All Posts by Jani Ziedins

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

Fundamental or technical buying?

By Jani Ziedins | Intraday Analysis

Stocks opened strong this morning as both the S&P500 and NASDAQ broke above their 50dma.  But the real question is if this price action is driven by fundamentals or technicals?  Has the market’s outlook on the future materially changed, or is this simply structural buying as we are passing key levels, triggering autopilot buying from both bulls and bears?  One is a sustainable phenomena, the other is temporary and will quickly run out of steam.

No doubt my judgement could be clouded by bias, but it seems not much light has been shed on the future protects of the economy or Euro justifying a run up in price.  But we crossed several key technical levels that could explain the buying activity.  My attitude at times like this is I would rather be out of the market wishing I was in, than in the market wishing I was out.  Profit opportunities are like a city bus, miss one and another one will be along any minute, but losses are forever.

Two other aspects that could be driving the market is the Euro is staging a monster move today, weakening the USD.  Over the last few years a weak dollar has often boosted the equities market.  The other aspect is the Fed is meeting today and tomorrow and many traders are hoping for a QE3 announcement.  But personally I don’t expect the Fed to act because QE3 is the last arrow left in their quiver and using it now simply to please equity investors doesn’t seem like a smart move on their part.

While my analysis of the market tends is a bit unconventional, a disciplined CAN SLIM trader should be testing the water with smaller positions from proper buy points, knowing his discipline and rules will minimize any losses if this FTD fails.  Each individual trader needs to stick to their game plan regardless of what other people are doing around them.  I’m not buying this FTD and could easily end up chasing the market above here, but that is what I feel comfortable with.

Stay safe

Follow Through Day?

By Jani Ziedins | Intraday Analysis

IBD called Friday’s gains a Follow Through Day (FTD) on the NASDAQ.  As many of you can guess, I’m not putting much faith in this recent FTD since we are nearing the upper end of the summer’s potential trading range.  Personally I’m going to close out my long index trade today and start looking for a good place to enter a short position.  The market broke solidly above May 29th’s high on Friday, sending shorts running for cover and no doubt the Greek vote will tempt all the Johny-come-latelys to jump in and pick up the tab for the rest of us.  We could rally a bit more and that is why I will wait to initiate a short, but I think the top is near.  Maybe we poke our head above the 50dma before heading lower, but it doesn’t need to happen.

Over the weekend the big economic news was Greece keeping the pro-bailout parties in control.  Seems in the previous election the citizens were voting with their hearts and sending a message to the leading parties that they are on thin ice.  But when push came to shove, they cast the final ballot with their head, fearing the risk of the abyss if they chose to break from the Euro.  But what should have been great news was met with skepticism at today’s open as the markets traded lower out of the gate.  No doubt many traders remembered last Monday’s sell-the-news on Spain’s bailout package and were afraid to see the same thing occur on this good news.  But the reality is this vote did nothing but maintain the previous status quo as the Greeks continue the inability to repay even their lowered debt obligations.  Of course this election does provide the opportunity for European leaders to structure a more orderly resolution to these problems.

As stated earlier, I have zero confidence in this FTD.  It took advantage of a quadruple witching where various futures and options contracts expire, leading to a spike in volume as all these derivatives are closed or rolled over.  Further, the 1.3% gain on the NASDAQ was on the light side for a typical FTD.  And of course we are at the upper end of a potential trading range.  But this is simply my take on the market.  WON’s advice is to buy every FTD because you can’t be sure which ones will work and which will fail.  But don’t jump in with reckless abandon just because IBD is saying we are in a Confirmed Uptrend.    The best course of action is to look for new breakouts or legitimate buy-points in individual stocks and then only initiate 1/2 positions in one or two names.  If the market continues higher, add positions in the follow on strength.  If the market noses over, you can close out your trial positions for a small loss and wait for the next FTD.

At present, the market recovered early weakness and is trading flat to up in midday trade.  This is blunting the fear of a major sell-off like we saw last Monday after Spain’s pop.  But it also doesn’t show a lot of excitement over the Greek elections that removed a major point of uncertainty.  This is demonstrating a certain level of both support and caution at these levels.  But my takeaway is the market’s spring is not coiled for a pop higher as we would have seen a lot more upside today if it were.  This shows that we might be getting extended given the sentiment in the market.

As for individual stocks, IBD’s Stocks on the Move from investors.com is showing several stocks breaking out or bouncing off their 50dma in large volume.  This should provide a bull several choices if they want to buy this FTD.  But remember, keep your initial buys at 50% of your normal position size and add as the market and individual stock’s show constructive price action.

Stay safe

Stuck in trading range

By Jani Ziedins | Intraday Analysis

Sorry about missing Wednesday’s and Thrusday’s posts, I’m down in Mexico and I mistakenly assumed it would be easier to get on line than it has been.  I’ll be back home and back to a regular schedule by Monday.

The indexes continue trading in a range of 1306 to 1335; up, down, and back up again.  We’ll see how the market trades today as Thursday’s price action pushed up to the upper end of this range and the futures are pointing to a slightly higher open.  Could this be the day we break through resistance and trigger all those stoplosses?  Or will the swing traders use the technical resistance at these levels to push us back down?  As I shared earlier, there is just too much fertile trading due to stop-losses above 1335 for the market not to at least poke its head above to trigger all those comissions for the market makers.  But regardless of these minor moves, I continue expecting the market will nose over shortly after breaking resistance.  There is simply too much headline risk at this time to expect we could rally without looking back.  Not that it will be bad news that causes us to head lower, it is simply that the bulls pushed us as high as they could, and the market will turn over because of a lack of buying.  No doubt there will be a headline that triggers the move lower, but remember, every day there is a plethora of both good and bad news, it is simply that the market choses to obsess about sone side and ignore the other depending on sentiment and buying power.  So in that regard, the news doesn’t drive the markets nearly as much as it provides and excuse or justification for the market to move in a way it is predisposed to move.

