Category Archives for "End of Day Analysis"

Fed Saves the Day

By Jani Ziedins | End of Day Analysis

End of Day Update:

Stocks surged to one of the largest gains of the year following accommodative language from the Fed. But it wasn’t all smooth sailing when early trade saw us slip to 1,925, ever so slightly undercutting last week’s lows. If this holds, that counts as a double-bottom, one of the most common bottoming patterns.

While journalists and talking heads credit today’s strength to the Fed, the news was actually quite bearish. The Fed is concerned about weak global growth and how a strong dollar will adversely affect the domestic recovery. But the half-full crowd cheered because that delays the inevitable rate hikes and who doesn’t like cheap money?

But regardless of the headlines, there were only so many people left to sell following the last several weeks of gut-wrenching volatility. Once the pessimists sell, they no longer have a vote in what the market does next. Those that held through the weakness and those that bought it exhibited confidence and their conviction kept supply tight and propped up prices. While the dip was unnerving, it is very Chicken-Little like to let a 4% pullback make us think about jumping out of windows. But that is the nature of markets; dips only work when they convince everyone the world is imploding.

Thursday is an important day for both technicals and sentiment. While today’s rebound was impressive, it still left us shy of the 50dma, something that acted as resistance over the last week. Stall again and there is little doubt we are headed back to 1,900. But if we break through, look for a continuation to all-time highs in coming weeks as bears scramble over each other to buy back their short positions. At the same time, don’t expect fireworks since moves tend to be fairly symmetrical. A 75-point dip typically only leads to a 75-point breakout, but that would push us close to 2,100 by year-end.

The bigger concern is if the rebound stalls and the selloff spirals out of control, shattering the nerves of previously confident owners, turning them into fearful sellers. There is no doubt we have a date with a larger correction, the only question is if happens this fall, or waits until next year. But, rather than guess, we will let the market show us.

Jani

A painful, but productive swing

By Jani Ziedins | End of Day Analysis

End of Day Update:

The relentless selling continued in the first half of the day, but in typical fashion, the market overdid it and snapped back to breakeven by the close. It was a fairly dramatic reversal, covering nearly 50-points combined. Volume was brisk for the third-day in a row as traders both bailed out as the pain got too great and chased the ensuing afternoon rebound.

Again there wasn’t an individual headline driving the selling and the weakness felt more herd-like when many traders dumped shares simply because everyone else was. But there always comes a point where we run out of sellers. When no one is left to sell, supply dries up and prices rebound. No matter what the headlines, tight supply props up prices and that was the case this afternoon. If today’s low holds, the bull market remains intact because this is a higher-low than August’s 1,900 dip. While pullbacks always feel like the world is ending, as long as we keep stepping higher, all is well with the market.

But what are the chances this low will hold? Markets move for one of two reasons. New information causes the majority of traders to adjust their forward-looking outlook. Whey they change their mind, they buy or sell stock to reflect their new expectations and this one-sided trade moves markets long distances. The other source of volatility is normal fluctuations in supply and demand. The former is what big market moves are made of because the new information converts bulls into bears or bears into bulls. It takes a fundamental shift in the underlying economics to drive these major changes in sentiment and so far the economic data we keep getting points to a slow, but steady recovery in the US and a struggling recovery in Europe. None of this is new and unlikely to change anyone’s mind. When bulls stay bulls and bears stay bears, what we are left with is the market’s normal gyrations due to minor imbalances in supply and demand. This is when we go a little too high and then turn around and go a little too low. Obviously the push to 2,020 a few weeks ago was a little too high and now it appears like 1,925 is a little too low. During these typical gyrations it is most profitable to buy weakness and sell strength. If this bounce holds, we should not violate today’s low. The best trade is buying the dip with a stop under 1,925.

Jani

Capitulation bottom

By Jani Ziedins | End of Day Analysis

End of Day Update:

It was another brutal day, smashing through prior support at 1,965 and ultimately closing under 1,950. Volume was some of the highest we’ve seen all year as traders reacted to both headlines and technical weakness. But the thing we must remember is routine dips only happen when everyone thinks the market is on the verge of plunging even lower. If everyone was confident this was little more than a buyable dip, they wouldn’t sell. If no one sells, prices don’t dip. Therefore by rule, to get the dip, we always need to scare a large number of people into selling. And clearly we’ve done that here. But what comes next? Is this really just another vanilla dip? Or the start of a larger correction?

