Category Archives for "End of Day Analysis"

Jul 19

Trading Outlook for Wednesday, July 20th

By Jani Ziedins | End of Day Analysis

Screen Shot 2016-07-19 at 9.27.04 PMEnd of Day Update:

The S&P500 slipped a negligible amount Tuesday in one of the lowest volume sessions of the year. To this point stocks are holding the recent breakout as they trade in a tight range between 2,155 and 2,170. Quite a reversal in fortune from the turmoil and uncertainty we faced earlier in the year. The biggest question on everyone’s mind is if these record highs are the real deal, or these are the last gasps before the crash.

Last year many bull market skeptics claimed they would have a lot more confidence in this rally if we pulled back and refreshed. Many were quoting how many months it’s been since we had an X% pullback. Since then we’ve had two dramatic selloffs, the first occurring last fall and an even more dramatic one this winter. Now that we checked that box and reset the clock, have we won over the skeptics? No of course not. But now they have to be more creative when coming up with a reason to disbelieve this strength.

For years I’ve been firmly in the secular bull camp. Over the last 100-years, “lost decades” have been followed by monstrous secular bull markets lasting a dozen or more years. That makes this seven-year old bull market relatively young in comparison. That said, secular bull markets contain brutal and terrifying selloffs. The infamous Monday in 1987 where stocks lost over 20% in one day was inside a phenomenally profitable, two-decade long bull market. This bull market will die like every one that has come before it, just don’t expect it to rollover any time soon.

But that is the big picture and mostly applicable to long-term, buy and hold investors. Those of us with shorter timeframes can look at this 150-point rebound from the Brexit lows with a more cynical eye. Even in powerful up-trends, we experience the inevitable (and healthy) step-backs.  Having moved as far as we have over the last few weeks, it is little surprise we ran out of buyers willing to chase prices higher. But even though we are struggling to find new buyers, stock owners are confidently hanging on for higher prices. Even without strong demand, prices are holding up well because so few owners are selling stocks. When supply is tight, it doesn’t take much demand to keep us levitating near record highs.

At this point it seems many traders are watching 2,155 and 2,170 levels and waiting for prices to breach either of these benchmarks before making their next move. A wave of profit taking will hit us if we slip under 2,155 and jumping above 2,170 will trigger the next round of chasing. But since we remain in the low-volume summer months, we shouldn’t expect either of these moves to get too carried away. The breakout will likely stall near 2,200 while a dip would most likely bounce before testing 2,100 support.

Even though we broke out to all-time highs, for short-term traders we are better off trading against these moves. That means buying weakness and selling strength. The sustainable buying won’t officially begin until big money managers return from their summer vacations this fall.

Jani

What’s a good trade worth to you? How about avoiding a loss?
For less than the cost of a daily coffee, have analysis like this delivered to your inbox every day during market hours. As an added bonus, I share personal trades with subscribers in real-time.
Start your free trial today!

Jul 05

Trading Plan for Wednesday, July 6th

By Jani Ziedins | End of Day Analysis

Screen Shot 2016-07-05 at 9.57.32 PMEnd of Day Update:

Tuesday the S&P500 stumbled modestly following last week’s shocking rebound that recovered nearly all of the Brexit losses. We lost 100-points in the two-days after the Brexit, but bounced back over the successive three-days as if nothing happened. That dramatic whipsaw leaves most traders confused and wondering what comes next.

It is fairly obvious why the market sold off after the widely unexpected Brexit vote shocked the world, but even more unexpected was the powerful recovery that pushed us back near all-time highs. If the world is falling apart, shouldn’t the market be reeling? While that was the initial reaction, it didn’t take long for opportunistic traders to realize central banks would respond to this political calamity by pumping even more stimulus into the economy. Any talk of rate hikes was quickly replaced by reassurances of further easy money. It seems market thinks this medicine is more attractive than the Brexit is bad.

