolate the rules and regulations going forward.  For example, who would have guessed the stock markets would rally after the Supreme Court shocked everyone by upholding Obamacare?  Surely that was horrible and unexpected news for the market, so why didn’t the market tank?  It wasn’t because the markets liked the bill, but because the market can live with the bill and knowing what to expect is far more palatable than having the health care debate reopened.

It is examples like the reaction Obamacare that confuse many investors because they can’t understand why the markets didn’t respond the way they expected them to.  But this is where it is critical to understand what matters to the market when trying to make reason of the market’s rhyme.  In this case, the markets hate uncertainty more than bad news, and thus the rally.  No doubt the same thing could play out with the issues currently facing us.  Bad news or not, the market can very easily rally simply through clarity coming from leadership in the US and Europe.  Part of this will come from November’s elections.

MARKET PERSONALITY

The markets were down for the day, but the afternoon trade recovered some of those losses.  An interesting trend has developed recently where the markets would plunge on bad news (Obamacare ruling, Fed inaction, ECB inaction, etc), but then quickly bounce back.  The swing traders would jump on the short bandwagon as soon as the news broke and drive the market down sharply, but nearly as quik as it started, value buyers would jump in and turn the market right back around.  In fact, most of these bounces turned into multi-day rallies.  Will we see this same thing happen here too?

It all depends on why the value buyers were buying.  Was most of the buying coming from bulls banking on the Fed and ECB cranking up the printing presses and now that their hopes have been dashed, their will to support the market has vanished?  Or is the market simply too bearish already and every attempt at luering in new bears fails because everyone is already on the bear side and no one is left to sell?

TRADING OPPORTUNITIES

Tomorrow will be a key day.  If value buyers step in and support us at these levels, that will go a long way to show this market is on firm ground.  But if all of the recent support was simply swing traders trying to get in ahead of a major announcement by the Fed or ECB, then that foundation will crumble as if it were built on quicksand.  If the market rallies on Friday, that is a green light to start getting aggressive with leading stocks.  But if the market struggles, look to close out positions as a hedge against a further move lower.  We could find support at the 50dma but I wouldn’t count on it.  Failing to find support at the 50dma or 200dma could easily lead to a sell-off taking us down to June’s low.

Stay safe

Consolidation continues

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The market continues trading sideways for a third day.  This demonstrates strength since we are at the top of the obvious trading range and many technical traders are expect a pullback.  Holding strong in the face of that expectation means there is support behind this market and we could see a breakout to the upside.  Many swing traders are shorting the market in anticipation of a pullback, but the market is refusing to budge.  Any positive news will have these shorts rushing to cover and the market will surge higher due to their buying.

The big news events on tap are comments from the Fed on Wednesday and the ECB on Thursday, but we shouldn’t expect anything surprising form either of these.  They both know the market is on egg shells and will be very careful with every word because saying one wrong word will crater the markets and make their jobs even more difficult.

MARKET PERSONALITY

The market has traded withing a tight 40-point ascending channel since May, but we should be prepared for the market change its character soon since patterns usually change after they become obvious to everyone.  We are already seeing a slight change with this three-days of tight trade after a run up.  Past rallies reversed quickly, so by that measure we have already broken part of the pattern.  The other interesting thing to note is that over the last few months sideways trade always preceded a move higher. This sideways consolidation could be building a base for another leg of this rally.

TRADING OPPORTUNITIES

Plan A:  Both market sentiment and personality indicate there is more upside left in this rally.  At the very least a swing trader should be reluctant to short the market here.  The more adventurous should be buying these strong breakouts in leading stocks.

Plan B:  While a move higher seems more probably the way the market is setting up, an unexpected news event could sent the market sharply lower and paranoid holders will run for the exits and bears will pile on the shorts.  Given the strong potential for a move higher, any weakness will invalidate this thesis and we should then look for a market breakdown and an extended move to the lower end of the range.

In the markets no one can know for certain what will happen next.  The best way to approach this uncertainty is to have a multiple plans ready for various outcomes and always be prepared for whatever the market gives you.  In addition, anticipating multiple outcomes helps mitigate the dangerous tunnel vision that occurs when a person spends too much time thinking about a single outcome.