LULU is having a tough run lately, dropping to the 200dma.  Is this simply another shakeout like we had last year, or the end of the run?  It will be interesting to see how well it holds up.  Often I find stocks that are heavily shorted are overvalued, but the trap mose traders who trade on valuation fall into is they most often get in too early.  So I have little doubt LULU will imploed at some point just like KROC did, it is simply a matter of when.  TTypically the way it works is when everyone is talking about how overvalued it is, the stock defies gravity and heads higher.  It is only aafter all the shorts have been demoralized and given up that the stock finally noses over.  It will be interesting to see if LULU has reached that point since I so little mention of it in the market coverage anymore.

One last comment, no doubt this post is riddled with errors, please forgive me because I amm doing this on an iPad and it isn’t easy to edit these posts.

 

Stay safe.

Support after yesterday’s reversal

By Jani Ziedins | Intraday Analysis

The markets had a terrible finish yesterday, turning a nice opening gain into a material loss.  Yesterday was a boilerplate “buy the rumor, sell the news” as the markets opened higher on Spain and then sold off aggressively with a 2%+ intra-day decline.

Today the markets struggled for direction early, but in late morning recovered some of yesterday’s sell-off.  What does this mean going forward?  It is hard to say because we are stuck in the middle of the trading range and things are more balanced as they could tip either way.  Maybe it is a tad lower to retest 1280, or higher to push up against the 50dma at 1350.  At 1315, we are smack dab in the middle of this range

Yesterday’s sell-off no doubt tempted a lot of shorts to jump back in the market with stop-losses just above yesterday’s high.  This adds even more fuel to a potential short-squeeze above 1335.  Like I said yesterday, I think a near-term move above this region is inevitable; the only question is if it happens before or after we test the 200dma.  Did yesterday’s sell-off clear out enough longs and temp shorts to set the market up for a contrarian move higher?  Or are there a few too many bulls left hanging on by their fingertips that need to get shaken out first?

As you can tell from the ambiguous commentary above, it is easier to anticipate market moves when the markets and sentiment are lopsided.  When the market is in the middle of the range and sentiment is mixed, there is far less clarity.  My earlier analysis expected a move up to the 50dma before turning lower, so if I had to call it one way or the other, that is what I would chose.  But at this point it is simply a coin-flip.  Of course this is nothing more than splitting hairs over a couple percent in the indexes either way.  Hardly a material matter unless you are a too-big-to-fail investment bank cranked up on 30 to 1 leverage.  The real story will come later this summer when the markets are finally ready to break out of this range.

Individual stocks continue being a mixed bag as some are holding up, others are breaking down; some are above the 50dma and others below.  The thing about CAM SLIM investing it is it a calm weather sport.  Much like sailing, who wants to go out when the water is choppy, the wind is swirling, and clouds are threatening?  Just like sailing, investing is far easier on nice sunny days with a predictable and constant breeze.  Most leading stocks are volatile and it is best to only ride them under the most favorable conditions.  No doubt we are giving up potential gains from stocks making new highs, but to be successful, it isn’t just about picking winners, it is also about also balancing risk and reward.  To win at this over the long-term, we must make more money than we lose; sticking to the best conditions moves the odds in our favor.

Stay safe

Sell the news?

By Jani Ziedins | Intraday Analysis

Markets opened higher on Spain’s bailout, but gave up all those gains out of the gate.  We are trading just a tad in the red after finding support at the 1320 level.  Was this fade the final gasps of last week’s bounce?  Or do we still have some upside left before turning lower?  Potential upside is about 30 S&P points and downside is about 50 points.  Surely it is not a good risk/reward for initiating a new position and a reasonable time for swing traders to think about reeling in profits.

It is helpful to see the EU lend Spain a lifeline, but it is just a temporary patch to keep them afloat.  And no doubt that is why pros used the Spain pop to sell more shares.  Last week a lot of shorts got squeezed as we witnessed the best weekly gain in months.  Today’s price peaked at resistance from May 29th’s reversal, but for me, that was a little too clean and predictable.  With all the buy orders above 1330 between breakout buyers and shorts getting squeezed, it seems we are bound to push through that region, if for no other reason than to trigger a flurry of transactions so market makers can pay their kids private school tuition.  But that doesn’t mean we can’t trade back down to the 200dma first to shake out all the swing traders and premature bulls.  Remember, it is always about hurting the greatest number of people at any given time.    Where we go from here depends on who is more at risk, the bears of bulls. Last week flushed out a lot of bears, meaning it could be the bulls turn next.

But all of this is splitting hairs.  The overriding theme is we are range bound and will most likely stay that way for another month or two.  No reason for bulls to go long or bears to go short, as any directional traders will get chopped up when each breakout or breakdown quickly reverses.  The best trade continues being the swing trade; buy the dips, sell the rallies.  Any CAN SLIM trader should relax and take some time off.  Keep a casual eye on the markets for a turning point, but no need to obsess daily over a range bound market.

Stay safe

Finding support for Wednesday’s gains

By Jani Ziedins | Intraday Analysis

Friday opened slightly lower, but rose above breakeven after the first hour of trade.  Support at this level is encouraging given the way yesterday gave up strong gains to finish flat.  After Wednesday’s monster performance, it seems both bulls and bears are afraid to stick their neck out and the market is left struggling for direction as both sides are waiting for a sign one way or the other.  As always, it hard to pick the path of least resistance, does the downtrend continue, or has it gotten oversold and we are ready for a bounce?  Statistically speaking, a trend is more likely to continue than reverse simply because there are many continuation days and only one reversal.  But as I shared in previous posts, pessimism is consuming a large number of market participants.  When you get too many people thinking the same way, it skews the market and creates an imbalance that is bound to snap back at some point.  Of course the thing to be careful of is imbalances often go further and longer and than any contrarian or cynic expects.

