All Posts by Jani Ziedins

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

Quiet morning

By Jani Ziedins | Intraday Analysis

The markets traded between flat and slightly lower in early trade Monday morning after Friday’s strong gains.  The EUR/USD continues to be choppy around the $1.22 level and is contributing to some of the volatility we are seeing in the equities markets.  Combine that with the lackluster summer participation by major market players who are on vacation and we are left with an ambiguous, indecisive, and directionless market.   I sound like a broken record since there is nothing new to report or insight to be added.  It has simply become a waiting game as we consolidate in this range before the market is ready to make its next move.

Earnings have been lackluster with many companies lowering their full year guidance.  The stocks that are doing the best as a group are the defensive sectors, including discount retailers, consumer product companies, and medical.  Hardly the best environment to be speculating in hyper-growth CAN SLIM companies.  But this is a good thing for the patient investor since stocks come in and out of favor.  The typical IBD stocks are taking breaks and building bases, creating a strong foundation to make their next move higher once investors’ apatite for risk returns.

The most successful traders are the ones who know when to trade and when to sit on their hands.  I’ve always found it is easy to make money in the markets, the biggest challenge is keeping it.  That includes both knowing when to lock in worthwhile profits, as well as when stay out of the markets and wait for a better opportunity.

We continue to hang out in the upper end of the recent range, where we go from here largely depends on what a person’s outlook is.  A directional trader would be excited by the series of higher-highs and higher-lows.  Someone who thinks we are still basing in a trading range would expect a move lower in the future because we are currently in the upper end of the recent range.  I’m in the latter camp, but will change my tune pretty quick if we keep making new highs.

Stay safe

Strong rebound

By Jani Ziedins | Intraday Analysis

The stock market is popping today after yesterday’s strong bounce from under the 50dma.  It would be highly encouraging for the markets if this bounce stuck because it continues a pattern of higher lows and higher highs.  The markets were helped this morning when the Euro gained almost one cent against the USD in early trade, a huge move in the currency world. The Euro has been selling-off for days and a relief day was inevitable.

But to be honest with you, the market is confusing me right now.  It feels like sentiment and pricing has disconnected.  Everyone is widely negative on the markets, but prices only fell 3.6% from the peak to the trough.  That doesn’t represent much selling at all.  How can we see such a dramatic swing in sentiment with nothing more than a 3.6% change in price to show for it?  There are few possible scenarios in a case like this.

First one, a lot of calm and collected value investors buying shares from the weak holders rushing for the exits.  These longer viewed investors see something the panicked crowd doesn’t and is willing to step in because they expect the market will head higher from here. With confident institutional money standing behind the market and propping it up, this is very bullish.

The second case is where investors are scared, but are still holding their long positions out of hope and desperation they’ll come back. This is driven by an emotional reluctance to admit defeat and give up on the chance of a getting their money back.  This is where the market becomes disconnected from reality and starts trading on hope, not fundamentals.  Most investors acknowledge the dark clouds circling the markets and this is why they are scared; China slowing, band-aids in Europe, stalling US employment, fiscal cliff, lowered earnings guidance, etc.  But the previous 6-day decline didn’t happen in a more traditional waterfall action that relentlessly punishes indecisive people until they are forced out.  It declined in steps, encouraging indecisive people to continue holding.

Typically people get flushed out when the market keeps moving against them and the losses continue to mount.  But the previous 6-day sell-off happened in steps where indecisive people were not punished for holding after the initial decline.  In some cases the indecisive traders were even rewarded as the prices rebounded from their early daily trading lows.

Given the step style decline and the modest size of the sell-off, I think a lot of weak holders are propping up this market through their emotional reluctance to admit defeat and sell.  What makes me most nervous about this prospect is the market becomes disconnected like this before a major collapse.  In August and September 2008, the market was disconnected from the fundamental headlines about banks’ financial stability.  In July 2011, the markets were indifferent to Europe’s debt crisis. We all know how those situations played out.

Now don’t get me wrong, I’m not predicting an imminent collapse, no one can see something like that.  But I am pointing out odd behavior that just isn’t jiving with me and it has potential ominous implications.  Let’s not jump to conclusions; the market gets disconnected all the time without crashing, so this could be no big deal.  It’s like skating on thin ice; you’ll be fine as long as you don’t break through.  In most instances you might not even know your life was at risk and everything goes on like nothing happened.  But unfortunately ignorance doesn’t change the risk profile.  The thing to keep in mind is while not all disconnects in the market lead to crashes, all crashes are the result of a major disconnect between pricing, sentiment, and fundamentals.  The crash occurs when the market can no longer hide from the disconnect and the gap closes in a very short period of time.  This almost always happens to the downside and is usually triggered by a piece of bad news that sets the whole thing off.

