Category Archives for "End of Day Analysis"

Feb 16

Where we go from here

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 snapped a seven-day win streak Thursday, but it is a stretch to call a 0.09% bump a meaningful loss, especially since we rebounded nicely off the intraday lows.

Looking at the chart it is obvious the recent rate of gains is unsustainable and today was finally the day we took a break. While there might be a little more upside left in this move, we are definitely closer to the end than the start. If a person is not already in the market, they are late to the party and should resist the urge to chase. Risk is a function of height and it is more dangerous to buy up here than it was before we broke out. Wait for the inevitable cooling off before rushing in. Institutional money hates chasing breakouts and we should follow their lead. If big money is holding back, in a bit of a self-fulfilling prophecy their lack of buying actually creates the dip they are waiting for. We should exercise the same restraint. As the saying goes, “It is better to miss the bus than get hit by the bus!”

It’s been a tough stretch for bears who were convinced the market was going to tumble from 2,300 resistance. Instead we broke through and surged 50-points. But that shouldn’t come as a surprise to regular readers of this blog.

I wrote on February 9th:

“the thing to remember is we tumble from unsustainable levels quickly. We have been hanging out near these record highs for two-months. If this market was fragile and vulnerable, we would have crashed a long time ago. There have been more than enough reasons for this market to selloff, yet every time it refuses the invitation and we run out of sellers. Say what you will about the fundamentals of this market, but when confident owners don’t sell bearish headlines and weak price-action, supply stays tight and prices remain resilient. If the sellers failed to materialize over the last eight-weeks, why would they show up now and sell far more benign headlines and price-action? That is the question every bear needs to answer. If it didn’t happen then, why is it going to happen now?”

Bears could have saved a lot of money if they used a little common sense, but that is that is a lesson to save for next time. Now that we are up here, the question is what happens next? As I already stated, the recent rate of gains is unsustainable, so at the very least expect the market to slow down. That doesn’t mean we are going to tumble, just that we need time to consolidate recent gains. As I wrote on February 9th, confident owners are ignoring all the reasons to distrust this market. Until we find something new and unexpected to shatter this calm, expect the bull market to remain resilient.

If we cool off, the nearest level of support is 2,320. That acted as resistance last Friday and we bounced off that level Monday and Tuesday. I would not expect a routine pullback to dip a lot further than that. Traders that missed the initial breakout can use this dip as a safer entry point.

Until something new and unexpected happens, expect this post-election drift higher to continue.

Jani

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Feb 09

The Inevitable Breakout

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 closed above 2,300 for the first time ever on Thursday. We started consolidating under this psychologically significant level in early December, but it’s taken us this long to find the demand necessary to push on through. While it’s been a long time coming, it shouldn’t be a surprise for anyone who has been reading this blog. As I said many times over the last several weeks, the longer we hold near the highs, the more likely it is we will break through. We tumble from unsustainable levels quickly and holding on this long told us the market wanted to go higher, not lower.

But now that we’re up here, the bigger question is what happens next. While I think the path of least resistance remains higher as we squeeze shorts and suck in breakout buyers, tepid demand continues to be a real obstacle for this bull market. No doubt we will get some recent profit-takers to jump back in when 2,300 resistance turns into support, but so much optimism has been priced into since Trump’s election that it is getting harder and harder for this market to exceed expectations. Even though momentum will keep us drifting higher over the near-term, this is a better place to be taking profits than initiating new longs. While cashing in over the next few days is a prudent move to make, going outright short creates a far different risk/reward. Even though this strength leaves us vulnerable to the unexpected, we need that unexpected event to happen first. It is far too dangerous to short for no other reason than “we are due for a pullback”. Just ask all the shorts that were crawling over each other to get out this afternoon when we smashed through their stop-loss levels.

There isn’t a lot more to add since this is such a benign market. Emotion is practically nonexistent, meaning there is not a lot of force behind these moves in either direction. Last week we saw a modest retreat from the highs the first time we tried to break 2,300. Now that we finally broke through, expect an equally lethargic breakout. Momentum is higher, but this thing is moving so slow we don’t need to chase it. If you are not already in the market, wait for a better trade. The hardest thing for a trader to do is not trade, but often that is the best move to make.