Despite all the prognostications of the bull’s demise, we haven’t done any real technical damage yet and the up-trend remains comfortably intact. The real threat won’t come until we undercut August’s dip to 1,900, making a new lower-low. Bouncing anytime in the next 40-points still counts as a higher-low and extends this resilient bull market.

The real test will come in the next few days. Capitulation bottoms typically smash through support on huge volume. This is the point of maximum pain where previously confident owners cannot bear the mounting regret of not selling earlier and reactively pull the plug. Unfortunately for many, this breaking point typically happens near the bottom of the move. Once the last wave of impulsive selling washes through the market, supply dries up and we bounce. Today’s dip had all the hallmarks of a traditional capitulation bottom.

But nothing in the market is ever clear-cut and one-sided. Rather than bounce, there is the real possibility today’s weakness will convince even more owners to sell in coming days, once they are pushed to their breaking point. Nothing rattles confidence like seeing everyone else running for cover and a bad open could lead to another bloodbath.

This appears like another cookie cutter dip and capitulation bottom, but we will know the answer for sure in a couple of days. A decent trade is buying the dip and using recent lows as a stop.

Jani

Contradiction

By Jani Ziedins | End of Day Analysis

End of Day Update:

Stocks slipped on the final trading day of the third quarter, but remain inside the recent consolidation. 1,965 has been support over the last four days as the market struggles to reclaim the 50dma. But the problem for the optimist is markets usually snap back decisively from oversold levels, meaning we are not at oversold levels here. But that is only half the story.

Most of the headlines filling the front page have been bearish. There is so much political discord in the world it takes more than one hand to count all the active hotspots. We also have persistent signs of economic sluggishness. And just tonight, the potential of a spreading pandemic. But for all the negativity, the market is only a couple percent from all-time highs. Is the market being naive, or does it know something the rest of us don’t?

It is too easy to assume the market doesn’t have a clue and will eventually wake up to what is so obvious to the rest of us, but unfortunately beating the market isn’t that easy. More often than not, when we disagree with the market, we are the ones who have missed something. By default the market already knows everything we know since it is made up of people who have all the same information we do. Taper, rate hikes, Ukraine, Syria, etc. These stories have been around so long we can no longer call them news. Anyone afraid of these headlines sold long ago to someone who wasn’t afraid to own this risk. When there is no one left to sell a widely expected headline, it becomes fully priced in. When markets hold up the face of bad news and refuses countless legitimate excuses to sell off, it shows us it doesn’t want to go down. No matter what we think should happen, we have to respect the market’s resilience.

Now it’s time to resolve the contradiction between a market that doesn’t want to go down with one that isn’t oversold yet. It all comes down to timing. In the near-term, the inability to bounce decisively and put the 50dma behind us means there is a good chance this selloff is not complete. Be prepared for one more dip under recent lows and testing support at 1,950 is a very real possibility. But rather than signal the start of a larger selloff, this will be the capitulation point before rebounding to fresh highs. Expect more near-term weakness, but this is yet another buyable dip.

Jani

Higher-Lows

By Jani Ziedins | End of Day Analysis

End of Day Update: 

Stocks took it on the chin for a third day following Friday’s early surge to record highs. This dip leaves us less than 10-points from the 50dma and just above recent support at 1,980. The primary catalyst for this weakness appears to be a selloff in small-cap stocks. While the S&P500 is less than 2% from all-time highs, the Russell 2000 is off 8% and continues the shift from high-flying, speculation stocks to blue chips.

Wednesday will be an important day for the markets with a looming challenge of 1,980 support. This technical level stretches back to early July when it acted as resistance. But as we often see, resistance became support and we bounced decisively off this level a couple of weeks ago. Will selling stall and buyers step in at this level again? We will know the answer in a few short hours.

If stocks stop sliding, look for a rebound to record highs. On the other hand, failing to find support means we should expect the selling to continue to 1,950. While this sounds easy, the real challenge is not falling for the head-fake where the market dips under support, flushing out the reactive traders, before reversing and finishing the day higher. If this were easy, everyone would be rich.