Stay safe

Swing traders are unable to push the market down

By Jani Ziedins | Intraday Analysis

MARKET SENTIMENT

The markets are trading in a tight range for the second day in a row.  So far this is showing good support at these levels as the swing traders are unable to push the markets lower at the upper end of the trading channel.  They are selling into this strength anticipating the next swing lower, but the market is holding up nicely.  The recent rally chased off all the bears and tempted in a few bulls on the breakout, but adding further gains to this breakout will give a larger number of cautious bulls the confidence to wade in, pushing the market higher.

Of course we do have some downside risk if all those bears sitting on the sidelines decide to try again and pile on the shorts in unison.  If this happens, the key level to watch will be the 50dma to see if the bears can finally break the back of this rally.  But so far the bulls are still in control and the bears are licking their wounds.

Looking at the bigger picture, even thought we are close to 52-week highs, there is a large amount of bearishness in the markets.  There is a lot of cynicism toward this rally and that is part of the reason the market is holding up so well.  All of these cynics have already sold or shorted the markets, meaning they can no longer pressure the markets.  And in fact they are built in buyers if they end up covering their shorts or are forced to chase a rising market.  This is exactly what we saw this winter as the markets had the best first quarter in decades.

But the thing to be careful of is oftentimes the bears are right, just early.  Success in the markets is all about timing, so early is the same thing as being wrong, but just because the market is holding up doesn’t automatically mean the bears are simply paranoid and wrong.  NFLX was one of the most heavily shorted stocks last year at $200.  While there was still a lot of upside left in the name as it eventually rose to $300, any bull would have done himself a favor to at least acknowledge the risks the bears were bring up.

The market is holding up very well right now and we are trending higher in the face of all the negative sentiment.  Conversion of bears to bulls could fuel a powerful rally, but any bull at least needs to recognize the risks bears are bringing up.

MARKET PERSONALITY

The markets continue to be heavily influenced by the currency markets and technical analysis of the EUR/USD is far more predictive of the equities market than the actual equity market charts. This skew from the foreign exchange markets is making it difficult to read the equities markets based on traditional behavior.  Globalization is making it a challenge for investors to specialize in one market and ignore all the others.  The more intertwined the world becomes, the more diverse successful investors will need to be.

Right now we are at the upper end of the trading range, and if we keep the recent pattern of staying within in this 40 point ascending channel, we will see a sell-off to the 1340 level.  But this will be the 5th swing of this pattern and it is getting a bit obvious and the market hates being obvious.  And we can see that as we are holding up near the high of the trading range for the second day in a row.  Past reversals happened fairly quick, so this is a departure already from the previous pattern.  If we do in fact have a lot of swing traders shorting the market here, but the market is not going lower, that could indicate a move higher since the bullish demand is offsetting the swing-traders selling.

TRADING OPPORTUNITIES

As always the market can head higher or it can head lower.  Brilliant insight, I know, but the market is at a turning point.  Right now the market is setting up for a move higher.  Between all the existing bearishness and holding at the upper end of the range indicate the market is ready for another leg higher.

But there is still very real risk lower since we have so much air under us from the recent rally and being near a 52-week high.  But the market has proven that it is willing to rally in the absence of horrible news.  This means barring a major shock to the system, the market will hold up.  But if we do hit a downdraft, be prepared to pull the ripcord quickly because the down-leg has room to run.

Based on what I see, trade the long side, but proceed with caution and be ready to run for cover.

Some leading stocks are doing really well over the last few weeks as the weight of the market has been lifted off their shoulders.  But do be careful because the higher they rise, the harder they fall if the market gets sucked into a correction.  Limiting any new buy to no more than 5% past the proper buy-point and that will greatly reduce the risk of getting shaken out in a normal pullback.

Stay safe.

Market trades flat after two-day rally

By Jani Ziedins | Intraday Analysis

I’m trying a new layout for these blog posts where I break it down into sections of Market Sentiment, Market Personality, Trading Opportunities, and Other Thoughts.