Jani

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Feb 07

Common Sense

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 flirted with 2,300 resistance Tuesday, but yet again failed to break through. Is this a healthy and normal pause before the next leg higher? Or are we running out of steam and on the verge of rolling over? That’s the question on everyone’s mind.

2,280 has been a ceiling for this market since early December. We broke through briefly at the end of January but failed to hold those gains. This is our second assult on 2,300 and thus far things don’t look any different. But the thing to remember is we tumble from unsustainable levels quickly. We have been hanging out near these record highs for two-months. If this market was fragile and vulnerable, we would have crashed a long time ago. There have been more than enough reasons for this market to selloff, yet every time it refuses the invitation and we run out of sellers. Say what you will about the fundamentals of this market, but when confident owners don’t sell bearish headlines and weak price-action, supply stays tight and prices remain resilient.  If the sellers failed to materialize over the last eight-weeks, why would they show up now and sell far more benign headlines and price-action? That is the question every bear needs to answer. If it didn’t happen then, why is it going to happen now?

That said, tepid demand has been a major headwind for the market at the upper end of the trading range. While confident owners are keeping supply tight, those with cash prove just as stubborn when it comes chasing record highs. When no one is selling and no one is buying, we trade sideways. We know this stalemate cannot last forever, and at least for the near-term, the path of least resistance is higher. What happens after we breakout is less clear, but unless something unexpected happens, don’t bet against this market just yet.

Jani

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Jan 31

Fizzled Breakout

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

After spending most of Tuesday in the red, a recovery in the final hour of trade pushed the S&P500 most of the way back to break even. Monday’s weakness killed last week’s breakout and pushed us back into December’s trading range, but Tuesday’s resilience tells us most owners are not abandoning their stocks yet. Volume was the highest of the year, no doubt boosted in large part by end-of-month adjustments.

The headline of the week has been Trump’s executive order to stop admitting immigrants from seven Middle East nations. As far as corporate earnings go, the financial impact is negligible but that that hasn’t stopped traders from selling the news. In large part they are not reacting to this story, but being reminded Trump’s unorthodox leadership style cuts both ways. Stocks enjoyed a strong close to 2016 on hopes of reduced regulation, tax cuts, and corporate tax reform. Largely forgotten in the cheer has been Trump’s less business friendly stances. Trump’s moves over the weekend reminded traders that his presidency won’t be all sugar and cream.

Demand near record highs has been an issue since early December and it is not a surprise to see stocks retreat from last week’s breakout. While confident owners continue holding for higher prices, few with cash are willing to chase the market to record levels. This standoff between bulls and bears has kept us rangebound for nearly two-months and at this point it doesn’t look like that is changing anytime soon. As long as we struggle to find new buyers at the upper end of the range and owners refuse to sell the lower end, we are not going anywhere fast.

At this point I’m more cautious than optimistic. The 200-point rebound from November’s lows priced in a lot of good news our leaders and the economy need to deliver. Hit these targets and the market will yawn because it already priced in most of those gains. But run into a snag and we tumble into all the clear air underneath us. Momentum is higher and all else being equal, we should expect the slow drift to continue. But the reward from owning a slow drift is small, especially when compared to the risk if something unexpected sends a chill through the market. Small gains and large risks create a poor risk/reward. That said, it is a tad too early to short this market because we will continue creeping higher until we have a reason to tumble. This is not a bad place to take profits, but wait for that worrying headline before attempting a short. Only options sellers and nimble day-traders make money in flat markets, the rest of us are not getting paid to own risk and are best served waiting for a better trade.

Jani

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Jan 19

Don’t overthink this market

By Jani Ziedins | End of Day Analysis

End of Day Analysis:

The S&P500 did a lot of nothing Thursday, continuing 2017’s trend of doing absolutely nothing. We’ve been sandwiched between 2,260 support and 2,280 resistance since the year started because traders are stubbornly sticking to their positions. Price move when people change their mind and right now bulls are staying bullish and bears are staying bearish.  Headlines and economic data no longer matter when people stop trading them.

Trump will become the 45th president of the United States Friday. Love him or hate him, it will be nice to put all of this behind us next week. Clearly the Trump trade is struggling to find new buyers since we stopped rallying in early December. Maybe we are simply consolidating gains before the next leg higher, or maybe we exhausted the supply of new buyers. Given how sanguine the market feels, it is hard to claim there is a lot of upside left because everyone is too pessimistic. If anything, I’d say traders are too optimistic and that leaves us vulnerable to a reversal in sentiment.