With disconnects, crashes are the most extreme resolution and only happen every few years.  Most disconnects are closed more gradually and market participants don’t even realize it happened.  That is most likely what will happen here, but it is worthwhile to at least acknowledge the risk for a big move down is here.  As it stands, I think we are one bad news story away from a 10-15% slide.  Given the limited upside from here, that doesn’t make for a favorable risk/reward on a long trade.

And of course the third possibility regarding the market is many of the normal traders are on vacation and less experienced traders are moving the markets in unexpected ways.

For me, the main takeaway from the above is the markets are acting odd and the most prudent course of action when this is happening is to just sit it out.  If I miss a nice rally, so bit it, I’d much rather miss the bus than get hit by it.  There are old traders, there are bold traders, but there are no old, bold traders.

Stay safe

Fell under the 50dma

By Jani Ziedins | Intraday Analysis

This morning the markets opened lower, dropping under the 50dma in early trade.  If this sell-off continues, it will be the 6th consecutive down-day for the S&P500.  There isn’t one key news story driving this slide and it is largely attributed to a combination of strong dollar, economic concern, and disappointing earnings outlooks.  The lack of a single key trigger has kept the slide more controlled up to this point, but this grind lower could elevate anxiety and eventually trigger an emotional run for the exits if it hits critical mass at some point.

The silver lining is violating the 50dma didn’t trigger an avalanche of selling and we are stable for the time being.  This is giving investors time to evaluate the situation and allowing nervous holders to hang on a little longer.  But all these traders have their fingers on the sell button and any additional weakness could lead to another leg down.  The 200dma is not far under the market and will be the next key technical level along with June 25th’s low.

But don’t let these small declines lull you into complacency like the lobster who never realized he was being boiled to death because the water temperature was only increased on him one degree at a time.  Use hard stop-losses and stick to them no matter how benign a decline feels.  Often the market takes your money slowly at first.

From my observations, it seems the recent rally was a combination of a short-squeeze and premature optimism by eager bulls.  These are unsustainable phenomena by themselves and it doesn’t take bad news to deflate a rally built on a weak foundation.  We simply ran out of buyers willing to commit new money at those higher levels given everything else going on in the world.  With a vacuum of buyers, the market will decline until it falls to the level where large value buyers find themselves unable to resist all the discounts they see.  This value buying is what finally puts a floor under the market.

By late morning the indexes are off their bottom and trying to retake the 50dma.  But are these the large value buyers stepping in to support the market, or is this support from a handful reckless gamblers trying to pick the bottom?  My guess is the latter, but as I pointed out yesterday, foreign exchange is in the driver’s seat right now and the interaction between the Euro and USD will most likely dictate where we go from here.

Stay safe

Resting above the 50dma

By Jani Ziedins | Intraday Analysis

The market is trading in a tight range after yesterday’s dismal close.  We’re resting just above the 50dma on the S&P500 and NASDAQ.  Drop under this key line and we’ll trigger a wave of stop-loss selling, sending us down to the 200dma.  Break the 200 and we’ll push toward June 6th’s low.  The way these technical levels line up, we could see a series of dominoes fall in automatic selling if the market gets spooked from here.

How quickly the weather can change in the markets.  Two weeks ago the market was giddy with excitement as Germany signed off on bailing out individual banks and it shrugged off the Supreme Court upholding Obamacare.  But that is a distant memory as almost all current headlines have returned to doom and gloom.

Part of the problem facing the markets is the traditionally light summer volume.  Many of the senior traders are on summer vacation and this allows the market to drift around listlessly as smaller currents can move the market.  This gives us a lot more random noise in the indexes and contributes to the large number of failed breakouts we’ve seen.  These minor currents have the strength to push the market up or down, but only temporarily and they quickly reverse.

This pattern is extremely frustrating for the breakout trader who is buying a directional move moments before the trend reverses.  Yesterday’s sell-off caused IBD to move the current outlook to market under pressure.  If this FTD fails, it will be the third failure in a row.  But this shouldn’t be a surprise to most because, this summer choppiness is nothing new and the source of the popular saying “Sell in May and go away.”  But don’t get complacent if you are trading this market, the lighter volume can also lead to increased volatility because it takes a smaller number of traders dumping their holdings to trigger a big slide.

As for how to trade this market, it is really hard to make headway given the choppiness and if you have something else to do, this would be an excellent time to take a break from the markets.  A couple of weeks away from the markets will give you fresh eyes and recharge you for the more productive trading season coming this fall.

Stay safe

Strong dollar pressures equities

By Jani Ziedins | Intraday Analysis

Stocks opened higher but slid back to breakeven as a strong dollar renewed pressure on the equities market.  The EUR/USD is making new lows again after a recent relief rally.  It is worth making this part of your daily routine because there are implications to the markets given the close inverse relationship between the USD and US equities.  If you don’t have direct access to currency market data, UUP is an ETF that follows the dollar.