MARKET SENTIMENT

The markets opened higher this morning, but gave back those gains and traded slightly in the red for the rest of the morning.  Who knows what the news was, but it really doesn’t matter because the crowd is moving the markets, not the news.  Thursday and Friday’s strong rallies ran off all the bears in a powerful short squeeze.  Friday exceeded July 19th’s high, marking yet another higher-high.  You could see the last of the bears covering their shorts in the intraday chart as we surged higher after breaking through the previous high of 1380. These were the last of the weak-kneed bears running for cover.

With most of the bears already run out of the market over the last couple days, that source of enthusiastic buying will dry up.  To continue higher we’ll need bulls to step up and commit fresh capital at these levels.

On Friday IBD said the market started a new confirmed uptrend given Thursday’s powerful rally.  The interesting thing was reading the article’s reader comments to yet another change in the market pulse.  As I stated earlier, the harder it is to buy a breakout, the more likely it is to succeed.   Everyone was buying the earlier breakouts and they failed.  But here we are countless failed breakouts later on both the low and high side, and both bulls and bears are getting highly cynical and reluctant to be fooled yet again.  But the ironic thing is these breakouts going forward are far more likely to work than the earlier ones everyone was excited about.

MARKET PERSONALITY

The market has inched higher in a series of higher-lows and higher-highs.  While the ups and downs felt dramatic, the upward channel we’ve been tracing is only 40 points wide.  So far the best trade has been going against the market each time it reaches the upper or lower bounds of this channel.  But we are now working on our 5th swing in this channel and this pattern is becoming obvious to even the most inexperienced traders.  The market doesn’t like being obvious and chances are we are getting close to a change in personality, most likely represented by a breakout above or below the channel lines.

TRADING OPPORTUNITIES

If we are getting close to a change in market personality, that will create better trading opportunities than the 40 point chop we’ve been stuck in since mid-May.  The big question is which way will the market breakout, to the upside or the downside?  But as nimble traders, we can wait for the market to tell us before we commit our capital.

Plan A:  Being so close to a 52week high means there is a lot of air underneath us if some bad news comes along and surprises the market.  Most likely this will be a breakdown in the cooperation between the various European leaders trying to salvage the Euro.  A move lower could see a break under the 50dma, 200dma, 1300, and even June 4ths low of 1266.  Obviously this would be a bad time to be long stock, so it is a situation to be wary of.

Plan B:  The market could continue rallying in the face of all the uncertainty in the world.  In situations like this, it is said the markets climb a “wall of worry”.  This is because the markets are forward-looking in nature and are anticipating a positive resolution to the current crises.   It is this slow transition from a large group of worry-worts to a more positive outlook as the group slowly realizes the worst will not happen and bears turn to bulls one and two at a time. It is this slow transition from bears to bulls that causes the markets to rally.

Plan A & B are the two potential outcomes we need to anticipate and prepare to trade whichever one plays out.  We don’t know what the market will do next, but we can have a plan ready and jump on board the next trend.

OTHER THOUGHTS

Seems I struck a nerve with my criticism of gurus and systems.  The thing we need to remember is it doesn’t matter how much money WON makes in the markets, but how much money his students make.  If we are following his system, we need to evaluate the success of other followers in order to understand the capability of the system and the probability of our own success.  WON could very well have a 6th sense about the markets that lets him achieve all his success, but if he can’t teach that same intuition to his students, everyone else will fail to reach his same level of success no matter how closely they follow the system.

As always, stay safe

What’s your edge?

By Jani Ziedins | Intraday Analysis

The market continued yesterday’s rally this morning and is getting close to exceeding July 19th’s peak.  The last couple days put in yet another higher-low and we are looking at another higher-high if this rally goes a few points further.  The market’s gyrations continue to exhibit indecisiveness, but there is an upward bias as we are slowly creeping higher with each swing.