Even though the market barely moved 1% since early December, you’d hardly know it given all the arguing going on in the Twitter and StockTwits streams. Flat stretches like this chew up opinionated, over-active traders who jump on every “breakout” and bailout of every “breakdown”. Buying high and selling low rarely work out, but traders who come to the market with a bias on their sleeve are helpless victims to the market’s countless head-fakes. Directional traders make a lot of money when the market is moving, but they get eaten alive during these flat stretches. Sometimes the best trade is to not trade. That simple piece of advice could have saved a lot of people a lot of money and heartache.

What is the market going to do next? I wish I knew the answer. But the great thing is we don’t need to know because the market is going to tell us. The longer we hang out near resistance, the more likely it is we will eventually poke our head above it. We’ve encountered numerous negative headlines and bearish price-action. If this market was fragile and vulnerable to breaking down, those would have been more than enough to kick off a wave of selling. Instead supply dries up and we rebound within hours. That bodes well for a continuation. But demand continues to be a real problem for this market, so any gains will be slow. At this point, a continuation is more likely than a correction.

That said, if something comes along and actually spooks this market, there is a lot of air underneath us. 2,200 support is an easy jump from here and it wouldn’t take much to break through that and test the 200dma. High probability of a small gain, or a smaller probability of a large loss. Which way you trade this depends on your risk appetite, but no matter what, be ready to jump out of the way if hints of fear start cropping up. A dip under 2,260 driven by a new and unexpected headline that doesn’t bounce within hours is our sign that the market is starting a pullback to support. Trade accordingly.

Jani

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Jan 17

Sell the news? Not so fast.

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 slipped modestly following the MLK holiday. Brexit headlines make a comeback when the British Prime Minister laid out her plan for leaving the EU. The pound rallied sharply when she said she the matter would be voted on by Parliament, but the same enthusiasm didn’t spread to equities.

The biggest event this week is Trump’s inauguration. Previously I suggested we could experience a sell-the-news deflation as air leaks out of the Trump rally next week, but now it seems like everyone is touting the same thing so now I’m no longer convinced. The more people expect something, the less likely it is to happen. That’s because traders try to get ahead of the market by trading early, but their early trading actually prices in the expected move before the event. If too many people expect a sell-the-news event this Friday, they are taking profits this week and could be the reason we are struggling with 2,280 resistance. Once this proactive selling subsides, we could actually do the opposite and continue rallying after the inauguration.

No matter what happens, we are within spitting distance of all-time highs and only the most stubborn bears are claiming the world is falling apart. The longer we hold near the highs, the more likely it is we will break through them. Markets tumble quickly from unsustainable levels and right now the market is quite comfortable near these highs. At this rate it will only be time before we break through and test the psychologically significant 2,300. No matter what the market “should” be doing, when confident owners keep supply tight, prices continue creeping higher.

Jani

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Jan 12

A Bullish Loss

By Jani Ziedins | End of Day Analysis

End of Day Analysis

Thursday was another seesaw session for the S&P500 when early losses rebounded in afternoon trade. Even though we closed in the red, finishing well off the intraday lows turned this into a bullish day. Volume was near average, but less than Wednesday’s levels. While most money managers have returned from vacation, the modestly muted volumes tell us they are not fully engaged in this market yet.

The early losses were primarily fueled by an echo from Trump’s first press conference the previous day. While nothing new was revealed Wednesday morning, it didn’t take much to convince anxious owners to lock-in profits. But these defensive minded traders were in the minority because not long after undercutting Wednesday’s lows, supply dried up and we rallied into the close.

Bull markets are typified by weak opens and strong closes. Cynics are always trying to pick a top and their selling pressures the market early in the day. But big money underweight stocks and desperately trying to catch up uses this weakness as an opportunity to buy at a discount. Late day strength signals institutional accumulation and is why the market axiom tells us it’s not how you open, but how you close that matters.

This is the seventh session in a row the S&P500 closed above 2,260. Markets collapse from unsustainable levels quickly and holding support for this long tells us we are standing on solid ground. Everyone is looking toward Dow 20,000 and S&P 2,300, but like a watched pot, the market is being stubborn about breaking these psychologically significant levels. While many traders are getting impatient, the longer we hold near the highs, the more inevitable it becomes that we will poke our head above this level.