Earnings season is kicking off this week and it will be interesting to watch the market’s reaction to both the Euro and US earnings.  Will these two forces offset each other or join ranks and shove the markets the same direction?  Rates on European sovereign debt from the periphery are creeping higher again, eliminating any margin of safety.  No doubt this is part of what is pressuring the Euro.  Earnings have been a mixed bag, but it is still way to early to make a a call on that.

Right now it feels like the market is stuck in no man’s land as everyone is waiting for it to break one way or the other.  There is some air under our feet and a few too many disappointments on the earnings front could drop us materially lower.  But on the other hand, a few marquee companies hitting the ball out of the park could ignite a lucrative rally.

The one thing I would like to see confirm new strength is high growth stocks taking leadership again.  There are too many defensive stocks showing the best relative strength and for us to have a sustainable move higher we need  investor’s hunger for speculative growth stocks come back.

Stay safe

Earnings season up next

By Jani Ziedins | Intraday Analysis

The market is off in light, holiday-like volume this morning.  Seems most traders are waiting for the start of earnings season before placing their bigger bets.  It will be interesting to see what companies report and how it matches up with the market’s expectations.  We’ve been hammered all spring with bad news out of Europe and US jobs, making a relief rally seem plausible.  But seeing how we are already within 6% of 4-year highs, it is really hard to argue the market is still in an over-sold condition and poised to pop at the slightest hint of good news.

Now don’t mistake me for one of the bears who is claiming we are on the edge of the precipice, about to “financial contagion” our way back to the stone age.  The world is only dangerous when we are complacent and oblivious to the risks around us.  With all the scary headlines out there, it is hard to make a case the market is blind to the dangers surrounding of us.

But rather than simply hang out at one level until it has conclusive evidence for a move one way or the other, the market is always trying to predict the future.  We trade one way or another for no other reason than to grind up premature directional traders who are trying to get a jump on the rest of the market.  We’ve already seen this with a 130 point sell-off in May and a 110 point rebound in June.  And no doubt we could have a couple more hundred-point moves left before we break out of this summer’s trading range.

The danger of breakout trading during a flat market is you keep getting zinged from each failed breakout.  Worst case is you hold to your 8% stop-loss, which doesn’t seem too bad until you consider 3-failed breakouts in a row is a 22% loss.  This is more than most people made in the strongest first quarter rally in 20 years.  And then of course the follow on risk is all the psychological damage to you and your account will make you more reluctant to stick your neck out on the fourth follow-through-day, fearing another repeat of the first three failed FTDs.  But the thing about FTDs is each successive failure makes the next one even more likely to work out.  A fourth FTD is very likely to work out and the exact one most people will sit out after having been burned by the first three.

Of course the market could be totally hoodwinked me and my expectation of a near-term move down too.  If there are too many contrarians out there, they are no longer contrarian and now constitute the majority opinion.  At that point the real contrarian needs to go against the contrarians.  The real skill of contrarian trading is knowing when to trade against the market knowing when the contrarian trade is to go with the market.  For example in the first quarter, the contrarian trade was staying long the market while everyone else was calling for a pullback.

Just a few stocks are making the cut on IBD’s Stocks on the Move screen today.  This list identifies leading stocks up in high volume each day.  And none of the 6 stocks making the cut today are near proper buy points.  This just reinforces the market’s wait and see attitude toward earnings season.

Stay safe

Jobs let the market down again

By Jani Ziedins | Intraday Analysis

Stock fell out of bed after yet another disappointing jobs report. But while sluggish, we are still in a very slow recovery.  The interesting thing will be to see how this plays out over time.  We’re four years into this recovery and under normal circumstances we should be on the lookout for a market and economic correction in our near future.  This is the boom and bust cycle typical of free markets.  So we need to ask ourselves, is this a normal economic recovery?

Economic boom and bust cycles are a factor of human nature.  Our minds like to project straight lines into the distant future as we expect conditions to remain stable.  No doubt we’ve all experienced this phenomena in the stock market as traders, but the same thing equally applies to business owners and managers out in industry.  When business is good, they anticipate it will continue indefinitely and they ramp up capacity and employment in anticipation of future growth.  Get a larger number of managers anticipating a rosy future and we become vulnerable to an economic correction as businesses find themselves over-staffed and start layoffs.  Fewer employed means fewer customers means more layoffs and the cycle continues until companies can’t afford to cut any more staff.  The economy is like a yo-yo going up and down overshooting on the high side and then on the low side.

So what does that mean for us right now?  I see a pathetically slow recovery and that might change how this boom and bust cycle plays out.  It would be hard to argue we are in the middle of an overly optimistic boom cycle.  The last several years have been full of nerve-wracking headlines and paranoid managers would rather sit on their hands than put their neck on the line and risk getting their head cut off by some unanticipated economic catastrophe.  This restraint on the part of business might actually keep the economy from overheating in its typical way.  This conservatism by business might allow this recovery to extend far longer than normal and there could be a lot more upside before we hit our next euphoric peak.

