Category Archives for "End of Day Analysis"

Trading Plan for Wednesday, July 6th

By Jani Ziedins | End of Day Analysis

End 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

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Trading Plan for Wednesday, June 29th

By Jani Ziedins | End of Day Analysis

End 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

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Trading Plan for June 8th

By Jani Ziedins | End of Day Analysis

End 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

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Trading Plan for Wednesday June 1st

By Jani Ziedins | End of Day Analysis

End 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

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Trading Plan for Friday May 26th

By Jani Ziedins | End of Day Analysis

End of Day Update:

Thursday was a quiet day for the S&P 500 as we await Janet Yellen’s speech on Friday. Volume was exceptionally light because few chose to adjust their portfolio. This apathy showed up in the price-action too as we spent all day inside a few point range and closed exactly where we started.

Given the 65-point rebound off last week’s lows, a do-nothing day is constructive. It allows traders to catch their breath and suggests that we are not at unsustainably overbought levels yet. If demand dried up and nervous traders were taking profits, we would have quickly tumbled from these levels. That means at least for the moment owners are confidently waiting for higher prices. When owners don’t sell, supply stays tight and prices remain strong.

The wildcard is what Janet Yellen says on Friday. Rate-hike headlines fell off of the front pages and that dissipating fear allowed us to rebound from last week’s lows. But has this move already priced in bullish comments from Yellen? Since risk is a function of height, the surge in prices makes this a riskier time to buy than last week and there is less margin for error. If she says the right things we bounce a little higher. If she says the wrong things, there is 50-points of air underneath us. Limited upside and lots of downside setup a poor risk/reward for buying the market ahead of this speech.

The most likely outcome is Yellen keeps a June rate-hike on the table and the stock market switches into fretting mode. That could push us back down to the 50dma. But since these comments won’t surprise many, only the knee-jerk traders will sell the news. Once they are out, supply will dry up and prices will bounce. Buying this rebound will be a good entry for those that missed last week’s recovery. But after a brief period of volatility, expect the frenetic trading to dry up as we return to more benign summer trade. Since a big portion of the institutional decision makers are on their way out the door for summer vacation, expect most portfolios to be put on autopilot. That means no big directional moves and a summer trading range to develop. Buy the dips, sell the rips, and repeat until fall.

Jani

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Trading Plan for Wednesday May 25th

By Jani Ziedins | End of Day Analysis

End of Day Update:

Stocks exploded higher in one of the biggest up-days of the year. We received encouraging housing numbers this morning but they were certainly not enough to justify this type of pop. Instead of a fundamental driver, this rally was fueled by sentiment.

As I wrote last week, bullish sentiment fell to five-year lows. While things can always get worse, the more skewed the market gets in one direction, the more likely a swift reversal becomes. Last Thursday’s intraday dip and rebound was our signal to buy. Breaking support is an obvious trigger for additional selling, but when that wave of liquidation failed to materialize, that is when we knew the sellers weren’t there. Friday’s and Tuesday’s strong gains confirmed this thesis. We’re not going up on good news, we’re rallying on a lack of supply. No matter what the headlines, when owners don’t sell, supply tightens and prices rebound.

The cynical bear will point to Tuesday’s light volume rebound, but that is further proof most owners are not interested in selling.  They’re happy with their positions and not responding to headline fear-mongering or weak price-action. Tuesday’s rebound reaffirms their decision to hold, making them even less likely to sell the next round of recycled rate-hike/China/oil/weak earnings headlines.

Given how skewed sentiment was, most likely there is more life in this rebound. The next obvious target is 2,100 resistance. From there it really becomes a battle of wills between those with cash and those with stock. Every previous rally attempt was thwarted when those with cash were unwilling to chase a breakout. Since we are quickly approaching the summer doldrums, we shouldn’t expect anything different this time. With big money managers headed to the Hamptons, a lot of institutional money will be on autopilot over the next few months. That means a continuation of this this sideways chop. Until further notice, buy weakness and sell strength.

For a trading plan, as long as the market continues to behave well, dip-buyers should hold until we test 2,100 resistance. Breaking this level could lead to another round of chasing and short-covering. If the breakout fizzles, that will be our signal to take profits. On the downside, take profits defensively if we stumble back under the 50dma this week. A deflation similar to May 11th tells us there is no demand and we need to lock-in profits before they evaporate.