But the above analysis assumes all of last week’s buying was thoughtful and rational. While it would reassuring to think that’s the case, the size and speed of the rebound reeks of emotional, reactive, and desperate buying. Anyone who sold or shorted the Brexit headlines quickly came to regret that decision and was forced to rush back into the market. Shorts were squeezed and the imminent close of the second quarter forced money managers to buy back their books ahead of their quarterly reporting. They certainly didn’t want to be the guy who had to explain to investors why they reactively sold at the exact wrong moment. Further proof of this quarter-end phenomena is the frenzied buying ended on the last day of the quarter and July’s prices have been floundering without fresh buyers. Given the way overnight futures are trading, it doesn’t look like things will get any better Wednesday.

None of this should come as a surprise to experienced traders. One-hundred point moves over three-days are clearly not sustainable and bound to run out of steam at any second. Tuesday seemed to be that day for this rebound. Now that we stumbled back under the widely followed and psychologically critical 2,100 level, expect profit-taking and defensive selling to continue replacing last week’s reactive buying. I don’t foresee this turning into a big crash, just a bit of consolidation following last week’s dramatic swings. Two-steps forward, one-step back. Nothing unusual about that.

I shared the following analysis with subscribers early Friday afternoon when the market was up, but the momentum was stalling:

“the time to buy the dip was earlier in the week, not now that we’ve raced 100-points in three-days. If anything, I’m more interested in shorting this strength because over the near-term, moves like these are not sustainable. Most of the short-squeezing and chasing has already happened. Any bear who had a reasonable stop-loss has been chased off by this relentless climb higher. And this afternoon we are running out of momentum as we struggle to find new buyers at the upper end of the Spring’s trading range.

I have zero interest in buying the market after we’ve run this far. But a short here could be interesting. Not because I’m bearish this economic environment, but because we priced in an awful lot of optimism the last few days. Invariably sentiment will swing the other way when someone important says the wrong thing. The long-three day weekend means there is even more time for us to stub our toe.”

Looking forward to Wednesday and how to trade this, we tested and held 2,080 support and the 50dma Tuesday. Unfortunately these things are rarely one-day events and if overnight futures accurately predict tomorrow’s open, we will find ourselves slipping under this first line of technical defense. From there the next key level is 2,050 and expect at least temporary support. If we trade sideways in this area for a couple of days, that counts as our step-back and things start looking more optimistic. But if we cannot hold this level, expect another wave of defensive selling to swamp the market and the next stop is the 200dma near 2,025.

Jani

What’s a good trade worth to you? How about avoiding a loss?
For less than the cost of a daily coffee, have analysis like this delivered to your inbox every day during market hours. As an added bonus, I share personal trades with subscribers in real-time.
Start your free trial today!

Jun 28

Trading Plan for Wednesday, June 29th

By Jani Ziedins | End of Day Analysis

Screen Shot 2016-06-28 at 9.26.15 PMEnd of Day Update:

It’s been a dramatic few days for global markets as the near universally expected “Bremain” turned out to be a shocking “Brexit” instead. The S&P 500 was complacently resting near all-time highs the night before the vote, but a few short hours later we found ourselves in the middle of a panic driven selloff. Friday’s selling extended through Monday morning, but by Monday afternoon we were running out of fearful sellers and found support near 2,000. Then Tuesday we surprised nearly everyone when we rebounded 1.8%. The question on everyone’s minds is what comes next? Is this a dead cat bounce before tumbling lower, or is the worst already behind us?

It’s been analyzed to death from countless other sources, but the Cliff Note’s version is the Brexit is more political than economic, especially when viewed from U.S. shores. A strong dollar, weak oil, and potential economic slowdown in Europe will be headwinds for our energy and export companies, but this is nothing new. Our service based and import heavy economy survived these headwinds all year and this is largely more of the same. This means the “Brexit” selloff is a buying opportunity, not a precursor to something much worse. If anything, this political uncertainty delays a Fed rate hike on the short end of the yield curve and the flight to safety is pushing down yields on longer end. Low interest rates leads to investors bidding up the prices of stocks and the risk to the markets from increasing rates gets put off yet again.