As I shared before, we could be in the start of a 10 or 15 year secular bull market and that is because business, banks, and investors are so overly pessimistic and restrained after the first 10 years of this century.  Companies are hording cash and the 10 year treasury is yielding far less than 2%.  That isn’t even keeping up with inflation!  There are deep wounds in people’s psyches and it will take a good long time for them to be excited about the markets and economy again, but it will happen over time and for those who have the courage to invest for the long-term in these uncertain markets will be hugely rewarded.  The market is up more than 100% from its 2009 lows and that is just the start of the move we’ll see over the next 10 years.

The US carried much of the world economically and technologically since the end of WWII, but now the rest of the world is catching up to us and the world will have ten times as many inventors, entrepreneurs, and middle class driving the 21st century economy forward.  It isn’t that the US is losing its edge, but that the rest of the world will now start contributing ideas and innovation.

But for the near term, I expect one more shakeout at the lower end of the June’s trading range before we begin our year-end rally.  Our election, Europe and China will start falling into place and the market will start rallying as many of those issues are finally put to bed.

Stay safe

Markets hold on to gains

By Jani Ziedins | Intraday Analysis

I apologize to everyone who came looking for my posts, but left empty-handed.  I had some issues in the first half of the week that prevented me from posting my thoughts on the market and hopefully all of that is behind me.

Even thought this is a holiday week, the market held Friday’s large gains.  Being a contrarian, I’m suspicious of this strong rally and  resisting the temptation to jump on board.  As self-selected investors, we tend to have a bullish bias and it only takes a few good days to get us excited to jump back in the markets.  There is no reason we can’t rally from here, it is just the market usually isn’t that easy.  The best rallies come after the most demoralizing periods.  If we want a strong rally, we need to base some more.

Pure speculation here, but the potential pullback in front of us could take us under the June 4th low before reversing higher.  From that point we could see a slow progression of higher highs and higher lows as we inch through the trading range.  But to be most effective we need one more flush-out at the bottom of the range to refresh the market.

But like always, these are just my thoughts and the market will do whatever it wants regardless of what any of us think.

Stay safe

Euro saves the day

By Jani Ziedins | Intraday Analysis

Markets popped on news out of Europe.  The union is adopting a softer stance on austerity measures and now allowing bailout loans to go directly to ailing banks instead of through each nation’s central bank.  This prevents additional debt from being laid on each nation’s current obligations and pressuring their creditworthiness.

Is this a real fix, or just another temporary patch job?  I’m not an economist, but it doesn’t sound like a real fix and Europe will continue to muddle through this for a good while longer.  But it is a step in the right direction and shows a hint of flexibility coming from Germany.

The markets popped above their 50dmas in the opening gap up.  Not a good day to be short and no doubt a good chunk of the buying is shorts getting run out of the market.  The interesting thing to watch is if there is follow-on buying on this news or if big money continues to be reluctant to commit more capital to this uncertain market.  If these price gains and volume hold up, today will be a follow-through-day and we’ll move back into market in confirmed uptrend.  This will be the 3rd change in IBD’s market outlook in two weeks.  It is hard to imagine how such extreme volatility can be bullish.  The next technical level on the upside will be breaking through June 19th’s high of 1363.

It will be interesting to see if this newly found euphoria is sustainable or not.  Pullbacks and bases usually demoralize traders as they grind up both bears and bulls with all the false breakouts and reversals.  This volatility wears out traders before clearing the way for the next directional move.  Last year we traded sideways in a choppy fashion for 5 months before the strong uptrend kicked off.   We’re currently 2 months into this base.  Personally I think the market needs more time to fully demoralize traders before it will be poised to make its next move.

I closed my short position for a small loss this morning.  It’s not that I believe in this move higher, but I’m just being defensive and exercising risk management to protect my portfolio.  I’m ready to jump back in on the short side if I see any weakness in the market.  This is the best aspects of being a small trader, I can move in and out of the market with ease.  This is the only edge we have over big money managers and if we fail to take advantage of it, we are giving up the only advantage we have in this game. But this can be a double-edged sword and it will bite us in the butt if we over-think and over-trade every little blip in the markets. There is a fine line between being prudently defensive and being reactionary.

Stay safe

Mandate upheld

By Jani Ziedins | Intraday Analysis

The Supreme Court blindsided the markets by upholding the individual mandate and mostly keeping Obamacare intact.   This was probably the least expected outcome given the tough questions many justices were asking during oral arguments.  But this might not be all bad for the markets because this is a definitive resolution to Obamacare and virtually eliminates all uncertainty by ending the health care debate.  The market now knows what the rules are and can move past this issue.  The markets deal with bad news far better than uncertainty, so this is most likely better for the markets than reopening the health care debate.