Jani

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Trading plan for Friday May 20th

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P 500 fell out of bed Thursday morning when the Philly Manufacturing Index came in below expectations. This conspired with Wednesday’s rate-hike fears and we crashed through 2,040 support. But just when it looked like we were falling into the abyss, we ran out of sellers and rebounded into the close, erasing a big chunk of the morning’s losses.

It was a scary morning for the traders who reactively dumped their stocks before “things get worse”. But for the contrarians in who moved to cash last week, this price-action is exactly what we have been waiting for. As I wrote last week, I was excited about March 10th’s 1.25% pop. That is until the rebound stalled the following day. That’s when I told my subscribers I was taking profits and moving to cash. A sustainable rebound would keep going. When last week’s rebound fizzled, that was our signal to move to the sidelines. But rather than give up on the trade, I knew I was simply early. Breaking support this morning and then rebounding is the sign I was looking for to jump back in.

Even though the headlines and price-action feel scary, these are nothing more than recycled news stories. We’ve been talking about rate-hikes, Chinese slowing, oil weakness, a sluggish recovery, and strong dollar for six-months. Traders that fear these stories sold a long time ago and were replaced by buyers who are comfortable holding these risks. This churn in ownership is how news gets priced in. When there is no one left to sell a headline, it stops mattering. While an inflammation here and there can cause some indigestion, the size of each successive dip gets smaller and smaller. Without anything new to add to the same old story, we can be comfortable knowing dip won’t go much further.

And if we need confirmation, 74% of StockTwits users on the $SPY stream are bearish and AAII bullish sentiment is at 5-year lows. Pretty surprising how bearish the crowd can be when we are less than 5% from all-time highs. Is it reasonable to expect a big chunk of the market to see the next big crash coming from a mile away, or is it more likely that the crowd is getting this one wrong and selling just before we rebound? It’s pretty obvious which side I’m on, but only time will tell for sure.

Thursday’s rebound created an attractive entry point but just like last week, if this bounce fizzles, then we’re still too early and need to move back to the sidelines. If this is the real deal we should rebound decisively Friday. We don’t need positive news story, simply an exhaustion of the selling. People trade their outlook and with so many bears running around we have to be darn close to running out of sellers. No matter what the headlines are, when we run out of sellers we stop going down.

Jani

What’s a good trade worth to you? How about avoiding a loss?
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Understanding Tuesday’s pop

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P 500 popped 1.25% in one of the biggest up-days of 2016. There wasn’t a headline worthy of this price-action, instead these gains were driven more by a lack of bad news than anything else. Overnight Chinese markets ended flat, Japan was up, and oil stopped selling off. What was holding us down the couple of weeks let go and the market responded by taking flight. Bears should take note: when we the market refuses to sell off on bad news, that tells us it is poised to go higher once the negative pressure lets up. That is exactly what happened Tuesday.

There are two types of pullbacks, routine and emotional. Routine pullbacks are part of the natural ebb and flow of supply and demand. Two-steps forward, one-step back. These are measured and controlled. On the other side, emotional crashes occur when fear spreads like wildfire through the market and trades “sell first and ask questions later”.

This distinction is important to us is because it lets us anticipate how deep a pullback will be. Routine dips bounce sooner than most expect while emotion fueled selloffs go far further than people are prepared for. In broad terms, routine dips bounce above support and emotional moves smash through support before bouncing. Tactically speaking, we buy routine pullbacks early while emotional selloffs require more patience before jumping in. Since this dip was fueled by recycled headlines, it had less potential to dive to new lows and is why it made sense to buy the dip early.

Just like in nature, symmetry is an important part of the markets. Less potential on the downside also means less opportunity on the upside. Routine rebounds are far more modest than their emotional counterparts. That means while Tuesday’s gains are nice, we should be thinking about taking profits sooner than later. We will be able to measure this rebound in the 10s of points instead of the multiple 100s that followed February’s highly emotional lows.

2,100 is the obvious target as long as China and Oil remain subdued. Given that we didn’t fall very far, there is less upside driven by chasing and squeezing. But what this rebound does create is even more confident owners who are that much less likely to sell the next round of negative headlines. If we can break through 2,100 and hold above this level, that sets the stage for an assault on all-time highs above 2,130. Hold those highs and it could be a nice summer to own stocks. On the flip side, if we quickly unwind Tuesday’s gains over the next couple of days, this was a bull-trap and we are headed for a retest of 2,000 support. 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.
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How to trade the employment report

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 treaded water Thursday ahead of Friday’s monthly employment report. We opened higher, but that attempted rally fizzled and we stumbled into the red by lunchtime. But the selling was just as uninspired and we rebounded back to breakeven by the close. Prices move when traders change their minds and throughout Thursday, bulls stayed stubbornly bullish while bears remained stubbornly bearish.