But as I have written this, the logjam broke to the upside, at least for the moment.  We’ll see if this rally can last through the day or if it unravels like yesterday.  The market has a propensity toward hurting and humiliating as many people as possible.  Given the large number of bears, they are feeling the most heat, meaning we could continue a bit higher before they are fully demoralized.  After which point the market will finally turn back down.  The market has to first convince you you are wrong before finally proving you right.

Seems Greece has already fallen off the edge of the earth since it is hardly receiving a mention in the press as Spain has become the new favorite obsession.  Here is a novel solution to the Euro problem, rather than kick Greece or any of the other battered PIIGS out of the Euro, why not turn the tables and boot Germany out?  Germany is the lone roadblock pushing economic crushing austerity and monetary restraint while shooting down any mention of a joint Euro bond.  Get rid of Germany and the tone of these Euro meetings would change dramatically.  No doubt a Euro ex-Germany would be a weaker currency, but the devaluation would be a huge boon for exports and tourism for the bulk of the continent, and a diversified Euro bond would keep lending rates under control.  The problem is most of the continent is falling into recession while Germany is booming, creating an economic dichotomy where the fiscal and monetary needs of each region are in direct conflict.  Most of Europe needs easy money and stimulus to revive their ailing economies, while Germany needs tightening to keep its economy from overheating.  The other benefit of removing Germany is there will be far fewer issues with bank runs as the new Deutschmark will be a coveted currency, not a shunned one like a new Drachma or Peseta.  While there is virtually zero chance this will happen, it could be a far more tenable solution for the region than crushing and removing the weaker countries one by one.

FRAN is showing the risks associated with shorting a high flier as it is popping over 20% today on earnings.  That’s gota hurt anyone shorting this name since it’s break under the 50 and 200 dma.  On both the long and short side, it is best to get in early, get out early, and leave someone else holding the bag.  Don’t be late and don’t get greedy.  Take your worthwhile profits and move on.

Stay safe

Bounce continues

By Jani Ziedins | Intraday Analysis

The markets opened higher this morning, no doubt due to retail investors placing overnight orders given yesterday’s big gains.  But within minutes the market gave back much of that upside as cynical institutional investors used the strength to sell more shares.  The question is, who’s right, the amateurs or the pros?  Conventional wisdom says the pros are far more savvy traders, but the reality is much different when you look critically at the pros performance.  The hard truth is pros are helpless victims to the market’s swings just like the rest of us.

I want to correct something I stated the other day when I said I was encouraged by the prospects of the next follow-through-day (FTD).  What I really should have said is I am encouraged by the prospects of the next bounce.  This week’s rebound took a lot of gas out of the tank and it will be a few more days before the market has the strength to stage another big up-day that will qualify as a FTD.  By that point the market will have rallied a bit more and the actual FTD will happen at least 2/3 of the way through this move, meaning anyone who buys the FTD will be late to the party and most likely watch the markets rollover not long after.  As I stated in previous posts, I expect the market will run into resistance near the 50dma and we are over halfway there. And to be honest, the market might not have enough left in tank to stage a 1.4% up day on higher volume before it runs into resistance, making all of the above FTD discussion moot.

As for how I am trading this market, I went long index ETFs on Tuesday.  The reason I chose indexes instead of top-rated growth stocks is this market is far too choppy to speculate in high-flying names that can crash 10-50% overnight.  The indexes are a far more stable and predictable in this environment.  This also lets me take larger positions than I would feel comfortable with in any individual stock.  Swing-trading the indexes is not a CAN SLIM technique, but it gives me something to do while I wait for a good bull-rally to trade, which could months away.  In addition, I find having multiple techniques in my toolbox gives me the flexibility to adapt my trading style to the market we are in.  A hammer is a great tool, but you’ll get yourself in trouble if you try to use a hammer on everything.

LULU dropped the ball with its latest earnings release and is down 10%.  The stock had a monster run, up 2,700% since the ’09 lows, but every good thing must eventually come to an end.  Is LULU’s time up?  The interesting thing is LULU beat on earnings and revenue, yet it is still getting pounded today.  What gives?  Most likely it is concern over declining margins.  Obviously investors in high P/E stocks hate to see that.  Was this just a blip, or signs of saturation, competition, and pricing pressure?  Time will tell, but given LULU’s impressive run, there is a lot of air under the stock.

FB is finding a little support, but there is a lot of fear remaining over the end of its lockup and the impending wave of selling by insiders.  But if everyone is already talking about it, wouldn’t it already be priced in?  I wonder if the stock will actually rally after the lockup expires?  There is way too much bearishness in this widely hated and ridiculed name and that will inevitably lead to a bounce.  But there is no need to catch a falling knife based on speculation and prediction.    Wait for the bounce and then hang on for a nice pop.  But don’t get greedy and take your profits early.

Stay safe

Reclaiming all of Friday’s losses

By Jani Ziedins | Intraday Analysis

A strong up day in the markets as we snap back from Friday’s plunge.  All the traders who piled in on the short side after the dismal jobs report are getting their clock cleaned today.  This morning’s rally has pretty wiped out all of Friday’s sell-off and is yet another example of the obvious trade being the wrong trade.  We’ll see if these early gains hold up through the day, but so far the market is marching higher and most traders are scrambling as they find themselves on the wrong side of the trade.  No doubt this could continue for a couple more days as bearish traders are forced to close out their short positions.