The markets opened lower on Euro concerns and then plunged on the Court’s ruling.  But after a sharp sell-off, the markets recovered a good chunk of the Supreme Court’s plunge and is getting back to the early morning’s levels.

It is less clear on where the market is headed because we are in the middle of the previous rally’s range.  At this point we could go either way since sentiment is fairly balanced.  I still expect the market will continue lower, but it really is a coin-flip.  The last few days shook out a lot of shorts that piled in on Monday’s sharp sell-off.  We’ll see if Tuesday and Wednesday were part of a reversal higher, or simply a head-fake to shake out momentum traders.  We’ve already given back all of Wednesday’s gains and half of Tuesday.  Another few points lower and we’ll be making new lows.

Some of the biggest movers are obviously health care stocks.  But the ruling has different implications for different sectors depending on if they were helped by or hurt by Obamacare.  Insurance companies are down, but hospitals and other healthcare providers are up because they benefit from the larger pool of insured.

Stay safe

What’s driving the rally?

By Jani Ziedins | Intraday Analysis

Markets are up nearly 1% at mid-day, a strong continuation of yesterday’s rally.  The interesting thing is this recent rally broke from the strong correlation of USD up, equities down.  This relationship has been rock-solid over the last couple years and seeing this divergence is extremely noteworthy.  There seems to be very little in the way of news to drive this rally, so what gives?

If I had to guess, a chunk of the market thinks it is being sneaky and acting on unique insight the market will rally tomorrow after the Supreme Court tosses out pieces of Obamacare.  The problem is this insight is not unique, as virtually everyone and their brother expects the individual mandate will be struck down and the only real question remaining is if the Court will also void the requirement insurance companies cover people with preexisting conditions, or a little more extreme, void the entire bill.  To make money in the market, you need to bet on the things few expect.  Obamacare is not one of those things, so I expect this could be a suckers trade.  The last couple days priced in most of the potential upside, so there is little remaining for anyone coming to the party late.

The one thing less expected is the entire bill being struck-down, and that could lead to a further rally.  But a peace-meal solution will renew the healthcare debate and create new uncertainty for the markets.   Hard to see how that is a bullish development.  The market hates uncertainty far more than it does quantified bad news.  In fact, leaving Obamacare fully intact could be more bullish for the markets simply because the result is definitive, same goes for completely throwing out the bill.  This halfway stuff is the least concrete of the possible outcomes and generates the most uncertainty.  But this is simply my thoughts on this trade and obviously the market doesn’t give a damn what I think.  This simply means we need to trade the market, not what we think.

But for how to trade this, if all the bulls get in ahead of the ruling, that means we might not see new buying on the news and the market could sag due to the lack of follow-on buying.  Of course there could be a reserve of Johnny-come-latelys waiting to buy the news, leading to one final push higher before exhausting the bounce and turning lower.  We could potentially reach and even penetrate the 50dma, but I still expect we have a date with the 200dma sooner than later.

It will be interesting to see how this all pans out, but most disciplined traders should be out of the market and simply spectators for this show.   We’re close to the middle of the range and the risk/reward for a move in either direction is not favorable for initiating a new position right now.

Stay safe

(p.s. I’m having some technical difficulties with my webhost and am unable to add charts at the moment.  Hopefully this can be resolved quickly.  Thank you for your patience.)

Rebound from sell-off part II

By Jani Ziedins | Intraday Analysis

The market opened up half a percent this morning, traded down to flat, and then rebounded to the opening levels in morning trade.  Seems to be a modest relief rally after yesterday’s large sell-off.  IBD moved it’s market outlook back to Market in Correction after yesterday’s price action.  Momentum systems do very poorly in sideways markets, often giving false signals and leading to buying the peaks and selling the troughs.  Just something to be aware of for anyone following a momentum strategy like CAN SLIM.

It will be interesting to see how the day ends.  Typically declining markets will show early strength and then weaken into the close.  We’ll see if this modest bounce ends in a slide this afternoon or if it can add to its morning gains.

I still think there is some downside remaining because too many people still have a buy the dip mentality.  They will be proven right soon enough, but the market needs to shake their confidence first.  The markets have a habit of convincing you you are wrong before proving you right.  We very well could see that come into play here as we drop under 1300 before rebounding.  Once everyone’s given up on the rebound it will be safe to wade back in after everyone’s sold in anticipation of a bigger decline. Of course an unexpected and highly bullish headline out of Europe could flip sentiment and the traders sitting on the sidelines could start chasing the market higher.

Staying with Europe, it seems a lot of people are worried Greece could be the next Lehman Brothers.  But the truth is Lehman and Greece are 180 degrees opposite.  Lehman caught everyone off guard, the market did not foresee the vulnerability of the banking system, and Lehman’s implosion happened over just a couple months.  Compare this to Greece that’s been a highly publicized, slow-motion, train wreck, 2.5 years in the making.  For the public markets, these  two events couldn’t be further apart in terms of expectations and what is already priced in the markets.