Recent weakness has been driven by flare-ups of the recurring Chinese/Asian slowing and sluggish domestic earnings themes. These persistent stories caused us to bump our head on 2,100 resistance last month and now that we’re 50-points lower, we are left wondering if this is a buyable dip, or the start of something far more insidious.

The thing about recycled headlines is they rarely lead to sustainable moves. When a story has been with us for six-plus months, there is plenty of time and opportunity for it to get priced in. Those that fear these events have been given more than enough incentive to bail out of their positions during last fall’s and this winter’s pullbacks. The remaining owners either chose to stick with this market despite these concerns, or even more bold, bought the dip despite them. This turnover in ownership transitioned us from a market that feared Chinese weakness, low oil prices, and lackluster earnings growth, into a core group of owners that is indifferent to these items. No matter what the headlines proclaim, if owners refuse to sell, supply remains tight and it is easy to prop up prices. While bears want to argue with the market for countless reasons, it is a losing cause if owners are not listening.

Friday’s employment report will give us insight into the market’s mood and which direction it is inclined to go. The knee jerk reaction is more vulnerable to a downside move because both “too-good” and “too-bad” will cause impulsive traders to hit the sell button. Only a “just-right” will lead to an explosive move higher without looking back. The most interesting development will be if the knee-jerk lower drops us under widely followed technical and popular stop-loss levels near 2,040 and the 50dma. If we stumble lower but then quickly recover those losses, that means we are dealing with a resolute ownership base and their reluctance to sell is keeping supply tight. Undercutting popular stop-losses and flushing out the remaining emotional owners could set up an attractive capitulation bottom and dip-buying opportunity for the adventurous. If bears cannot close the deal on Friday, stick with the bulls. On the other hand, if we stumble and cannot get back up, we’re likely headed for a retest of 2,000 support. Trade the market accordingly.

Jani

What’s a good trade worth to you? How about avoiding a loss?
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How to trade this dip

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P 500 continues searching for stable footing following last week’s selloff. Thursday Japan took us down. Today it was China. What’s next? Only time will tell. While no one can reliably predict headlines, lucky for us we don’t need to know the headlines to successfully trade the market.

While I was just as oblivious to the Bank of Japan’s (lack of) response to deflation as the rest of us, I recognized the market was overheated following the sharp rebound from February’s lows and setting up for a pullback. Even though I didn’t know what the headline would be, I knew one was coming that would push us lower. How? Easy, there are hundreds of data points every day. Some are bullish and others are bearish. While the financial media always has an elegant explanation for every market gyration, the truth is the market is doing what it wants to do and the justifications only come after the fact. When people want to sell, they will always find a reason to sell. When they want to buy, they will come up with an excuse to buy. The reasons matter far less than the actions.

Now that we’ve cooled off a little, the million dollar question is if it’s been enough. While it was nice to see the S&P 500 bounce off of its late-morning lows, I’m less convinced because we didn’t undercut Thursday’s intraday lows. It was a little too easy to hold the dip, meaning we haven’t reached the point of maximum pain yet. Volume was barely average, telling us not a lot of people were reacting to these headlines and price-action. To find a real capitulation, we have to send fear through the heart of the market.

The most interesting move here would be falling through 2,040 on the heaviest volume in weeks in a multi-hour selloff that undercuts most stop-losses and convinces emotional traders to jump out before things get worse. But once that wave of selling washes over the market, supply dries up and we rebound into the close. That would be our signal to buy the dip. While that is the ideal buy-setup, unfortunately the market rarely gives us exactly what we want. If we hold 2,050 for a couple more days, that is demonstrating decent support and this becomes a valid entry point. On the other hand if we crash through 2,040 and keep on going, stay away and wait for the next level of support before even contemplating a buy.

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.
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Keep an eye on this one

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 slipped back under 2,100 resistance two-days after closing above this level for the first time in six-months. This tepid response to the breakout tells us few are excited to buy these 2016 highs. We rallied nearly 300-points from February’s lows with nothing but modest dips along the way. While it’s been a great ride, at some point this rebound will exhaust the supply of available buyers and we will slip into a very normal and health pullback.