Fundamentally speaking, earnings seasons has been at best unimpressive.  This makes it highly noteworthy to see the markets holding 3% from its 52-week high.  Over the short-run the markets can ignore fundamentals as other factors dominate the market’s psyche.  Right now Europe and the exchange rates are front and center.  As we’ve seen, a declining dollar will rally the market even when all the marquee companies are lowering expectations.  The question becomes, what is more powerful over the longer-term, the economy or the dollar?  And of course this is not an exclusive either or situation.  A weak dollar can boost earnings and a strong dollar can dilute earnings.

If you trade the markets, the one question you must answer is “what’s my edge?”  The only way to consistently make money in this game is to have an edge over everyone else.  Maybe it is inside information, maybe it is lightning quick execution, maybe it is arbitrage, or maybe something else.  But without an edge, you are just throwing darts based on a gut feeling of what will happen next.  Why is your guess about the future any better than the next guys?  The truth is it isn’t and without a quantifiable edge your success is based on nothing more than luck.

Gurus would have you believe following their system gives you and edge.  But if it is a widely publicized system, where is the edge if everyone else knows the same techniques?  There is a saying in this business, it is far more profitable to sell advice than it is to take advice.  These gurus are not rich from trading, but from selling their system.  It is noble to think these gurus are wealthy beyond their wildest dreams from trading but are so unselfish that they spend half the year away from home living out of a suitcase simply because they love teaching.  Really?  I don’t know about you, but if I were loaded, living in motels is not how I’d spend my time.

Now don’t get me wrong, teaching and helping others makes people feel good, but there is a big difference between leading a local meetup group or teaching at a community college and spending months on the road selling multi-thousand dollar seminars.  Never forget these people are in the business of selling seminars and are not helping out of the goodness of their heart.

But that is not to say these systems cannot work.  In fact most of them do work………some of the time.  The key to trading any system is knowing when it is applicable and when it is not.  For traders without inside information or supercomputers co-located next to the exchanges, this is one of the few edges left to us.  Any system is like a tool and it has a time and place where it works great.  But using it somewhere any other time is bound to lead to undesired results.

CAN SLIM is a great system, but there is a very specific window where it works exceptionally well.  The rest of the time it will produce false buy signals and erode your account one false breakout at a time.  As I’ve shared many times before, I find it very easy to make money in the markets.  The hardest part is keeping those profits.

Back to the original question, what is your edge?  What makes you a better trader than the other people in our meetup group?  What makes you better than all the other CAN SLIM traders?  What makes you a better trader than other retail investors?  What makes you a better trader than all the pros on Wall Street?  If you don’t have a good answer to this question, how do you expect to beat all the other traders in the market and consistently out perform the market?  This is a game of skill and you need that edge to come out ahead.  If you can’t convincingly answer this question, you have two options.  First, study and learn the markets until you develop that edge.  Or if you can’t beat ’em, join ’em.  Buying and holding index funds is the easiest and most reliable way to make money in the markets.

Now some people will argue with me, but if you think I am wrong, will your trading account back you up?  Are you consistently outperforming the markets without an edge?  Proof is in the pudding.  If you find the market is easy to make money off of, then I’m wrong.  But if you struggle to beat the markets, that should be sign your approach is incomplete and you need to find that missing ingredient if you want to improve.

Back to the present, the markets are up for a couple days and then down for a couple.  We’re in the middle of two strong up days.  If we continue this pattern, we have one or two up days left before we pullback.  Up for a couple days, down for a couple days.  The best way to trade this market is cash in any profits after a strong day and then prepare for the reversal.  The only way to profit in this market is scalping a few percent at a time.  Wait any longer and your profits will evaporate.

The news out of Europe continues to be encouraging, contributing to this upward trend.  But what happens if we hit a rough patch when some of the anti-austerity leaders start asking for too much at these meetings and we hit another stalemate?  Things have been going smoothly for a while now, but remember these are politicians we are talking about here and they can only play nice for so long.  Given our proximity to 52-week highs, I continue to think there is material headline risk to the downside if we see one of these Euro meetings blowup.