The other big catalyst is the Supreme Court’s ruling on Obamacare.   Virtually everyone is expecting a repeal of the individual mandate, so that has long been priced in the market.  At best it will lead to a temporary bounce before sell-the-news kicks in.   I actually expect a piecemeal repeal of Obamacare will lead to additional uncertainty since it will be impossible to predict how Congress will fix it.  That uncertainty will pressure the markets more than if Obamacare is upheld.  The markets prefer certain bad news than the unknown because the markets tend to price in the worst when dealing with uncertainty.

With IBD moving the market in correction, disciplined CAN SLIM investors need to resist the temptation to buying shares before the market triggers a follow-through-day, which is a large up-day on large volume at least four days after the market put in a low.

Stay safe

Slide continues

By Jani Ziedins | Intraday Analysis

The market rallied into Friday’s close, but the move was obviously not sustainable given this morning’s dismal open and early trade.  It appears Friday was nothing more than a head-fake, sucking in premature bottom-pickers and shaking out weak shorts.  If this morning’s 1.5%+ decline holds, it will result in the market falling back into Market in Correction.

I suspect this down-leg is at least halfway through its move as many of the previous bulls and breakout buyers have already bailed on their recently initiated long positions.  1300 is easily within reach, but the bigger question is when will the market bounce?  If this remains a technical correction, it will run out of sellers soon.  Outside of unexpected bad news, the market will most likely find support between 1300 and 1280.  Of course sell-offs can develop a life of their own as selling begets more selling, but I think there is a strong possibility this leg down does not mark a new low.  Of course over the intermediate-term I still think the market is stuck in a trading range and the best way to trade this market is swing-trading; ie buying the dips and selling the rallies.  It will most likely be another month or two before we can buy the breakout.

Much like my March 13th analysis of a head-and-shoulders pattern, we also need to make steady progress transitioning from impulsive traders moving the market to real trades coming from institutional managers driving the market.  Impulsive trades rarely stick because there is no weight to this short-lived phenomenon.  Once all the impulsive traders make their move, the market quickly reverses because it lacks follow-on buying (or selling) from big money.  But with each successive failed move, the balance shifts from impulsive to real as the impulsive trader is less like to participate in the follow-up moves after being burned and losing money on the first or second failed breakout.  With the impulsive traders sitting out subsequent breakouts, it is far more likely for those to stick because these later moves are driven by a larger percentage of real buying (or selling) from the big institutions.  I did a better job explaining this phenomenon in my March 13th post if you want to read more about it.

I continue neglecting my watchlist in this environment simply because high growth stocks are so volatile.  They are up and down in dramatic fashion depending on the whims of the market.  The only good time to own high-beta stocks is when there is a strong and consistent wind at your back during a nice up-trend.  I’m still trading, but through index ETFs because these are far less volatile and more predictable in this environment.

As for predicting the market, many gurus say it is a fool’s game, but obviously I beg to differ.  The big difference comes from what data people use to make predictions.  It seems most experts are looking at the wrong things when their predictions fail to work out.  Sports make for a good analogy to this phenomenon.  A defender always looks for clues for which way the ball carrier is headed.  It is our natural tendency to look for cues in the head and eyes, but this can often be misleading and is the source of the term head-fake.  The ball carrier will often fake out the defender by moving his head and eyes one direction while moving in the other.  An inexperienced defender falls for the head-fake and goes the wrong direction, allowing the ball carrier to easily run by.  But a more experienced defender ignores the head and eyes and instead focuses on the hips.  While it is easy to move your head and eyes, the hips are far more difficult to fake.  You go where your hips are pointed and is why a defender who cues from the hips will have far more success than one who follows the head and eyes.

When it comes to the markets, it is also always trying to fake out traders and many times the fundamental and technical data send out misleading clues.   (I’ll get into why this is in a later post)  This is why I don’t put much weight in news or technical levels.  Most of my analysis is figuring out what other market participants are thinking and how they are trading the market.  The market is nothing more than a trillion-dollar popularity contest.  Get in the mind of other traders and suddenly the irrational and unpredictable behavior starts making sense.  It is never about what the market should do; it is about how market participants are positioned and what they expect.  Follow those clues and you’ll have far better success in anticipating the market’s next move.

Stay safe

Buy the dip or sell the weakness?

By Jani Ziedins | Intraday Analysis

As everyone already knows, yesterday was a tough day.  Second biggest decline of the year.  A big news story didn’t trigger the slide and the sell-off was fairly methodical without big gaps or dramatic drops.  It was simply a domino effect as one stop-loss triggered the next.  Lacking a major headline, the market simply ran out of buyers and it’s little surprise a technical rally ends in a technical correction.   No doubt the media is trying to identify some culprit, but when dealing with crowds you don’t always need a reason for the herd to make a move.