There is nothing to fear from a routine stepback following such a large price move. In fact we should embrace a cooling off period because the higher we go without one, the larger and more violent the inevitable pullback. Sentiment has recovered to more normal levels after reaching nearly historically bearish levels only a handful of weeks ago. StockTwits $SPY sentiment reclaimed 50% bullishness for the first time in recent memory and AAII bearish sentiment is well under historic averages. Nothing like a 300-point rebound to calm previously frayed nerves.

Not so long ago traders couldn’t make a move without first seeing what happened overnight in China. Then oil became the obsession. Three-months later and the global economy is still standing as most of these fears faded into the distance. While things could have been ugly, most often the market fears the worst and reality turns out far less bad. Nearly four-months after January’s sell off started, things don’t look so bad.

Even though the world looks less bad than many predicted, we shouldn’t rush off and buy stocks with reckless abandon. Risk is a function of height. The higher we are, the more vulnerable we are to a pullback. While we feel better about the market, this is actually the riskiest it’s been since the start of the year. The time to dive in was back when everyone was fearfully selling stocks at steep discounts and we were 200 and 300 points lower. Now that stocks are selling at full price, they are far less attractive from a risk/reward perspective. Given how far we’ve come, this is a far better place to be taking profits than adding new positions.

While every dip over the last three-months has bounced, we are not far from the one that keeps falling. It concern me that few buyers showed up after we broke through 2,100 resistance. Without new money it will be hard to keep the momentum going. Typically these things rollover fairly quickly, so if it’s going to happen, it should happen over the next couple of days. A little profit taking soon turns devolves into waves of anxious selling. If on the other hand we continue hanging out near 2,100 resistance for several days, that tells us few owners are taking profits because they are waiting for higher prices. No matter what the experts think should happen, when confident owners refuse to sell, supply gets tight and prices rally.

I’m concerned about Thursday’s inability to hold the 2,100 breakout. For those that have profits, this is a good time start thinking about locking them in. The most aggressive can look at shorting this weakness with a profit target of at least 2,060 support. Fail to bounce there and the 50/200dma and 2,000 support are in play. But if bears cannot get the ball rolling, look for the rebound to continue up to all-time highs near 2,130.

Jani

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Did anyone notice that?

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 climbed above 2,100 for the first time in nearly six-months as oil prices rebounded and fear of a global slowdown fade into the distance. We came a long way from the fear driven selling that dominated the first couple months of the year, but like what happens all too often, following the crowd’s lead turned out to be a terrible trading strategy.

While I’ve been cautious following such a strong rebound, last week when the S&P500 failed to break down multiple times, I told readers to expect a near-term continuation of the uptrend. When the market refuses to do what it is “supposed” to do, braces yourselves for a move in the other direction. And that’s exactly what happened as we find ourselves 40-points higher.

But that was then and this is now. While we can pat ourselves on the back for riding this move up to 2,100, this morning’s price-action concerns me. We smashed through 2,100 resistance in early trade, but rather than cheer the news, traders started taking profits. This quick reversal tells us there is not a lot of demand above 2,100 and we are quickly running out of chasers.

If anyone is lucky enough to have profits, failing to hold 2,100 is a good signal to start locking-in those gains. If we cannot hold 2,100 Wednesday, this presents an interesting short entry. Weak demand and tons of air underneath us creates an attractive risk/reward that favors a countertrend trade. It’s not that I expect the market to breakdown, just recognition that we take a step-back for every two-steps forward. If we open under 2,100, use that level as a stop-loss and the 200dma and 2,000 support are interesting targets. But stay nimble since counter-trend trades are always more risky.

Jani

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Is this time different?

By Jani Ziedins | End of Day Analysis

End of Day Update:

Tuesday the S&P500 stumbled into its biggest losses in nearly a month. Overseas weakness spread to our shores and this time dip-buyers were helpless to stem the tide of selling. While we are only a few points from recent highs, this dip felt different.

As we discussed last week, the move to a new quarter often brings a change in investor strategy. In March big money was caught off guard by the swift rebound from February’s lows and these managers were forced to buy back the stocks they sold earlier in the year. Their insatiable need to rebuild their portfolio pushed us higher all month. But now that the calendar’s rolled over and managers are given three-months of breathing room, there is less pressure to buy every dip. This vacuum of demand was fully evident Tuesday. We slipped and there was no one to catch us. This is why we finished at the lows.

While one data point doesn’t establish a new trend, it should be enough to give us pause. We rallied 15% in two-months. That’s a huge number by any measure and it would be foolish to expect this rate of gains to continue. Now that we moved into the second-quarter, will money managers continue buying with reckless abandon? Tuesday’s price-action suggests otherwise and we should prepare for a bumpier road ahead.