Market sentiment is cooling off slightly, but it remains at bullish levels. While overconfidence could ultimately cause the demise of this bull market, contrary to popular opinion, confidence and complacency is bullish in the short-term. Confident owners don’t flinch in the face of a 2% dip to support. The lack of nervous owners keeps supply tight and props up prices. This has been the story for the last 12+ months and there is no reason to assume the tide is changing here. We continue making higher-highs and higher-lows and the best trade is sticking with what works.

Jani

When is Bad Good?

By Jani Ziedins | End of Day Analysis

End of Day Update:

Stocks fell further on Monday following Friday’s reversal from all-time highs. Volume was well above average as we broke under prior support/resistance at 2k. While the daily chart gives the impression the market sold-off through the day and finished weak, the intraday chart shows we found a floor in late-morning trade and moved sideways the rest of the day. While this seems like a minor nuance, it is actually fairly significant.

The market gapped lower at the open and continued sliding fairly aggressively until just after 11am Eastern. This pushed us under the psychologically important 2k level and set off a wave of automatic stop-losses littered under support. But rather that accelerate the selloff, these stop-loss orders were the last of the selling before we found a bottom above 1,990. This weak price-action dared owners to join the selling, but most resisted the temptation and stood confidently by their positions. If this selloff chased off the weak, then all we are left with is the strong.

While I’m not super bullish on this market, the stalled selloff shows supply dried up fairly quickly and that bodes well for a bounce to new highs in coming days. If the market finds support Tuesday, then the selling is done and we are headed higher. If we breach 1,990 and continue lower, then Monday afternoon’s support was a false bottom and the 50dma is in play. Trade accordingly.

Jani

Don’t Believe the Hype

By Jani Ziedins | End of Day Analysis

End of Day Update: 

For all the hype over the Fed meeting, the market sure didn’t seem to care, finishing up a fraction of a percent. The thing we need to remember is those that hype up these events are in the business of selling eyeballs to advertisers. The more sensational they make the story, the more money they make.

The Fed did a good job of not surprising anyone and is why we finished unchanged for the day. Bulls saw what they wanted to see to keep holding and bears got what they expected and continue shying away from the market. When no one chances their mind, we don’t get the waves of buying or selling that drives price moves.

Volume was also fairly muted, only matching yesterday’s upside move. In a buy-the-rumor type of trade, we saw most of today’s strength come a day early. But that is how the market works. Wait to trade the headline and you are too late.

This was just another potential stumbling block the market put behind it. While we could not hold on to the intraday highs, this is one more bearish catalyst we can cross off the list. If this market wants to keep going higher, no matter what we think personally, don’t fight it.

Jani

Stocks Bounce

By Jani Ziedins | End of Day Analysis

End of Day Update: 

Stocks bounced decisively from recent lows following some journalists comments about something. While we could waste energy talking about who said what, the only thing that really matters is how the market responded. We exploded higher because recent selling was overdone and all it took was one little catalyst to set off a buying frenzy. While bears will point to how meaningless the justification for the rebound was, they are missing the point. We didn’t bounce because of a reporter’s comments, we bounced because the market was oversold.

Recent weakness flushed out many weak holders through a series of successive new lows. The pain trade convinced many that we were on the verge of a larger selloff. But we knew this selloff didn’t have legs when it kept undercutting prior support, but didn’t trigger a larger wave of technical selling. That told us most owners were content holding and were giving little attention to this minor move lower. When the masses don’t sell, supply stays tight, and we bounce.

While the market is set up to continue higher, don’t expect fireworks. Market moves tend to be fairly symmetrical, so a couple dozen point dip is frequently matched with a couple dozen point breakout. While it seems like 2,020 is easily in reach, we need to watch how the market trades at this level before deciding what to do next. Traders have been reluctant to buy above 2k and if this trend continues, the rally could stall on a lack of demand.

Wednesday we get the Fed policy statement and Yellen’s press conference. Expect some short term volatility as some traders impulsively react to the headlines, but its been a long time since a Fed action moved the market for an extended period of time. We rallied through easy money and now we’re rallying through taper. If the Fed continues to play their cards well, this statement will be ancient history by Thursday.

Jani

A Critical Juncture

By Jani Ziedins | End of Day Analysis

End of Day Update:

A tale of two markets; while the S&P500 ended flat, the NASDAQ and small-cap indexes cratered 1%. The divergence shows investors were pulling away from speculative technology and small-caps and moving that money into boring blue-chips. Similar to the phenomena we saw back in April. While one day doesn’t make a trend, it would be foolish not to take note.