Today is shaping up to be an excellent follow-through-day, if only it wasn’t day three of a rally attempt.  No matter how great today’s price action looks, we still need a strong rally day tomorrow or later to confirm a new uptrend.

It appears this summer is shaping up with a similar choppy feel as last summer, except without the extreme volatility.  Last summer we were up and down 5 and 10% every couple days, this summer the moves have been far more moderate.  No doubt the current market is nervous about headlines, but it is less panicky and irrational than last summer.  We should expect this trading range to stick around for a while unless Merkel shocks the world and does an about-face by suddenly supporting Euro bonds and money printing.  I have no doubt Europe will figure this thing out, it will just take a bit of negotiating and compromise.  And as we all know, the political process is both messy and drawn-out, as any resolution won’t be reached until it looks like everything is ready to collapse.  Brinkmanship is the name of the game in politics and that is what we should prepare for.  But the market has a hard time coping with the back and forth, and thus the choppiness will continue.  But as we approach the end of the year and the whole thing hasn’t unraveled, more speculative traders will get the courage to start going long in a meaningful way.  Not long after, others will fall in line, pushing the markets higher and the strength will continue as the stragglers chase to keep up.

Former darling TPX is getting pounded today, down 50% and is 75% off of its 52wk high of just two months ago.  The higher they go, the harder they fall and is yet another highflier with an extreme valuation coming back to earth.  CAN SLIM is a trading strategy, not an investing strategy.  Don’t fall in love with a stock, just date them.  As O’Neil often says, all stocks are bad, unless they go up.  We can now throw TPX in the same bin as recent blow-ups like NFLX, OPEN, and GMCR and previous crashes like AOL, PALM, CSCO, FSLR, RIMM and CROX.  And the same thing will happen going forward.  Always be warry, knowing there are other hot stocks in the IBD50 whose days are numbered.  The best way to cope with this risk is to take profits early, sidestep pullbacks, and roll your profits into the next big thing.  Follow those simple rules and it will keep you from giving back all your profits on your best trades.  It is easy to make money in the stock market, the hard part is keeping it.

Stay safe

Finding support after Friday’s sell-off

By Jani Ziedins | Intraday Analysis

The markets continue finding support around their 200dma and so far arrested what could have become a cascade of panic selling after Friday’s jobs report.  This is an encouraging sign the markets are taking a wait and see attitude to this economic weakness versus a sell first, ask questions later approach we’ve seen in previous plunges.  The interesting thing about browsing major market news outlets is the complete absence of professionals saying this weakness is a great buying opportunity.  From my highly unscientific survey, it seems many Wall Street traders are pessimistic about the current outlook.  But being a contrarian, I find this is highly encouraging.  The reason contrarian investing works is who continues holding stocks when they are convinced the markets are headed lower?  So when everyone is bearish, it means they have already done all the selling they are going to do.  If all the selling has already taken place, how much lower can we go?  Thus what becomes the new path of least resistance?  No doubt a nasty headline could take the knees out from under this skittish market, but as we are watching the markets digest Friday’s dismal jobs report constructively, at this stage in the game it appears there is not a lot of extra selling pressure left in the market and any additional bad news will also be more limited.  It helps to think of market sentiment as a spring.  Sometime it is extended and others it is compressed.  A stretched market snaps back hard and fast, while a compressed market resists additional pressure fairly well.  This is most likely why Friday’s jobs report hasn’t triggered a two-week slide like we saw last summer when the markets were trading near 52wk highs.

As for how to trade this, now might be a good time to lighten up on any short positions, as the potential for a bounce is more probable than another leg down.  This correction is pretty long in the tooth and fairly obvious to everyone; remember, traders who overstay their welcome always get stuck with the bill.  Take your profits early and get ready for the next high probability trade.  For those with an iron stomach, buying small positions could make for some excitement with limited risk as we wait for a more concrete follow through day.  Speaking of which, given yesterday’s price-action, we are in day-two of an attempted rally.  We could see a follow through as soon as Thursday if the markets have a strong up-day on higher volume.  And keep in mind, the more reluctant people are to buy the follow-through-day, the more likely it is to work.  While I’ve been pessimistic over previous follow-through-days, I’m fairly constructive on the next one given the extreme sentiment.  No doubt we could see additional selling from here as anything is possible in the markets, but when looking at recent price action between the sell-off since April and the apparent support after Friday’s disappointing jobs report, it seem like the higher probability trade is now higher. But keep in mind there is a difference between a bounce and a sustained rally.  Most likely we’ll move sideways in a trading range as the market digests the headline risks in front of us, but this churn is what clears the way for additional gains later in the year.  In our current environment swing trading will be the best way to approach the market, meaning get in early and take your profits early.

As I alluded to earlier in this post, I follow the financial news daily, but not in a traditional way where I am seeking trading advice or looking for the next big thing.  I use the media to gauge sentiment by hearing what other traders are thinking.  There are a lot of successful investors like Buffet and O’Neil who avoid the noise of Wall Street and have moved thousands of miles away from the crowd.  But I’ve taken it to the next level and rather than simply ignore the noise, I actually sample it and use it to give me clues on group-think and clustering that present trading opportunities.  This style is not suitable for most people, but I find it gives me an edge when trying to anticipate the market’s next move.

Stay safe

Sell-off continues

By Jani Ziedins | Intraday Analysis

The markets opened higher, but quickly turned those gains into losses as they reversed lower in the first 20 minutes of trade.  It seems eager speculators were trying to catch a falling knife after Friday’s massive sell-off, but after that temporary support, the markets resumed their slide due to a lack of follow on buying from a wider pool of investors. In fact, some larger money managers most likely used the early strength to sell even more of their positions, causing that quick reversal just 10 minutes after the open.