If we truly exhausted the supply of willing buyers, prices should continue slipping over coming days. The most obvious support level is 2,000. Fail that and the 50dma and 1,940 are the next logical levels to bounce at. Now don’t get me wrong, I’m not predicting a crash and return to February’s lows. But a cooling off period is warranted given how far we’ve come. Two-steps forward, one-step back.

That said, if we bounce Wednesday and recover Monday’s close, dip-buying is alive and well. That means there is no vacuum of demand and the good times are still rolling. Selloffs are swift and if Tuesday’s weakness doesn’t spread, then this was just another dip on our way higher.

Jani

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Wait for it…….

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 had a good day, setting another 2016 closing high and putting us back in the green for the year. Quite a reversal of fortune from what most people expected in January. This is yet another example of why we should be skeptical of what most people know. That’s not to say the crowd is stupid, just that its opinion is already priced in and something else is more likely to happen, either better or worse. This time we were saved by less-bad than feared.

Things didn’t look so great this morning when we opened and the market slipped on Asian weakness and falling oil prices. But Janet Yellen came to the rescue by promising slower than previously forecast rate-hikes. That was enough to send stocks surging and the dollar tumbling. This brings up the other certainty of 2016: Euro/Dollar parity. So far that’s been a painful ride for all the hedge funds that thought this trade was easy money.

But this only tells us where we are, something everyone already knows. What we really want to know is where we are going next. Without a doubt this is far better time to be a bull than a bear. We are more than 200-points higher than February’s lows. Anyone who sold defensively and missed this rebound is left wondering what to do next. While I’d love to say we will surge another 200-points between now and June, markets don’t work that way. The easy money has been made and now the gains will be slower and harder. Given how far we’ve come, this is a far better place to be taking profits than adding new positions. While the temptation to chase is strong, even if we continue higher in the near-term, without a doubt we will retest these levels in coming weeks and months. Never forget markets move in waves and we are far closer to the top of this wave than the start of it. There is no need to chase because we will get another shot at these levels in the future and longer-viewed investors should hold off and wait for better prices. Shorter-horizon traders probably want to stick with the near-term momentum. Typically we sell off fairly quickly from overbought levels and now that we’ve been above the 200dma for two-weeks, the next few points are more likely to be higher than lower.

A big portion of the fuel propelling this strength comes from desperate money managers chasing this rebound into quarter’s end. Anyone who reactively sold January’s weakness is in a world of hurt now that the market turned green for the year. Smart money definitely isn’t looking so smart right now. They want to show their investors they didn’t miss the rebound and are buying stocks by the dump truck load. But all of this changes when the calendar rolls over on Friday. The artificial demand caused by quarterly window-dressing will evaporate and we will see if anyone is left to sustain this march higher.

The real tell will come early next week. Hold up after the artificial window-dressing demand fades, then there is real support under this market. Stumble and all of a sudden weeks of chasing turns into weeks of selling as the market takes a well deserved break. While I’d love to be able to tell you what will happen, recent price moves are too erratic and unreliable to be predictive. One day’s breakdown turns into the next day’s breakout. Anyone trading this market with a bias is getting chewed up by these head fakes. But rest assured, the next move is coming and the market will reveal its hand once Q2 gets underway. Trade well and all-time highs are next. Stumble and we won’t catch ourselves until 1,950 support.

Jani

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What Selloff?

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 set another 2016 closing high Thursday as it continues to leave the January doldrums further and further in the rearview mirror. Oil broke through $40 for the first time in a while and the world feels a lot better than it did a few weeks ago. But to a contrarian, these good times are just as unnerving as the obscene pessimism we saw in mid-February. I trade against the crowd, not with it and right now this feels like too much of a good thing. It bears repeating that markets move in waves and just like January’s one-way selloff stalled and rebounded after it exhausted supply, this one-way rally will run out of demand any day now.

Wednesday the Fed told us to expect fewer rate-hikes this year than previously indicated. That reassurance was enough to fuel this two-day pop that pushed us through the 200dma and moved us to these 2016 highs. But the thing to remember is a big chunk of this buying came from bears covering their shorts and technical traders buying the breakout. Now that we’ve crossed virtually every technical level that people would use, we no longer have this autopilot buying to keep this move going. Instead we will have to convince thoughtful traders to start putting their money into the market. Given traders’ natural fear of heights, this 200+point run from February’s lows has a lot of nervous people sitting on their hands.