Stay safe

ECB promises to do what it takes

By Jani Ziedins | Intraday Analysis

The markets jumped after a strongly worded statement from the president of the ECB saying they would do whatever it takes to preserve the Euro.  That sent the US markets up nearly 2% at the open.  But just a few hours into the day the markets gave up 1/2 of those gains.  For most of the summer the markets have been leaderless and subject to knee-jerk reactions to this comment or that headline.  This choppiness makes the markets difficult to navigate and no doubt chewed up anyone that got in the way.

Will the markets rally further on this verbal support from the ECB?  Or will this be a short-lived lift that quickly settles back to the 50dma?  Any guess is simply a toss of the coin and makes it very difficult to trade.  The smart money is sitting out this market and waiting for better trading opportunities.

The US equities market continues to be a derivative of the currency markets.  Early this morning the Euro shot up 2 cents against the Dollar after the ECB president’s comments.  Exchange rates are in the driver’s seat these days and this has completely changed the personality of the equities markets.  It is no longer about fundamentals or expectations of future growth, but a battle over whose currency sucks the least. At the moment the USD sucks the least, but Congress and the Fed are trying to change that.

Is this currency correlation just a temporary phenomena, or paradigm shift due to increasing globalization of most companies?  This overlap and correlation between the various markets and assets makes it increasingly more difficult for a trader to focus exclusively on one market.  Going forward, the most successful traders will need to understand all these interactions in an increasingly interdependent world.

AAPL failed to wow the market the other day and fell back under its 50dma.  But what was the leader of the markets in the first quarter has lost some of its influence.  A few moths ago an Apple stumble would have taken down the markets, but now the new standard-bearer is the USD and the currency markets. For better or worse the markets are constantly evolving and as traders we need to stay on top of these changes.

Stay safe

Stuck on the 50

By Jani Ziedins | Intraday Analysis

Third day in a row we’ve flirted with the 50dma.  As with everything in the markets, there are two ways to interpret this price action.  Half the money in the market thinks we’ll head higher from here and the other half thinks we are headed lower.  The market price is the exact balance point between these two points of view and it is always moving up or down from day-to-day or even minute to minute as traders change their minds.  This is what moves the markets.

For the bulls, holding solid above the 50dma shows strong support at these levels as we are building a base to launch the next move higher.  But for the bears, failing to bounce off of the 50dma in a meaningful way shows lack of conviction from buyers to sustain a rally from these levels.  Both sides are exceptionally smart, savvy, and informed in their logic.  That is what makes trading one of the most difficult ways to make a living in the entire world.  We are attempting to outsmart and take money from people far smarter and better informed than we are.  That is the brashness required to be a stock speculator, but this is the game we chose to play, so lets try to figure it out and see if we can get an edge on everyone else.

If we bounce off the 50dma, that will continue the pattern of higher lows, a very constructive and positive pattern showing strength and health in this market.  But dropping a couple more points will trigger a wave of automatic selling at the 50dma, the July 12th low, 200dma, June 25th low, and 1300 level.  There are a whole truckload of landmines waiting for investors between here and 1300.  If we break through the 50dma, it could get ugly if we stumble into that minefield.

Three days hanging out near the 50dma concerns me because it shows a lack of follow-on buying that we’ve seen in recent sell-off recoveries.  This could indicate we are not ready yet to bounce.  IBD’s big picture is saying the market is in a correction and the conservative play is watching this unfold while sitting in cash.  I don’t foresee a big crash, but we could have some weakness ahead.  But this is a great thing for a CAN SLIM investor because it creates attractive prices for us to get in on some of the best quality stocks.  The summer is wearing on and we are getting closer to the next rally, so start looking for stocks showing unusual strength in these summer doldrums.  Many of these will be the next big stocks that show the best gains in the coming bull market.

Stay safe

Still waiting for the bounce

By Jani Ziedins | Intraday Analysis

Markets sagged again today. The saving grace is the markets bounced off of the 50dma. Is this signs of strength and an imminent rebound, or the misguided rationalization of the Titanic captain commenting about the positive aspects of striking an iceberg?