The one positive through late morning is the selling is fairly orderly and there has not been a mass rush for the exits as we are down a manageable ~0.5%.  But that could easily change this afternoon if the markets fail to find a floor and this weakness triggers even more selling.  It will be interesting to see how many potential sellers are left in the markets after the two-month decline and Friday’s steep sell-off.

The question we are left to ponder, “what is greater, the fear or the reality?”  Has the market underpriced the risks ahead of us, or is it irrationally fearful of what is over the horizon?  The problem in 2008 was the markets grossly under-appreciated the risks associated with the banking sector, leading to a massive crash in Oct 2008 as the world finally woke up to just how dire the situation really was.  Are we in a similar position where Greece, the Euro, and US economic recovery will also catch investors off guard?  Seeing how the media has obsessed over these headline issues for the last two years, it would be hard to make a case these events are still flying under the radar.

But that doesn’t mean the selling will stop since fear and selling begets more fear and selling.  It is a highly contagious disease that spreads quickly with devastating consequences for anyone standing in the way.  Crashes need a trigger to get kicked off and Friday’s jobs report could easily qualify.  But how much fuel, ie weak holders, is left in the markets?  Are there enough to trigger another 20% plunge like we saw last summer?  Anything can happen, but I expect we are closer to the end of this correction.  There is only a 1% cushion remaining from this year’s first quarter rally in the S&P500.  Is this the magic value the market is magnetically drawn toward?  Often the markets target obscene values before finally reversing.  Is 1257 that bogie?

Speaking of which, it is crazy how quickly the markets can unravel the best first quarter in 30 years.  Easy come, easy go.  It is simply another example why the savvy trader always harvests his profits when the sun is still shining.  The markets peak when everyone is most optimistic, so when everyone is bullish, it is time to start trimming positions.

But back to the previous discussion, using the above logic, it seems ~1250 is our line in the sand.  Find support there and it could make for a good swing trade as the market rebounds.  Crash through this level and we could see a cascade of selling push us down to and through 1,200.  But from what I see, there is a lot of fear in the markets right now, meaning we could be close to the end of this move.  But remember, only impulsive traders try to pick the bottom; disciplined traders wait for the follow through day before jumping back in.  Given how far we’ve come, I expect the next follow-through-day has a high probability of being the real thing.  While I don’t expect it will lead to new highs in the indexes, it will make for a good swing trade as we bounce to the upper end of the summer’s trading range, most likely near the 50dma in the mid to upper 1,300 range.

As for individual stocks, I’ve been neglectful of maintaining my watch list as I am simply waiting for all the shoes to drop and see where leading stocks stand when the market finally finds its footing.  As an example of how hard the leaders can fall, 1/2 of my old watch list is down 20% or more from its 52-week high, with 1/3 down over 30%.  Most scary is INVN and FOSL who are down over 50%.

In the rebound, the best short-term trades will come from the high quality stocks that got smacked down hard due to irrational selling.  Once the broad market pressure lifts, many of these stocks will pop like a cork.  The better longer-term trades will come from the high quality stocks that resisted a sharp sell-off and held up better than most.  But because they were not subject to an irrational sell-off, their near-term upside will be more limited in comparison.

Stay safe

Fresh lows on disappointing jobs report

By Jani Ziedins | Intraday Analysis

The jobs report came in far under expectations and the markets sold-off hard at the open.  Both the S&P500 and NASDAQ made new lows in early trade, putting an end to the rally attempt dating back to May 21st.  This means we are at least four days from a legitimate buy-point.  But given the headlines, I don’t expect market participants are ready to start buying equities with reckless abandon any time soon, so patience is the key.

The more interesting debate is if the market is shortable on this news.  Are we on the verge of a cascade sell-off, or has a lot of the selling already occurred and we are in the process of forming a base before heading higher?  The two things to consider are 1) has European turmoil and the feeble US economy actually caught anyone off guard and 2) is the market extended or compressed?  The answer to those two questions will give us strong clues about the potential for a cascade sell-off.

Maybe I’m off base, but it seems like the news has reported Euro troubles and a pathetic domestic recovery for at least a couple of years, so I doubt the recent headlines are catching anyone off guard.  The second aspect is we have long since sold-off from our March peak.  Looking back to last July’s crash, we were coming from 52-week highs prior to the plunge.  The sell-off over the last two months has taken a lot of potential energy out of the market.  Many of the weak holders have already sold, leaving far less fuel for a sell-off this time around.  Of course the thing about a panic sell-off is it can turn resilient bulls into weak-kneed worrywarts over a matter of days as the market crashes through support levels and triggers additional stop-loss selling.  But so far I am encouraged by the floor the indexes are finding at the 200dma, indicating traders are not rushing for the exits…….yet.

But as we flirt with the 200dma, it wouldn’t surprise me to see the market dip under, triggering all the stop-losses sitting at this level.  The question is how much lower do we go if we break through.  Do we just poke our head under?  Do we drop to 1257 to go flat for the year?  Or do we fall all the way to 1200?  I find 1200 the least probable outcome without a new catalyst pressuring the markets.  A slowly growing US economy and European infighting is already priced in the markets.  But actual US job losses and economic contraction could spook traders.  Same goes with a fatal breakdown of European negotiations.  But for the trader, both of these would most likely trigger temporary dips as it flushes out all the pessimists and weak holders.  The lower we go, the bigger the bounce will be.

As for Greece, booting them out of the Euro might initially trigger a sell-off, but it could bounce shortly after as the initial panic transitions to relief that the Euro is actually stronger without Greece.

As for individual stocks, the best performing stocks as of late are getting smacked down.  LQDT, SWI, CRUS, and TRIP are all selling off hard after making recent 52wk highs.  During a market correction, resist the temptation to buy stocks showing great strength because they are far more vulnerable to broad market weakness.  All of these stocks have shown unusual strength recently, but in a market correction that simply makes them good watch-list candidates, not buy candidates.