Last October we bounced more than 200-points from the lows in a massive relief rally, but we climaxed and stumbled into a nearly 100-point pullback right around the levels we currently find ourselves. While it is hard to sit out a of rally like this when fear of losses is replaced by fear of being left behind, resist the urge to chase. Risk is a function of height and currently these are the riskiest levels of the year. Even if stocks continue going higher, don’t worry about it too much since the inevitable pullback will at the very least retest 2,000 support, and more likely push us back into the mid-1,900s. This is a far better time to be taking profits than adding new positions, so be patient and wait for a better entry point. The more aggressive among us can look for this rally to climax and short a dip back under the 200dma as we transition from this half-full sentiment back to our half-empty obsession.

A notice for regular readers of this blog, I’m taking my family to Hawaii next week for Spring Break and will not be posting to the free blog while I am on vacation. I will continue following the market and premium subscribers will still receive their daily market analysis.

Jani

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A Long Ride to Nowhere

By Jani Ziedins | End of Day Analysis

End of Day Update:

While the S&P500 finished Thursday unchanged, it was anything but a boring day. An impressive mid-morning, 16-point rally was gutted and crashed 35-points, pushing us deep into the red. But just when it looked like the bottom had fallen out, we rebounded 20-points and finished the day exactly where we started. For as much as the market moved, volume was surprisingly light and didn’t even reach average levels. While it was an impressive day, most people resisted the urge to trade these volatile swings.

This insanity was driven by the European Central Bank’s latest stimulus efforts. They initially surprised global traders with the size of their move, but then follow-up by underwhelming us with their commitment to future actions. Those contradictory statements lead this unhinged price-action.

What does this volatility mean for our next move? That’s the million-dollar question. Following February’s 200-point rebound we’ve been struggling with 2,000 resistance. We raced up to this level last week but have been unable to break through it ever since. Thursday was the 3rd time we’ve traded above 2,000, but so far we failed to hold those gains because buyers keep disappearing. Given how far and fast this market moved since the February lows, this pause is anything but a surprise. But it would be helpful if we knew if this was simply a pause before continuing higher, or hitting our head on resistance and tumbling back into the heart of 2016’s trading range.

The thing to remember about selloffs is they are shockingly fast. The two-weeks we’ve been struggling with 2,000 by contrast are moving in slow-motion. If we were going to crash, why hasn’t it happened yet? That’s a tough question bears need answer. But we cannot give bulls a free pass either. We had great employment last Friday, a huge surge in oil prices, and now additional stimulus from the ECB. Given these tailwinds, why can’t we break 2,000? Failing to rally on good news is often a signal to look out below.

This afternoon I would have given the edge to bears given the massive intraday selloff. But everything changed when we ran out of sellers and closed flat. As I said, selloffs are fast. No matter how well things are lining up for bears, we have to respect this price-action. If people don’t sell the headlines, they don’t matter. I’ve been expecting a routine pullback following this 200-point run, but given how stubborn owners are clutching onto their stocks, this sideways trade could be all we get. That said, the smaller the correction, the less upside we will see from a continuation. If we break 2,000 resistance Friday, expect the upside to be limited to a quick run above the 200dma before the necessary pullback happens. Given the limited upside, this is still a better place to be taking profits than adding new positions.

Jani

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Buy the Fear and Sell the Cheer

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 continued its hot streak Thursday, closing in the green for the third consecutive day and rallying nearly 200-points over three-weeks. This leaves us just shy of 2,000 and well above the 50dma. Not bad for a market that had been written off for dead in early February. Just goes to show what the herd and experts on TV know.

In my February 11th blog post, I reminded readers that markets move in waves and that period of weakness represented a buying opportunity, not a place to sell defensively. Now that we find ourselves just shy of 2,000 resistance, I will remind everyone again that markets move in waves and this is a far better place to be taking profits than adding new positions. While seeing the market bounce this high brought relief, we cannot forget risk is a function of height and right now we are near the highest levels of the year. Rather than feel good about these gains, we should be growing paranoid.

Friday morning we get the monthly employment report. Maybe it will be better than expected. Maybe it will be worse. I have no idea and I won’t pretend to. What I do know is the recent rebound sucked up a big chunk of the available demand, meaning there are far fewer willing buyers prepared to jump in this market than there were two-weeks ago. No doubt momentum could keep this move alive a little longer, but it would be foolish to assume we could rally another 200-points over the next three-weeks. If this move is closer to ending than starting, we should be thinking more defensively than offensively. While I don’t know what employment will be, I do know it will be far harder to keep this rally going than it will be to stall and consolidate recent gains. Successful trading is not about predicting the future, but understanding probabilities.