Combining crowd psychology with economic pricing models, when people run for the exits at the first hint of trouble is a good indication the market is on solid footing and not overvalued. With such skittish holders, it is hard for the market to get overpriced since there is so much selling pressure at every turn. But on the other hand, when people start making excuses and rationalizing on how the fire in the corner is not that bad and it probably isn’t a big deal, that is when the crowd has become complacent and the market is likely overvalued because people are reluctant to sell. With a lack of seller representation, the markets will be skewed to the high side.

Applying that logic to this market, we need to ask ourselves, is the market panicked over this pullback, or is it rationalizing how the 50dma is providing good support and is creating a buying opportunity?

The market is vulnerable here, so be on high alert. It is better to be out of the market wishing you were in, than in the market wishing you were out.

Stay safe

Europe strikes again

By Jani Ziedins | Intraday Analysis

Concern over Spain sent global markets tumbling. While the market and Euro recovered 1/2 of their initial losess, it was still a day where doom and gloom dominated the news.

Continuning the recent pattern, markets bounced from their early selloff. In weeks past, this marked the low of a down move; will it do the same here? Every trend must come to an end, and so will this one, but to make money in the markets we also need to nail the timing. So do we buy the dip, or sell the bounce?

The positives are the market bounced off of the 50dma again, showing accumulation at this level in addition to the bears inability to push us below it.

We also maintained the a lower trend line connecting the lows of this recent move. All highly encouraging developments. But as a contrarian, the question I am left asking is if this pattern has become too obvious, and thus suspect to breaking down?

This will be the 4th bounce and even the most novice chart reader can see the pattern. The problem arises if the most novice of chart readers is also the ones buying this dip. After they’ve committed their capital, who is left to buy and support the market? Without follow on support, the market will inevitably turn south.

As any regular reader of this blog knows, I’ve been fairly skeptical of this most recent rally and am not sure it has the foundation and support necessary to break summer’s trading slump. I’m not predicting an economic crash, just expecting we need more basing before resuming the longer-term bull market. But that my attitude will quickly change if we start making new highs again.

The poke above the previous high last week could easily be a short squeeze, but to return and superseded those levels so soon after will show material support from larger investors and make the breakout buyable.

I’m on the road again, so my blog posts will come later in the evening. I apologize for any disruption this may cause. Further, this post is coming from my iPhone and as most people know, the editing capabilities are not the best so please excuse any typographical and spelling errors.

Stay safe

Turning back from yesterday’s new high

By Jani Ziedins | Intraday Analysis

The markets are down today as the Euro is making a new low against the USD.  It is not unusual to see the markets pause after a strong run like we’ve seen over the last several days.  But what we really want to know is if this a pause before continuing higher, or hitting our head on the top of a trading range and returning lower.

IBD moved the market back into confirmed uptrend today, but given their recent track record of making the exact wrong call at the exact wrong time, we should pause before blindly following IBD’s recommendation.  I don’t fault IBD’s systems for giving us false signals, it is simply the nature of a trend following system in a trend-less

market.  It is our responsibility as savvy investors to know when to use what systems given he market conditions.  This is the art of making money in the markets.  No system works 100% of the time and it is critical to understand this.  Of course for every wrong signal, we move one step closer to when IBD’s system will start working again.  Maybe today’s call is when they are right again, or maybe it will be next time, or the time after, but I feel we are getting closer to exiting this trading range and directional systems will start working again.  If not this move, soon.

The last few attempts the bears made to push the market down failed and resulted in them getting chased out in a short squeeze.  After getting their head handed to them a couple of times in a row will make anyone a little more cautious the next time presented with the same situation.  So here we are at the next time.  If the aggressive bears are more timid due to their previous failed attempts and not plunging in on the short side today, that means there are other sellers pressuring the market and causing us this weakness.  This goes back to earlier discussions of real and artificial buying or selling.  Artificial trading is driven by fear and greed, a temporary phenomena that quickly fades.  Real trading is driven by large institutions selling for fundamental reasons that are unlikely to change in the near term.  Volatility is a product of artificial trading as aggressive and emotional traders try to push the market one way or the other, but directional moves are made by larger changes in sentiment and fundamentals.  Is today’s sell-off artificially driven by aggressive bears and emotional bulls rushing for the exits?  Or is it driven by real and methodological selling by larger institutions and the move is more likely to continue?