Tuesday is the start of the Fed’s meeting and is a popular event for the market to speculate on, but while Fed meetings, notes, and press conferences generate lots of buzz in the financial press, they haven’t done much to change the mood of the market. Last year everyone dreaded the very mention of Taper, yet here we are, practically done with Taper and yet holding near record highs. So much for conventional wisdom. Outside of raising short-term interest rates to 5%, I doubt the Fed meeting will have a lasting impact on the market. Of course we should expect near-term volatility as traders impulsive react to a stray word or two.

The market is at an important turning point. What happens next could determine how we trade the rest of the year. While we are holding near record highs, we are seeing a slight roll off from the top. Quite bullishly, we haven’t seen recent dips under prior lows trigger waves of technical selling. This shows most of the people who fear weakness already sold this consolidation. Those that remain are demonstrating they don’t mind a dip here or there. As long as they remain confident and complacent, supply stay tight. But at the same time, we are rolling off in what could be a double-top or head-and-shoulders. One move, two legitimate interpretations. If this were easy, everyone would be rich.

We are a few points above the 50dma. Bulls need us to bounce over the next few points. Fail to hold the 50dma and it could be a very rough few weeks for the market as previously confident owners turn into nervous sellers. Trade accordingly.

Jani

Another Failed Selloff

By Jani Ziedins | End of Day Analysis

End of Day Update: 

As with most things in life, it isn’t how you start, but how you finish. Again the market opened weak, but found a bottom in early trade and proceeded to climb into the green by the end of the day.

There is a laundry list of reasons why we should selloff; geopolitical tensions, weak domestic growth, stalled European growth, Taper, this bull is five years old, etc. But if there are so many reasons to selloff, why do we keep trading near record highs?

The quick and dirty reason is those that don’t trust this market sold long ago and no longer have a vote in what comes next. Markets move when traders change their outlook and either buy or sell stock. Those that don’t trust this market continue staying out and those that believe in it keep holding. As long as those that own continue believing every dip will bounce, they will hold any weakness and the market quickly bounces on the resulting tight supply. Those that criticize this market from the outside gave up their right vote, so the people we need to pay attention to are stock owners. As long as they remain confident and complacent, the market will stay strong due to a lack of supply.

Today’s failed selloff shows there is no bite to the bearish thesis. Markets stretched to overbought levels will snapback within days. We’ve been hanging around 2k for nearly three weeks and had multiple invitations to selloff. This resilience demonstrates the market is not over-extended….yet. The smart play is sticking with the rally in the near-term. After 2,010, what happens is anyone’s guess. If we explode past 2,010 unsustainably, then that could finally be the top bears have been waiting for. But if the market rallies smartly and deliberately, look for this to set the mood for the remainder of the year.

Jani

The Market Doesn’t Want to Breakdown

By Jani Ziedins | End of Day Analysis

End of Day Update:

Stocks slipped under Tuesday’s lows in early trade, but bounced off of 1,983 and never looked back. The noteworthy thing is we broke support, but no one sold. That tells us most of the people who wanted to sell have already sold. Owners that watched the early morning weakness, shrugged it off and we bounced on the resulting tight supply. This most likely means we are headed back to the upper end of the recent trading range near 2,010. While not a large move higher, it shows us the market is not poised to breakdown.

Jani

 

 

 

Testing recent support at 1,990

By Jani Ziedins | End of Day Analysis

End of Day Update:

Another tough day for the market, notching the fifth loss out of the last six trading sessions. Taken out of context, that sounds like a horrific stretch, but each loss has been so modest we are only down one-percent from all-time highs. Like everything in the market, there are two ways to interpret this. Bears will point to all the distribution, while bulls will claim how meaningless this distribution’s been. Which sides is right? That’s the million-dollar question.

Volume returned to nearly average levels since we came back from the holiday break. This shows institutional money is playing a larger role as we head into the busier fall-trading season. Even with the elevated trade, the market’s been successful at finding a buyer for every seller and we continue trading near the psychologically important 2k milestone.