The ideal short setup would be a price surge following a stronger than expected employment report that fizzles and stumbles into the red before the end of the day. Failing to add to recent gains on bullish news tells us demand is drying up. No doubt the talking heads will spin it as good-news-is-bad-news, but we know better. Things are a little too good right now and inevitably the pendulum will swing the other way in a few days. But rather than jump on the world is ending bandwagon, we will buy that dip and ride it back to the upper end of the trading range.

For a trade, short a rally that fizzles and falls back under 2,000 resistance. Most likely it will retest the 50dma and even 1,900 support before bouncing and giving us another dip buying opportunity. While things look less scary than they did a few weeks ago, not a whole lot has changed and we should expect this trading range to continue through the end of the quarter. Keep buying weakness and selling strength.

Jani

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Sell When We Don’t Want to Sell

By Jani Ziedins | End of Day Analysis

End of Day Update:

The S&P500 broke through 1,940 resistance Monday, driven by hopes of an imminent OPEC production cut. But the good times were short-lived when the Saudis and Iran threw cold water on those expectations Tuesday. That sent us tumbling back to the 1,920s where we finished near the lows of the day on lighter than average volume.

During choppy periods like this, we are often our worst enemy. Almost all of us come to the market with a bullish or bearish bias. Either we think the economic dominos are already falling and it is only a matter of time before stocks wake up to this reality. Or all these headlines and fear mongering are nothing more than Chicken Little and stocks will rebound once people realize the sky isn’t falling. The problem with thinking with a bias is it causes us to get sucked into every breakout or breakdown that confirms our outlook. Slip to the lower end of the trading range and bears are greedily shorting with reckless abandon. On the other side, bulls are buying hand over fist every time we approach the upper end of this range. Unfortunately these have been the worst moves to make at the worst possible times because moments later prices have reversed sharply. Buying breakouts and selling breakdowns is a great strategy in trending markets, the problem is we are stuck in a range bound market and smart money is buying weakness and selling strength. While bulls and bears are duking it out on social media, the pragmatist is making money in the market.

Two-weeks ago owners were emotionally selling stocks at steep discounts near 1,800 because they were desperate to get out before things got even worse. I told readers of this blog that was the exact wrong move to make. Markets move in waves and it is a mistake to sell at the bottom of a wave. If they held that long, then they should continue holding and wait for the inevitable bounce. Now that we rallied 140-points, the previously fearful owners are now getting cocky and patting themselves on the back. But rather than gloat over their good fortune, they should recognize we are nearing the upper end of this range and this is a far better time to be selling defensively. Holding when we are scared and selling when we feel good is hard to do, but going against our emotions is often the best trade to make.

The reason stocks remain range bound is most traders are stuck on their bullish or bearish outlook and no headline or price move is going to dissuade them. Stubborn owners keep holding even when the headlines and price-action are dire. But no matter what headlines proclaim, if owners don’t sell, then we stop going down. That happened in January the first time we tested 1,800 support, and lo and behold the same thing happened when we retested 1,800 support two-weeks ago. Owners that didn’t want to sell in January also didn’t want to sell this time. While that kept a floor under prices, we are also bumping our heads on a ceiling near 1,940. This is where those with cash are no longer interested in chasing stocks given this economic uncertainty. In the same but opposite phenomena, when we run out of buyers, stocks stop going up.

Until one side is unequivocally proven right and the other wrong, expect this stubborn standoff of wills to continue through at least the end of the first quarter. Prices move when people change their mind and adjust their portfolio. Be on the lookout for that new development that persuades one side to give up and join the other. That is when we will finally break out of this sideways market.

As for a trade, 1,900 support will be a key test over coming days. Hold this level through early next week and it is building the foundation for a run to 2,000 resistance. Tumble through 1,900 over the next few days and expect another test of 1,800 support.

Jani

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Strategies for Trading this Rebound

By Jani Ziedins | End of Day Analysis

S&P500 daily

End of Day Update:

Thursday was a rest day for the S&P500 following three-days of powerful gains that recovered 100-points of the recent selloff. Given how far and fast we moved, it’s neither a surprise nor unhealthy to take a small step back. The question is if this is nothing more than a pause before continuing higher, or hitting our head on resistance before returning to 1,800.