This is a tough call and I feel the market at a key juncture.  Reclaim the recent breakout and we’ll continue the uptrend.  Fail to hold the breakout and we’ll probably slide back to the lower end of the trading range.  How to trade this, if the market holds the breakout, that would be a greenlight for CAN SLIM trading, failing to hold the breakout would mean swing trading is still the name of the game..

Stay safe

 

New high

By Jani Ziedins | Intraday Analysis

This morning the markets tagged a new high, which is not unexpected as market makers like pushing the market into areas a lot of automatic trading will be triggered from breakout buyers and stop-losses from short bears.  This is how market makers pay their alimony and kids private school tuition.  But the big question remains, with the market more richly valued than it has been in three months, are value investors still going to line up and buy at these higher levels?  Or will the buying taper off once all the autopilot buying has run its course?

This is a critical juncture for the markets as it will chose between a directional move higher or returning back into the trading range.  Traders need to decide if they want to buy this breakout or sell it.  Over the past three-months, buying the dips and selling the rips was the only reliable trade that made money.  Will this swing-trading pattern continue here, or is the market ready to move into a new phase?

In individual stocks WON likes to see a convincing breakout on higher volume that demonstrates large institutional support.  The same type of price and volume action in the indexes today would be reassuring for a buyer of this breakout.  A feeble breakout will show a lack of conviction and could indicate this rally is in the last stages before breaking down.

Double bottoms and double tops are common reversal patterns.  A key to the double top/bottom is the second move must exceed the first.  In our case, the second peak must exceed the previous peak.  The reason this pattern works is a large portion of investors trade technical levels of support and resistance.  Previous highs and lows make popular areas where traders will cluster buy and sell orders.  They assume crossing these previous highs and lows will clearly indicate a breakout or breakdown.  The double bottom and double top patterns work because the second leg triggers a flurry of automatic buying or selling that quickly fades away before the market reverses.

If you ever want to know what the market will do next, the most reliable indicator is identifying what move will make the greatest number of people look stupid.  There is a lot of complex psychology and pricing theory behind this phenomena, but figuring out what direction the market is headed is no more difficult than determining what direction will hurt the greatest number of people the most.

If we were to apply this theory here, we’ll see the last week and a half knocked the crap out of bears as the market bounced hard after the previous slide.  By making a new high, the market has forced almost all of the bears out with their tail between their legs.  If most bears are bloody and on the sidelines, it is hard to hurt them any more, so who will be the market’s next victim?  There are a lot of bulls that just bought this week’s rally and today’s breakout.  But this is not a binary game of just bulls and bears.  There is a third important contingent that needs to be included, those sitting on the sidelines.  The market can humiliate people not in the market by running up sharply and leaving them behind.  This is exactly what happened in the first quarter of this year.  Everyone was on the sideline waiting for the inevitable pullback, and the market humbled all those traders by rallying non-stop and leaving them in the dust.  The pain felt by those left out of the market during the Q1 rally got so great, they ended up chasing the market higher.  The only problem is most of the chasers bought in near the top before the market rolled over in April, adding insult to injury.

Bears are knocked out of the market right now and no longer a factor, so we need to evaluate who is more venerable currently, bulls or those sitting on the sidelines.  But time frame is critical in this.  Over the short-term bulls are probably most venerable, but over the longer-term all the investors hiding out in bonds are at risk.  But the bond story took years to build up and thus will take years to unwind, so that long-term bond story is not much of factor when figuring out where we are going next week.  For this equity rally to continue higher, we need a large number of traders reluctant to buy the breakout.  The more reluctance, the greater the chances are for the rally. But on the other hand, if people are excited by the rally, then lookout below.

Stay safe

Going for a higher high

By Jani Ziedins | Intraday Analysis

Another nice up day in the markets.  In midday trading we moved up against July 3rd’s high, pushing toward yet another higher high.  Yesterday finally provided a strong up day in higher volume, something recent up days have lacked.  Friday’s reversal was largely a short squeeze, but the last two days have added follow-on buying from a wider base of bullish investors, giving more credibility to this move.