Stay safe

More weakness

By Jani Ziedins | Intraday Analysis

We continue selling-off after Tuesday’s “breakout”.  It seems fairly safe to call Tuesday’s strength nothing more than a short-squeeze.  Imagine the pain all the bears who were shaken-out as we broke above the consolidation or the bulls who bought the “breakout” are feeling today as the market reversed course.  If there is one overriding truth we can count on is the market’s propensity toward humiliating as many people as it can at any one time.  And more often than not, it crushes and humbles both bears and bulls before finally revealing its hand.

The market testing 1300 as we push toward the lower end of the recent consolidation.  Will we bounce off of the recent lows?  Will we plummet in a cascade of selling?  For those in cash it really doesn’t matter.  In fact, the lower the better because irrational selling creates more upside potential.  But for those trying to play the short side, it helps to have profit targets.

Tomorrow we’ll get the monthly employment report.  Expectations have been dramatically lowered after the last couple misses and the deceleration in hiring we’ve seen in recent results.  Will this trend continue, or will the lowered bar make it easier to surprise to the upside?  While employment numbers were a big driver in 2009 and 2010, they have become less of a market moving data point recently.  No doubt it will make waves, but as long as the number isn’t too shocking in either direction, the effect will be short-lived as the market quickly returns to its obsession over Greece and the Euro zone. But one thing to consider is we are still holding above the lows of the recent consolidation, meaning the current rally attempt is still alive and a strong employment number could trigger a follow through day tomorrow if we have a 1.4% pop on strong volume.

While there are a lot of IBD50 stocks holding up during this correction, the thing to note is the difference in names between this week’s IBD50 and those form March.  Many of the favorite stocks of the Q1 rally have completely fallen off the list.  Often the higher they rise, the harder they fall. Most of IBD’s top groups are defensive, coming from the medical and banking industries.  Are these stocks showing potential as the next big thing, or are they simply hiding places for long-only mutual funds trying to lose the least amount of money in a market correction?

Stay safe

Giving back yesterday’s gains

By Jani Ziedins | Intraday Analysis

Stocks opened lower, giving back all of yesterday’s gains and then some.  Good news one day, bad news the next, typical action for a consolidation.  The interesting thing to watch is if this consolidation is the bottom of the range, or if it is a pause halfway down as part of a three wave correction.  As I shared earlier, I expect at the very least we’ll retest the lows of the range and more likely than not make new lows before this is all said and done.  The question is if the lows will be 1290, 1280, 1257, or lower.

For the time being the market is reading too much into each headline coming out of Europe or China.  One day the market is excited and the next it is dejected.  No doubt the news will go both ways for a while and as a result the market will get whipped around. One thing to put all of this in perspective is no matter what the economy is doing, there will always be both good and bad headlines at any given time.  What really matters is how the market responds given what the masses are inclined to gravitate toward.  Is the market optimistic, pessimistic, or confused?  Right now we are in a choppy consolidation because the market is swing back and forth between bullish and bearish biases.  While it seems like the market is chaining its mind on a daily basis, what is really going on is neither the bulls nor bears have the strength to sustain a breakout and after a flurry of bull or bear activity, it quickly fizzles and the market swings back the other direction.

Breaking the upper side of the recent consolidation shook out many bears and tempted premature breakout traders to go long.  But this was nothing more than highly speculative buying and there is no substance to these traders as they come and go with the prevailing wind.  To sustain a move higher we’re going to need buyers with conviction that are willing to hold for extended periods of time.  With all the headline risk facing the markets, many of these longer-term traders are waiting out the uncertainty before committing more capital to the markets.  Many of these savvy traders have the view they would rather buy several percent higher and forgo those profits if it means they have less risk of the market reversing on them. And this is why each breakout fails to gather the critical mass it needs to continue higher.

CRUS is trimming yesterday’s strong breakout gains.  This demonstrates the risks associated with buying even the strongest stocks during a correction where very few stocks can overpower a declining market.  And even the best performing stocks only notch modest gains during a correction, giving a very low risk to reward.  As pointed out during our monthly IBD meetup, if WON makes all his portfolio managers hold cash during a correction, what makes us think we can do better?  The goal isn’t to make all the money, but to capture a chunk of highest-probability profits when the wind is at our backs.  Using leverage on the way up and sidestepping the pullbacks will produce great results even when buying late and selling early.  And back to CRUS, yesterday’s breakout is highly noteworthy and the stock should be added to a ready list for consideration when the uptrend resumes.

Stay safe.

Early gains fizzle

By Jani Ziedins | Intraday Analysis

Stocks are higher in response to global headlines and strength seen in overseas trading.    Given the extremely low holiday volume on Friday, a technical follow-through-day seems plausible if the indexes close with 1.25%+ gains.  Of course we should be suspicious of any follow-through-day that takes advantage of a holiday comparison.  A more reliable benchmark is Thursday’s volume or the 50-day average volume. But as I write this, the markets have given up 1/2 of the early morning gains as the euro is plunging against the dollar.

Part of the headwind equities are facing is the inverse relationship between the strength of the US dollar and the US stock markets.  Weak dollar = strong stock prices, strong dollar = weak markets.  Much of this relationship occurs because most companies in the indexes derive a large portion of their sales and profits from overseas.  When foreign currencies are weak relative to the US dollar, those overseas revenues and earnings lose value, lowering a domestic company’s profits, and thus valuation.  In addition, a strong dollar means domestically produced products and services become more expensive in foreign countries and those higher prices put further pressure on international sales and earnings.  Given how close this relationship has been, the US dollar is worth keeping an eye on as part of your market routine.