The question isn’t if we will break 20k/2,300, but what happens after we do. Demand has been a real issue for this market. It’s not because people are afraid of stocks, but because the crowd finally believes in the market and is finally fully invested. Long gone are the days of predictions of doom-and-gloom around every corner. Now the crowd is giddy over the business friendly policies the GOP is going to implement. While these are great developments and will no doubt boost the economy, the problem is stocks are struggling to rally on this optimism. I love to buy stocks that stop going down on bad news and fear stocks that cannot rally on good news.

Over the near-term I expect us to break 20k/2,300, but I’m less optimistic about what happens after that. Most likely that will be the final hurrah of the post-election rally before we fall into a much needed step-back to support. Two-steps forward, one-step back. Everyone knows the market moves this way, but somehow they continue to be surprised by it every time it happens.

Jani

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Jan 10

Don’t Read Too Much Into The Price-Action

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 started Tuesday with modest losses, rebounded decisively into the green by lunchtime, but ultimately was unable to hold those midday gains and finished flat. While it looked like a lot was going on and it gave the financial press something to talk about, the mistake is reading too much into what is truthfully little more than random noise.

We have been stuck inside a tight trading range since early December. The market only briefly ventured outside of 2,250-2,280 and even that departure lasted little more than a day. If we assume the market is driven by fundamentals, it is hard to fathom four-weeks of alternating bullish and bearish news so perfectly balanced that we danced on this fine line. That’s akin to flipping a quarter twenty-times and having it come up heads every time. Possible, but not likely. Instead of being driven by headlines and fundamentals, this market is responding to the simple laws of supply and demand.

Trump’s surprise win put stock owners in a good mood as they anticipate bullish policies that will drive stocks even higher. When owners are patiently holding for higher prices, supply stays tight and that props up prices. But on the other side, those with cash have been far less convinced. While there was a brief flurry of short covering and breakout buying following the election, further gains have stalled because buyers are scarce near these record highs. No matter what the headlines have been trumpeting over the last several weeks, owners don’t want to sell and those with cash that don’t want to buy.  The result is this trading range.

The biggest risk in flat markets is most traders arrive with a bullish or bearish bias. That means they assume every story or price gyration will lead to the next directional move. Bulls rush to buy every apparent breakout and bears pile on the breakdowns. But because there is no substance behind these random moves, each breakout or breakdown fizzles within days and these overactive traders get washed out for a loss when prices reverse. Often the best trade is to not trade and that has definitely been the case recently.

Stocks tumble from unsustainable levels quickly and it is encouraging we’ve held the upper end of the trading range for five-days. Even though today’s intraday price-action was pathetic, the market is acting like it wants to test the psychologically significant 2,300 level. At the same time the Dow will have finally broken 20,000 and once we get these round numbers out of the way, we can finally get on with business. Many traders will use the exuberance around these milestones as an excuse to take profits and we are more likely to stumble from these highs than stage a decisive breakout. Lack of demand continues to be a major obstacle and it unlikely to be rectified anytime soon.

Assume we will continue trading sideways until something unexpected happens. That means buying weakness and selling strength.

Jani

Dec 06

Buy the Breakout, or Settle into the Trading Range

By Jani Ziedins | End of Day Analysis

screen-shot-2016-12-06-at-7-29-48-pmEnd of Day Analysis

The S&P 500 added modest gains Tuesday, extending Monday’s rebound for a second day. That leaves us a couple of points from all-time highs. Volume was average, but not bad for this lull between Thanksgiving and Christmas.

In last Wednesday’s free blog post, I warned readers to be wary of the market’s pathetic afternoon fizzles.

“Today’s bullish news was more than enough to unleash a flood of buying when we opened near record highs. If the market was a coiled spring ready to explode higher, this would have triggered that move. Instead we hit our head on the ceiling and fell into tail-spin. There are few things more ominous than a market that cannot rally on good news because it tells us we are running out of new buyers.”

“Don’t get me wrong, not ready to call the bull market dead, but this week’s poor price-action says we are not ready to extend the breakout into record highs just yet. The market was getting a tad frothy following the straight-up move from the November lows. A step-back here would be a healthy part of building a sustainable foundation for the next leg higher. A high-volume dip to 2,180 would flush a lot of excess enthusiasm from the market. If prices bounce and reclaim 2,200 not long after, that tells us bulls are still in control.”