The interesting thing to note over the last couple weeks is how all the bad news from the Obamacare ruling to yesterday’s disappointment over the Fed’s inaction led to a sharp sell-off, but then just as quickly reversed higher and ended the day positive.  There is a contingent of traders trying to push the market down after each disappointing headline, but they are quickly run over by value buyers jumping on every dip.

I still think we have a retest of the lows in our near future, but I have obviously been early in my anticipation of that move lower, and in the markets early is the same thing as wrong.  No one can be certain what the future holds and that is why we practice disciplined risk management to mitigate the losses when we are inevitably wrong.  But at the same time, just because I was stopped out doesn’t mean I’m going to give up on the trade either.  In the market it is all about timing and if you get the timing wrong, simply take a small loss and wait for the next opportunity.  Trading is many different things for many different people.  Some people have the need to be right, but I’m in this to make money, so I don’t mind making a mistake, adjusting my plan, and then trying again.

Europe, weak domestic economy, and stagnant jobs growth was widely expected and already priced in the markets.  The new information we have is the affirmation of Obamacare and underwhelming earnings results from most companies.

As I shared in an earlier posts, the Obamacare ruling can actually be positive for the markets simply because the result was decisive and we can move forward knowing what the rules are.  Uncertainty is what drives the market crazy and bad news is almost always better than uncertainty.  Even though the market doesn’t like Obamacare’s new rules, it is better than if the Supreme Court forced Congress to refight the healthcare debate.

Earnings have been disappointing, but not so bad as to crash the market.  But it has been enough of a concerting to steer large money managers into defensive names.  When boring blue chip companies like WMT are making monster runs and setting all time highs, that is clear indication big money is seeking safety.  So while the main indexes are holding up well, more speculative stocks, such as those found in IBD’s 85/85, are under performing the indexes and still trading under their recent highs.

Stay safe

A tale of time frames

By Jani Ziedins | Intraday Analysis

Another indecisive day in the markets.  Up 0.5% at the open, dropped negative 0.5% in the first hour of trade and then back up 0.5% again the following hour.  Moves like this make it seem like the market really knows what is going on doesn’t it?  You’ll give yourself a headache (and most likely lose money) if you think you can find patterns in this random noise.  The market doesn’t know what’s going on any better than we do and is why it is drifting around while fools and suckers try and trade the next move.

Bernanke’s testimony before the Senate Banking Committee offered no new hints of additional easing, triggering the early slide.  But this really shouldn’t come as a surprise to anyone.  The Fed has one bullet left and they are not going to use it except in the most dire situation.  And if they do use it, that should be a huge warning to the rest of us; if the Fed is nervous, we should be nervous.

Bernanke’s comments also affected the currency market because the lack of further money printing strengthened the USD relative to other currencies.  The inverse USD – US equities relationship continues to hold up and the strong dollar pressured stock prices early.

The recent price action coming out of the markets is garbage and can’t be relied on for any meaningful analysis.  Using longer time-frame charts helps filter out some of this noise.  A weekly chart of the S&P500 shows the indexes are doing a good job of holding the 200dma and is in a modest uptrend.   As long as we continue to muddle through this recovery without any major stumbles from Europe, China, domestic employment, or Congress, we should make it through to the other side without too much damage. We will continue to see short-term volatility, but the longer term uptrend should remain intact.

The problem with interpreting shorter time frame charts is they are are filled ominous looking spikes and drops, especially in the intraday charts.  WON primarily uses weekly charts when browsing stocks because it cuts out most of the random noise and gives him a much better feel for how the stock is actually behaving.  When you find yourself confused by the price action in a chart, change to a longer time frame and things will come into focus.

As for trading the markets, this continues to be a very poor environment to own high beta growth stocks as defensive sectors and stocks continue leading the market.  Often the hardest thing to do in the market is nothing, and that is exactly what we should be doing right now.  Wait for conditions to improve and become more favorable before putting your hard earned money at risk.

Stay safe