No doubt a lot of bears are running for cover as today’s price action broke above recent trading highs.  Many of the late bears who shorted the market long after the decline was obvious are feeling a lot of pain as most of their positions are in the red.  To stop the bleeding, they are buying back their positions, contributing to this move higher as part of a classic short squeeze.

Now the question is if there will be follow-on buying from value investors after the temporary lift from the short squeeze dissipates.  To continue rallying from here, the market will need to conclude the reasons for the recent sell-off were unjustified.  That means getting over our renewed fear of headlines.  What are the chances of that happening over the next several days?  And late morning trade gave back many of those early gains, showing not many traders were eager to follow the short squeeze.

But while I don’t see a lot of reason for us to sustain a rally from here, the downside risk is equally suspicious.  As we  find ourselves in a headline obsessed market, the thing to remember is we can safely ignore what everyone is talking about because it is already priced in the market.  The markets are the most efficient discounter of information ever conceived.  As soon as a material number of people become are afraid of a Greek default or a Euro breakup, they either immediately sell their positions that would be affected, or lower the price they would be willing to pay for those vulnerable  assets.  This shift in sentiment moves markets prices to the exact point where there is just as much optimism as pessimism and the scales are perfectly balanced.  Existing fears or hopes cannot drive the market because they are already priced in.  It takes chances in expectations to move markets as traders change their mind and either bid up or sell assets to reflect their new expectations of the future.

I expect we’ll continue to trading in this range as the market sorts through its feelings toward the economy in the US, Europe, and China.  From here it will take a material shift in sentiment either due to new information or fatigue over the same fatalistic headlines failing to crash the market (ie Chicken Little effect).

The stock market is one of the few places in the world where people are excited for the opportunity to buy merchandise at inflated prices and turn their nose up at buying anything at a discount.   You don’t need to look any further than FB to see this phenomena.  Two-weeks ago people were excited for the opportunity to buy FB at $45.  Yet here we are just a few days later and what was a screaming buy at $45 is now an untouchable pariah at $29.  What gives?  It is the exact same company with the exact same balance sheet and future as it had two-weeks ago, yet it went from being a must have stock to a complete embarrassment that no one is willing to admit to owning.

This is a perfect example of clustering.  People’s views on FB are based entirely on what other people think, namely the aggregate’s view as reflected in the stock price.  When the group likes a stock, they bid up the price and everyone loves it.  When the price falls, everyone hates it.  But the thing to remember is the more people who end up clustered around a single view, the less independence and balance there is in the market and the more likely the price will make a big move in the opposite direction.  We saw this when FB was the must have stock and was bid up to a $100b valuation and we are now seeing the pendulum swing the other way as FB is the laughing-stock of the market with its $60b market cap.

FB continues to get pounded today as it sliced through $30 with the initiation of options trading today.  But this shouldn’t surprise anyone as it continues to shakeout irrationally euphoric bulls.  Using GRPN and LNKD as benchmarks, both traded lower for 4-5 weeks before bouncing higher.  We should expect to see something similar with FB before it bounces.  For swing traders, we want the stock bottom before buying because anything else is trying to catch a falling knife.  Day traders who watch each tick of the day can get away with trading short-term moves as they jump in and out of a stock over a period of hours, but the rest of us would be better served by waiting for the stock to bottom and rebound first.   Anyone contemplating a trade on FB, keep your price target under $38 because of all the regretful IPO buyers who are praying to the stock market gods so they can get out of their bonehead trade without losing money.  This selling pressure at the IPO price will create a headwind for the stock, slowing further gains.  But for the breakout trader, seeing a high-volume break above the $38 level would make for an interesting buying opportunity.  Remember this is an advanced trade and most would be better served waiting for a follow-through-day and buying more traditional CAN SLIM stocks showing the strongest fundamentals and charts.

Stay safe.

Quiet pre-holliday session

By Jani Ziedins | Intraday Analysis

It’s a quiet pre-holiday trading session.  The market has been trading around breakeven all morning as everyone is far more focused on what they are going to do over the three-day weekend than what is happening in Europe.

The market continues finding support in the 1300 region, moderating the anxiety of a cascade sell-off as investors are getting more comfortable with these new levels.  There might be a little more upside left in the bounce, but no doubt we’ll test the lower end of the range over the next couple weeks.  The market will need to chew through both bulls and bears as we consolidate and search for the next move, either up or down. But for the time being, I think most of the traders who wanted to sell have already sold, so it will take new and unexpected bad news to trigger another big leg down.  (For the purposes of this discussion, I’ll consider a move down to 1250 as part of the original sell-off and consolidation, not a new leg down.  A new leg down would be a dramatic plunge to 1200 or lower.)

The thing we need to realize about Greece is by itself, a default or eviction from the Euro will have little direct effect on the banking system since all Greek debt is already viewed and booked as near worthless.  No doubt it will hit some speculators and hedge funds making big bets on the outcome in the pocketbook, but we should not fear global contagion and banks falling like dominoes.  Most major banks have either gotten rid of their Greek debt, hedged it, or written it down and already booked the loss.  Greece losing the Euro will be a major disaster for the local region, but it will not be a material issue for the global financial sector.

The fear in the markets has never been about what happens if Greece fails, but about the bigger dominoes like Spain and Italy, situations not already priced in the market.   No doubt Germany could make an example out of Greece to get Portugal, Ireland, Italy, and Spain to tote the line, but ultimately I expect the Euro to hold together through a combination of all the ideas being thrown out there, namely a hybrid of bailouts, Euro bonds, money printing, and austerity.  There are major negative consequences to each of these, but doing all in moderation will lead to the least bad resolution.