And that is exactly what happened.

While it was nice to call that move, attaboys don’t pay the bills. The more pressing question is what happens now that we returned to all-time highs. Do we resume the prior uptrend, or are we getting sucked into another sideways trading range? This is a critical distinction because it is the difference between buying the breakout, or selling the top of a trading range.

If last week’s selloff was driven by bad news and we recovered those losses this quickly, that would be a strong buy signal. Shrugging off bad news so easily tells us the market is ready to fly. But that’s not what happened. In fact the opposite happened. We fizzled on bullish news. Private payroll numbers were strong and oil prices popped when OPEC finally agreed to production caps. Even though everyone was cheering the news, the market couldn’t make any more headway because everyone was already fully invested. Unfortunately it takes more than a two-day dip to fix supply-and-demand problems like that. Tuesday’s smaller gains suggest this week’s rebound is slowing down, not getting ready to take flight.

That said, we need to be careful we don’t read too much into what could be an innocent gyration. Was last week’s fizzle telling us the November rally is running out of steam? Or was it a normal step-back on our way higher. Lucky for us the market will give us the answer over the next couple of days. If we hit our head again, supply is a serious problem and we will trade sideways into year-end. On the other hand, if we break 2,220 and don’t look back, last week was little more than an anomaly and the chase higher into year-end is on. Trade accordingly.

Last week’s fizzle makes it feel like we are falling into a trading range to close the year and is how I’m positioned, but the trader in me hopes we resume the breakout because it is more profitable to ride a wave higher.

Jani

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Nov 30

The market is telling us to be careful

By Jani Ziedins | End of Day Analysis

screen-shot-2016-11-30-at-8-27-53-pmEnd of Day Analysis

Wednesday morning the S&P500 rallied to all-time highs shortly after the open. Oil popped 10% when OPEC finally agreed to cap production and the ADP payroll number came in far stronger than expected. But the enthusiasm was short-lived and the market retreated from those highs in a relentless selloff that saw us close under the psychologically important 2,200 level. Volume was off the chart and only exceeded in recent months by the two-trading days following Trump’s unexpected election.

While November had a heck of run from the pre-election lows, this week’s poor price-action has been far less confidence inspiring. We rallied to record highs during the low-volume Thanksgiving week, but the market has been behaving poorly ever since. The last three-days has seen significant givebacks in the final hours of trading. That tells us big-money investors are far more inclined to take profits near all-time highs than they are to add new money and chase prices higher.

I’ve been quite bullish and expected the market to rally into year-end. We’ve been consolidating since mid-summer and the market refused multiple invitations to breakdown. When the market doesn’t go down on bad news, look out above. But this morning’s pathetic price-action forced me to reevaluate that outlook. Today’s bullish news was more than enough to unleash a flood of buying when we opened near record highs. If the market was a coiled spring ready to explode higher, this would have triggered that move. Instead we hit our head on the ceiling and fell into tail-spin. There are few things more ominous than a market that cannot rally on good news because it tells us we are running out of new buyers.

It looks like we’re stuck in a market that won’t break down on bearish news and won’t rally on bullish news. Owners are stubbornly clinging to their stocks and won’t sell negative headlines and price-action while those with cash have zero interest in chasing prices near record highs no matter how “safe” the market feels. Entrenched views like this are what trading ranges are made of. The longer we stay inside the range, the more stubborn both sides become. But this building pressure also means when the dam finally breaks, the resulting move will be swift and decisive.

Don’t get me wrong, not ready to call the bull market dead, but this week’s poor price-action says we are not ready to extend the breakout into record highs just yet. The market was getting a tad frothy following the straight-up move from the November lows. A step-back here would be a healthy part of building a sustainable foundation for the next leg higher. A high-volume dip to 2,180 would flush a lot of excess enthusiasm from the market. If prices bounce and reclaim 2,200 not long after, that tells us bulls are still in control. On the other hand, if the losses accelerate through 2,180 and we cannot find a bottom, the 200-dma and 2,100 are very much in play. Right now the pressure is on Bulls to prove they are still in control and that is what we need to watch over the next few trading days.

I took profits defensively this morning when we couldn’t add to the early gains, but I am more than ready to jump on the next trade when it shows itself. The price-action over the next couple of days will tell me if that is shorting this weakness or buying the dip.

Jani

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