That’s the big picture. But what we really want to know is how to trade this and for that we need to zoom in. The Brexit is a large, ambiguous mess that no one understands because nothing like this has happened before. It would be a mistake to assume two-days of selling is all it took to fully price in the risks and headlines that will come out over the next weeks and months. While it was nice to see global markets bounce Tuesday, it is premature to call this thing over. Currently the market is expecting a rather smooth and painless transition for Britain. But all it takes is for one loud-mouthed politician to start spouting off that now is the time to reconsider and renegotiate these free trade agreements. Or another from Europe to say that London won’t get a free pass and needs to suffer the consequences of their decision. Right now politicians on both sides of the English Channel are humbled and meek from this gigantic rebuke. But give it a couple of days and soon they will find their big mouths again. When they do, expect the market to shutter and reel. At best we should expect the market to remain range bound for a while. That means these pops should be sold, not chased. We will survive this and pull out of it this fall, but expect it to be a bumpy ride between now and then.

What can we learn from this? Was the vote as unpredictable as people are claiming? I’ll be the first to admit I fell for it. I was nearly certain Britain would vote to stay in the EU. But just because that was the most likely outcome doesn’t mean it was a good trade. The previous runup in price ahead of the vote created a very poor risk/reward and is why I chose to be in cash ahead of the vote.

Quoting last Thursday’s Premium Analysis sent to Subscribers the day before Britain’s historic Brexit vote: 
Traders are fixated on Thursday’s Brexit vote and this drift up to 2,100 resistance tells us the crowd is optimistic and expecting a favorable outcome. This positive outlook is somewhat unusual because more often than not the market fears uncertainty and typically prices in the worst, but this time traders are buying ahead of what they think will be a Stay result. Unfortunately for those positioning for pop, they will be disappointed because a big chunk of this buying is happening ahead of time. If no one is left to buy the headline, we could actually stumble into a sell the news situation. The market hates to be predictable and right now the least expected outcome would be a selloff following what most bulls are hoping for.

While I agree with the crowd that a Stay vote is the most likely outcome, I don’t want to buy ahead of the vote because much of the upside has already been realized. Since this Brexit drama never really pressured prices, there is not a lot of upside to be realized once this weight is removed. While we could surge 20-points in a knee-jerk relief rally, we could also open down 40-points if the Leave crowd surprises everyone. That is a poor risk/reward even if the reward is a higher probability outcome.

Jani

What’s a good trade worth to you? How about avoiding a loss?
For less than the cost of a daily coffee, have analysis like this delivered to your inbox every day during market hours. As an added bonus, I share personal trades with subscribers in real-time.
Start your free trial today!

Jun 07

Trading Plan for June 8th

By Jani Ziedins | End of Day Analysis

Screen Shot 2016-06-07 at 9.07.00 PMEnd of Day Update:

The S&P 500 carved out fresh 2016 highs Tuesday, a long way from the February doldrums that lead to widespread predictions of doom-and-gloom. The biggest question is if we should buy this breakout, or short the upper end of a summer trading range.

The day’s other big headline is oil closed above $50 for the first time this year. A nearly 100% gain in a few short months persuaded many to predict a continuation straight to $60. The problem with consensus is it’s rarely right. If everyone is convinced oil has another $10 of upside, then it seems like an easy buy. Unfortunately for us, very few things in the market are easy. This nearly universal bullishness makes me suspect a near-term top is just around the corner. No doubt we can get to $60, but most likely it will be bumpy ride with many confidence shattering gyrations along the way. Since oil’s breakout above $50 is an obvious buy-point, many oil traders have already bought and incremental demand will be harder to come by. With a scarcity of new buyers, what is going to push the price higher?