This morning the markets bounced half a percent in early trade.  Is this the rebound hopeful bulls are praying for, or just a head-fake to suck in bottom pickers?  The question on everyone lips is if this correction is done or not.  Can we buy the dip, or should we sell the weakness?  If we look at the market as a spring, comparing yesterday’s pullback to the recent rally, it’s hard to claim yesterday’s move was overdone and no doubt there is more downside potential.  For the market to stage a recovery, we need fundamental investors to step in and buy these discounted shares.  Are they ready to do that in this environment?  More often than not these more conservative investors will take a wait and see approach after a sharp decline.  I expect prices will need to decline a bit more before value investors see prices as too attractive to pass up.  Of course that doesn’t mean we won’t see a feeble rally to suck in bottom pickers and shakes out late shorts.  And by early afternoon, the indexes are trading in a tight range as both bears and bulls are taking a wait and see approach.

Looking back at the last 12+ months of index price moves, it is hard to find a major down day that was part of a continued uptrend.  Using history as a guide, that indicates a high probability there is more downside left in this move.  But if it really is a technical sell-off, meaning people are selling simply because the price is falling under their stop-loss, this move lower might be more limited.  Technicals can move the market around a few percent here and there, but a major move requires new fundamental data and a change in outlook.  Barring anything new and unexpected, the technical slide will probably peter out around the 1300 level.  I don’t expect this down leg to make a new low unless the market starts getting spooked by its own shadow.  Once the technical selling exhausts itself, we’ll reverse higher.

As for what comes next, we’ll probably trade sideways for the remainder of the summer and won’t resume the uptrend until all the senior institutional traders are back from their summer vacation.  By that time there will be a little more clarity regarding Europe, the election, and economy.   As long as all these things hold together, we should see a year-end rally.  While not the same size as last year’s rally, it will still be very tradable.

It appears FB found a bottom and is rebounding from its grossly oversold levels.  Chances are several dollars of upside remain, but I expect it will run into significant resistance at the $38  IPO price.  No doubt a lot of people dyeing to get out at breakeven and given the gigantic number of IPO buyers, this will be a huge wall to breakthrough.  If it breaks above $38, that would be highly bullish, but realistically I expect it will turn back after running into insurmountable resistance at $38, at least over the near term.  If anyone is swing trading this move, plan on taking profits before it reaches $38.  You can always get back in if it stages a breakout above $38.

Stay safe

Following the rules

By Jani Ziedins | Intraday Analysis

The Euro is tanking, pushing the USD higher and the markets lower.  A strong dollar dilutes overseas revenues and profits for domestic companies, hence one of the reasons US stocks typically decline on a strengthening dollar.

Today’s decline is pushing us back down to the 50dma and testing this key technical moving average.  No doubt there is a cluster of stop-losses sitting just under the 50dma that would be triggered if we break this line.  Then the question becomes if value buyers jump in and prop up the market before we trigger more stop-losses around the 1340 level.  Without the value buyers support, the autopilot stop-loss selling can snowball and the next key level is prior support just above 1305.  Of course all of this is moot if the market holds above the 50dma and avoids triggering those stop-losses.

Update:  Since I started writing this post, the markets have slipped under the 50dma and the decline accelerated and we broke this level.  We’ll need to watch the rest of the day to see if the market can bounce back.

There doesn’t seem to be much in the way of headlines driving this modest weakness.  If I had to guess, it was a poor Spanish debt auction that sent the Euro lower, but in reality this is just a normal pullback after a strong run the last two-weeks.  The market tends to bounce around as it overshoots on both the upside and downside, giving us the sawtooth patterns so common in stock charts.  The calendar is littered with meetings and economic reports, so it will be interesting to see which ones the market grabs on to and which it ignores.

Yesterday’s price action was interesting, while the market closed mostly flat, there were wild swings after the Fed’s statement.  While it looked like a quiet day to anyone looking at a daily chart, no doubt it chewed up and spit out a lot of day-traders who got whipped around by those intraday swings.  The best course of action around events like that is to let the dust settle before trying to place a trade.  It’s better to be a little late than a lot sorry.

I went to one of the new IBD meetups last night hosed by IBD and presented by Ted LePlat.  It was a boilerplate CAN SLIM review peppered with promotion of premium services.  Ted is a very convincing guy, but the question I’m left with is if it is really as easy as it sounds?  If it is simply a matter of following the rules, how come we aren’t all rich by now?

Many people will rationalize the lack of widespread success to lack of discipline and not following the rules.  While that sounds plausible, surely there are lots of anal-retentive people who follow the rules to the letter.  Where are they?  And of course if the key to success is simply a matter following the rules, why not automate it using a computer that has zero emotional impulses or temptations to cheat?