Who wants to buy FB?  Anyone?  Anyone?  Being a contrarian, seeing the humiliation suffered by early FB investors makes for an interesting counter-trend opportunity.  No doubt the stock could decline a lot more from here and there is a very real risk of decelerated growth crushing its high-flying valuation, but all the highly bearish sentiment forming around this story makes me far more intrigued by this name.  I continue to be skeptical of its long-term prospects because consumer tech companies have a limited shelf-life (just ask PALM, RIMM, AOL, MySpace, etc), but this highly skewed sentiment in FB could setup for some short-term trades.  Regardless of which way FB eventually goes, no doubt there will be some tradable swings like we’ve seen in LNKD and GRPN.  Obviously this is the deep-end of the pool, so only try something like this if you know what you are doing and understand the risks.  The key to managing these kind of trades is capturing profits early and not allowing yourself to hold too long and get whipped around by the inevitable volatility.

Have a great weekend.

Did you see the olds?

By Jani Ziedins | Intraday Analysis

The markets bounced around modestly all morning and are currently lower with no new headlines to push the markets decisively one way or the other.  For the time being the correction found footing around 1300 as the selling pressure moderated and value buyers are finding these levels attractive.

Today is the first day that could qualify as a follow through day from Monday’s rally attempt.  The thing to be careful of is while there are such things as V-bottoms, they are typically associated with frantic sell-offs that are emotionally charged and lack fundamental merit, thus the extreme plunge followed by a quick rebound.  Further these are most often found in individual stocks, not the indexes.  Based on history, if we do get a FTD in the next few days, it is unlikely the market will take-off and resume the previous uptrend, if for no other reason than we have a fair bit of overhead resistance from regretful buyers over the last three months who are praying for the chance to get out at breakeven.  So while this pullback is constructive in the big picture, leave the raging-bull hat in the closet for the time being.

As for headlines, it seems like we are stuck in the movie Ground Hog Day as we continue seeing the same economic stories recycled from last year.  We should start calling it the “olds” because there is nothing new about it.  As it stands everything should already be priced in the market fairly well given we just reset for the Q1 Teflon rally that was completely oblivious to ominous headlines.  Not to say we can’t dip a bit lower over the coming weeks and months through the market’s typical gyrations and head fakes, but it will take something genuinely new and unexpected to crash the market from here.  Maybe this is Greece actually getting kicked out of the Euro instead of just idle speculation and debate.  Or some kind of irrefutable proof that China has been manipulating their economic numbers and the situation is far more dire than we are lead to believe.  But as long as we are simply fretting over a sluggish economy or a Greek default, that is already baked into the cake and accounted for.

In individual stocks, FFIV is getting crushed today and is 20% off of its 52-week high.  This is just one of many recent examples of why every great investor preaches never fall in love with a stock.  Date them and then take your money and run while the sun is still shining.  The idea of home-run hitting is extremely seductive, who doesn’t want to hold a great stock through an entire 1,000% run?  But while it is easy to identify the biggest winners at the end of each year, the thing we fail to consider is the hundreds of stocks that had the exact same fundamentals and chart patterns that crashed and burned.  This phenomena is called survivor bias because we only study the successful and ignore similar examples that plunged into obscurity.  In trading, the best way to hedge against this is to take your 20% profits and move on to the next hot trade.

Indecision

By Jani Ziedins | Intraday Analysis

The markets are facing another bout of weakness after a strong showing on Monday and early Tuesday.  Almost all of those gains have been wiped out as the S&P500 is flirting with 1300 again over renewed Greek concerns.  But so far we continue holding above Friday’s low, keeping the rally attempt alive.  If we honor Friday’s low, starting tomorrow we could have a follow through day if there are nice price gains on higher volume.

While there are a lot of similarities between this year’s sell-off and last year, the big difference is this market don’t seem nearly as frantic.  Last year could easily be described as bi-polar as the market whipped from one extreme to the other, but this time around things seem far more orderly, lacking those violent changes in sentiment.  If last year was bi-polar, the current market is simply indecisive.  Similar Euro and economic headlines are weighing on the market’s mind, but the market is no longer fearing the end of global civilization and is doing a better job of keeping headline risks in perspective.  These unresolved issues will continue to haunt us for a while, but the market is acting far more rational and that is giving the market more stability.

Even if the indecision continues through summer, I expect we’ve already seen the bulk of the sell-off.  We’ll probably dip under the 200dma or 1257 to go flat for the year at some point, but that will most likely be the process of building a solid foundation for this correction to bounce off of and that violation of support will not be a trapdoor triggering a massive sell-off.  Of course this assumes a fairly orderly resolution to the Euro debt problem and modest economic growth.  No doubt the markets will unravel if the Euro comes apart, China crashes, or conflict in the Middle East threatens oil supplies.  But barring those unlikely events, the market should be fairly stable going forward.  Of course there is a big difference between stable and rallying.  It will take a period of price consolidation to find suitable resolutions to these headline issues and that will delay the indexes from making new highs for a bit.  But while the market might trade sideways, there will be opportunities to locate leading stocks making big price gains once the market headwinds stop knocking them down.

Not a lot to say about individual leading stocks right now as most of the favorites continue trading under their 50dma.  But standard bases take at least two months to form, so we shouldn’t be expecting many of these CAN SLIM stocks to start making new highs any time soon.  Patience is the name of the game and we just have to wait for the market and individual stocks to move back into buyable positions.  If we were being optimistic, we should hope for a tradable fall rally to help end the year on a strong note.  If someone has problems sitting on their hands for the next couple months, you’d probably do better buying the dips and selling the rallies.  In a sideways market, buying breakouts can be a frustrating and expensive game. No doubt there will be a handful of strong performers, but these will be the exception, not the rule.  So be very selective and disciplined with any buys for a while.

And of course I reserve the right to be 100% wrong and revise my opinions as the conditions warrant.

Stay safe