The story for the S&P 500 sounds a lot like what I just described for oil. While we’re near all-time highs, what catalyst is ahead of us that will convince people to buy stocks at record highs? A lot of institutional money managers are on summer vacation, leading to the typically lower volume we see this season. If big institutional money isn’t around to buy, who else has the firepower necessary to sustain a continued move higher? If we cannot answer that question, it is hard to get excited about this breakout.

This week the stock market rebounded from the slowest hiring numbers in half a decade. Rather than fear economic slowing, traders cheered the Fed’s postponed interest rate-hike. I don’t know about you, but I would more bullish if the Fed hiked interest rates because the economy was doing well, not the other way around. This excitement over a stagnant economy doesn’t make a lot of sense and is most likely only a reactionary phenomena. Delaying the second rate-hike a few months isn’t going to do much to improve corporate earnings and thus will have a limited impact on longer-term equity prices.

As for how to trade this, the last couple of days looked more like short covering than sustainable breakout buying. Shorts were forced to cover when we rose above their stop-loss levels. But often the point of maximum pain is where the market reverses. Surging to 2,120 would have led to widespread capitulation as most bears gave up ahead of the “inevitable” runup to all-time highs. But this afternoon the air was let out of the breakout as most of those early gains fizzled and we returned to near break-even. That lack of follow-on buying is a big red flag for bulls. We want to see people chasing this breakout, not taking profits. If we hold above 2,100 through the remainder of the week, then the situation looks good for bulls. But if we stumble back under 2,100 so soon after the breakout, look for a return to at least 2,080 and more likely 2,060. Trade accordingly.

Jani

What’s a good trade worth to you? How about avoiding a loss?
For less than the cost of a daily coffee, have analysis like this delivered to your inbox every day during market hours. As an added bonus, I share personal trades with subscribers in real-time.
Start your free trial today!

May 31

Trading Plan for Wednesday June 1st

By Jani Ziedins | End of Day Analysis

Screen Shot 2016-05-31 at 8.41.36 PMEnd of Day Update:

The S&P 500 gapped above 2,100 resistance at Tuesday’s open, but the euphoria was short-lived and we slipped back under this psychologically important level by midmorning. That tells us few were willing to chase the breakout and we were held back by a lack of demand. Volume was elevated, but this had more to do with last day of the month adjustments than the crowd overreacting to today’s price-action. The big weekly event is payroll numbers on Friday. Another lukewarm or better result will give the Fed a green light to raise rates over the next few weeks.

In her speech on Friday, Janet Yellen made it clear a June or July rate-hike is still a very real possibility. Following some brief intraday volatility, the market largely brushed off the rate-hike talk and ended the day strong. This was bullish because it showed most owners don’t fear a quarter-point rate-hike and were more than content hold their stocks through this noise. But this morning’s fizzled breakout tells a different story. While lack of supply fueled this two-week rebound from May’s lows, we are running into an equal and opposite lack of demand as we approach old highs.

Since we are quickly rolling into the summer doldrums, we are more likely to fall into a trading range than breakout to new highs. Big institutional decision makers are headed to the Hamptons and they are leaving their portfolios on autopilot. We need traders to buy this market with enthusiasm to breakthrough a stubborn 2,100 resistance level. At the moment stalling seems more likely than chasing.

Until we get better clarity about the market’s intentions, short-term traders are better off waiting for a more attractive opportunity than trying to force a bullish or bearish bet here. If we roll over, expect the profit-taking to push us back to the 50dma. On the other hand, if we keep bumping up against 2,100 resistance, there isn’t much selling pressure and we will likely continue to all-time highs. Both of these moves only amount to a couple dozen points, so don’t expect an explosive move in either direction. But during the summer we take what we can get.

Jani

What’s a good trade worth to you? How about avoiding a loss?
For less than the cost of a daily coffee, have analysis like this delivered to your inbox every day during market hours. As an added bonus, I share personal trades with subscribers in real-time.
Start your free trial today!

1 2 3 64