Virtually every aspect of CAN SLIM is already automated.  All the fundamental data contained in Current and Annual earnings and is already automated and compiled in the newspaper and on investors.com.  Supply and demand is accounted for in IBD’s accumulation/distribution ratings.  Leader or laggard shows up in industry group rankings, relative strength, and stock checkup.  Institutional sponsorship shows up in IBD’s mutual fund rankings and fund holdings.  Market direction is easy to calculate given the simple rules and the market outlook is published daily in the paper.  The most qualitative component is the New, but it should be fairly easy to identify between annalists’ growth projections, relative strength of the stock, and write-ups in the New Americas section.

So far all of CAN SLIM is already calculated and automated on various IBD computer generated screens, ratings, and lists.  The next important aspect is chart reading.  But IBD even automated this with its Pattern Recognition upgrade to its Market Smith charting package.  It will automatically identify common chart patterns, show buy points, stop-losses, profit taking levels, and even base counts.

So with all of the above, why not automate the whole thing and relax on the beach while a computer prints money for you?  Further, why does WON still pay portfolio managers big bucks to do his trading?  He was an early pioneer in using computers to compile and calculate market data back in the 60s, why not take the next step and use computers to do the trading too?  Wouldn’t a computer be far less likely to cheat on the rules?  That sounds like a perfect solution………unless there is something more to CAN SLIM than simply following the rules.

If a computer can’t do it, could that mean there is some secret sauce that isn’t in the rules?  Does it take human insight and intuition to make CAN SLIM work?  Is that why some, like WON, can be phenomenally successful while his mentees, portfolio managers, and followers struggle to produce the same kind of profits?

Now don’t get me wrong, I’m not bashing the system as I am a huge believer in the logic behind it, having read HMMS five plus times already.  But the thing I question is how easy is it?  Obviously I believe it is the special sauce that separates the few from the many.  It is being able to pick the true winners from a sea of false positives.  It is knowing what rallies to buy and which to sit out.  It is knowing when something is topping or just pulling back.  It is knowing when to hold and when to take profits.

I don’t really know where I am going with this other than to say it is never as easy as a salesman makes it sound.  If you really want to be successful at this game, you won’t find all the answers in a 300-page book or a set of seminars.  It takes years of learning, practice, and experience to succeed.  Never stop learning.  I’ve read countless books on the market from a wide range of viewpoints.  Some of my favorite books were the ones that claim no one can beat the market.  Rather than always drink the Kool-Aid and ignore the critics, I embrace the other side and learn as much as I can about those criticisms in order to mitigate those very legitimate weaknesses.  The honest truth is all sides are right, it is simply a matter of figuring out which rules apply at what times.

Stay safe

Fed day

By Jani Ziedins | Intraday Analysis

Yesterday was a big day for the markets as we clearly smashed through the 50dma.  The price gains over the last several days knocked out many bears as a fair amount of the recent buying was fueled by a short-squeeze.  The other portion of the crowd was Johnny-come-latelys who were jumping in as we passed key technical levels giving them the green light to take the plunge.   But with the bulk of the short-squeeze and Johnny-come-lately buying behind us, what will it take to move higher from here?  Exhausting the technical buying, the only thing left is an influx of fundamental buyers.  Are these traditionally conservative traders ready to start buying in the face of all the headline risk flying around the market?  That’s the question any bull needs to come to terms with.

But if we look on the other side, all these Johnny-come-latelys bought in recently, meaning their downside stop-losses are right under the market.  This sets up an interesting dynamic as we just cleared all the automatic buying on the high side, but setup a whole new tranche of potential automatic selling on the low side.  This means any upside move will have to be earned, but there is potential for a cascade of stop-loss selling if we dip lower.  Simply looking at the potential fuel on each side of the market, there is far more risk of a large move to the downside.  This isn’t talking about the probability of one direction over another, simply the potential for a strong move either direction.

A big catalyst for the market will be any announcement by the Fed this afternoon on monetary easing, ie QE3.  It seems the market is hopeful of more easy money and could be disappointed if the Fed doesn’t act.  Could that kick off the move lower?  We’ll know the answer soon.  But as far as sentiment, it seems market participants are excited about the current market, a dramatic reversal from just two weeks ago.  The size of the rebound and breaking through key technical levels has many pros expecting this move to take us back to 1400.  Further, it is hard to find anyone bearish at these levels.  When market participant’s opinions get so one-sided, more often than not, the market moves the other direction.  It is simply supply and demand at work.  If everyone is bullish, it means everyone has already bought and as a result there is no one left to buy and continue pushing prices higher.  In the absence of new buyers, the market moves lower regardless of how bullish everyone is.  Are we at that point?  It is hard to say, but the lack of bears raises a red flag for me.

Update:  The Fed released its statement and is extending Operation Twist, but not initiating QE3.  The initial reaction in the market was lower, but just as quick, it reversed and recovered those losses.  It will take a bit of time for the market to process this information and decide what it means.

Stay safe