The last few days have been painful for bears and no doubt a big chunk of the buying has been propelled by a short-squeeze. But short covering and dip-buying only represents a small sliver of the demand necessary to sustain a larger move higher. While this smaller group can kickoff a move, they don’t have the buying power to keep it going. For that we need big money. The thing about big money is it is far more conservative and hates chasing fast moves. These more experienced and patient investors wait for the dust to settle and prices to pullback before making their move. And in a bit of a self-fulfilling prophecy, their lack of buying actually causes the pullback and buying opportunity they are waiting for.

Long-time readers of this blog know markets move in waves and were expecting this pause near prior resistance. What is less clear is what happens next. There are three possibilities. We are off to the races again tomorrow. Unfortunately the higher and faster we move, the less sustainable the move becomes and we will like stall near 1,960 and the 50dma before crashing back to earth. The next possibility is a gentile pullback to 1,900 support over the next several days. These minor discounts and subsequently stability will be enough to convince big money it is safe to buy at these levels and their demand will in turn drive the next leg of the rebound. The last possibility is we slice through 1,900 support on our way back to the lows of the trading range. Stocks stumble from unsustainable levels fairly quickly and it won’t take long before we know if this is happening or not.

The biggest differentiator between these possibilities is time. The unsustainable climax surge higher will happen on Friday if it is going to happen at all. If the market wants to return to the lower end of the trading range, it will show its hand by Monday at the latest. On the other hand, if we can hold 1,900 support into Wednesday, then things are stable and present good entry for those that missed the first leg of the rebound.

Jani

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Your Next Move

By Jani Ziedins | End of Day Analysis

End of Day Update:

Thursday was another rough day for the S&P500 as we were taken down by overnight weakness in Asia, Europe, and the oil market. There wasn’t anything new driving this global selloff and it seemed to be more of the same global growth fears that have been hanging over us since the start of the year.

Two-weeks ago everyone felt better when oil surged above $33 and stocks reclaimed 1,940. As relief spread across the market, it felt like the worst was behind us. Unfortunately that was nothing more than the calm before the next wave lower hit us. Here’s the thing, everyone knows market move in waves. Rationally we understand we should buy stocks when they are cheap and sell when they are expensive. But if we know better, why do most people buy when we go up and sell when we go down? That makes as much sense as telling your neighbor that you refuse to buy gas at $1.75 and will take public transit until prices return to $3.00. How stupid is that? Well that is exactly what most people do in the stock market. They greedily buy stocks when they are expensive and fearfully sell them when they are cheap. No wonder most people have a hard time making money in the market.

Looking at equity and oil prices on Thursday, are we at the upper end of a wave, or the lower end? Sure looks like the lower end to me. Armed with this knowledge and using the rational side of our brain, should we be selling or buying stocks on days like these? Of course some people will justify selling because they are getting out “before things get worse”. Well unfortunately I’m afraid I have some bad news for you, if you are down 15% things are already worse. That’s because we are closer to the end of this move than the start. Over the last 65-years we have only fallen 30% from the highs five-times. And it’s actually better than it seems because two of those times we only exceeded 30% losses for a handful of days before rebounding sharply. For all practical purposes only three-times in 65-years has a 15% loss been closer to the beginning than the end. That averages out to one time every 21.7 years. Not exactly a high probability event.

Sure we might fall another 5% from here, but if someone is already down 15% and we only have another 5% to fall, should they be selling defensively now, or just riding it out since they already came this far? The time to sell defensively is before these things get away from us, not after the damage has been done. January 4th when we were still above 2,000 I told my subscribers to get out because things didn’t look right. That is the proper way to sell defensively. Waiting until the pain gets too great is nothing more than trading emotionally and the best way to give away money.

Three-weeks ago I told readers of this free blog that it was the wrong time to sell because we were getting close to bouncing and a couple of days later that is exactly what happened. Then I warned readers that the rebound was bound to stall near 1,940 as we carved out a trading range that would take us into the second quarter. If a person wanted to sell defensively, that rebound was their best chance to get out. Now that we find ourselves at the lower end of the range, this is where we should be looking to buy the dip, not sell it. While we could fall a little further and undercut recent lows, there is nothing new to these global slowdown headlines and no reason for them to take us dramatically lower. Expect the market to bounce over the next few days and return to 1,900 over the next few weeks. If someone wants to get out, selling at the higher end of the trading range is a better time to do it.

Jani

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