While it is concerning buyers don’t want to chase prices higher, at the same time it shows owners are content and not taking profits. When owners don’t sell stock, supply remains tight, propping up prices. Markets typically retreat from unsustainable levels fairly quickly, so spending nearly two-weeks around the 2k level shows broad support from buyers at these prices. But what we don’t know is how deep this well of support is. Will we continue to find an ample supply of buyers ready to buy today’s 13-point dip? We will know the answer on Wednesday.

While Tuesday’s trade pushed us under recent support at 1,990, it didn’t trigger a larger wave of selling and we quickly bounced off of 1,985. The big test for Wednesday’s trade will show if this was yet another head-fake whipsaw around 2k, or the start of the next directional trade. If breaking support fails to trigger a larger selloff on Wednesday, look for the market to bounce back to new highs in coming days. On the other hand, continued selling shows we are running out of buyers and it will only be time before the weakness converts previously confident owners into nervous sellers.

Jani

Caution

By Jani Ziedins | End of Day Analysis

End of Day Update:

Today was one of those days that make you stand up and take notice. The ECB surprised everyone with their unexpected rate cut, but rather than rally on all the free money, US stocks sold off from early gains. When markets selloff on good news, watch out!

There are always two ways of looking at things. Until this point, quantitative easing was seen as a good thing and our markets are up huge since the US Fed started the program a couple of years ago. But there are two sides to every story and it seems the market is taking the contrarian view with the ECB rate cuts. Rather than embrace the easy money, the market became concerned this unexpectedly aggressive action is required to keep Europe from falling apart. The means market is starting to reconsider how little risk premium it is currently carrying at these record levels.

Markets frequently overdo things on both the upside and downside. This rally defied all the naysayers over the last two years, but every good thing must come to an end. Are we there yet? If the market continues to struggle  in the face of normally good news, that is a strong warning to us.

Friday morning we have US non-farm payroll.  I expect a respectable number and a modest bounce in equities, but if the market fails to gain traction and recover Thursday’s weakness, we could see more selling in the near-term. The best trade over the last two years has been buying every dip, but failing to hold the 50dma so soon after reclaiming it shows many investors are no longer throwing money at this market and we could be in the early stages of a larger correction. Continued weakness on Friday gives us an interesting shorting opportunity, but brushing off Thursday’s weakness and closing strong shows the market is ready to continue higher.

Jani

Still hanging on to 2k

By Jani Ziedins | End of Day Analysis

End of Day Update: 

Stocks barely held 2k following the Labor Day break. After opening modestly higher, there was a swift, late-morning selloff that pushed us under 2k. It wasn’t until the final 20-minutes of the session that we finally held above this psychological milestone. Volume was elevated in comparison to the lethargic flows in the final weeks of the market’s traditional summer session. In coming weeks we should expect big money to return to the markets and begin adjusting their portfolios heading into year-end.

This was the sixth day we traded around 2k. While we cannot break through this psychological barrier, we are not turning away from it either. Without external support, markets tend to fall under their own weight, meaning this sideways trade is actually supportive of a continuation. It shows few owners are worried and locking-in profits. As long as owners continue holding, supply will remain tight and keep propping up this low-volume rally.

There is a tremendous amount of headline noise coming from Eastern Europe and the Middle East, but so far the market is not paying attention to it as we continue to trade near record highs. And it isn’t only the stock market, but commodities too. Between a rising dollar and few worries that any of these situations will expand beyond regional conflicts is keeping a lid on fear and risk premiums. Since most of these hotspots have been flaring up for months without any major consequences, the market is already looking beyond them. If it is on the front page, it is already priced in.

The million dollar question is what does big money see when they look at this market. Are there still bargains to be found? Or are values getting a little too rich to put new money to work? As they look to year-end are they more inclined to keep buying, or will they start taking profits? It is easy to say this rally’s come too far and needs the proverbial ten or 20% pullback. But at the same time it is foolish to fight the trend. I wish I knew the answer, but the best we can do is wait and see what happens. Either we are basing for a continuation, or building a double-top/head-and-shoulders reversal. Only time will tell.

Jani

Why stocks no longer care about Ukraine

By Jani Ziedins | End of Day Analysis

End of Day Update

Stocks cratered when Ukrainian officials announced Russian forces invaded their country. Actually cratered might be a too strong of a word to describe the early 9-point selloff. How about we say stocks yawned 9-points following reports of a Russian invasion.

Here’s the headline bears have waited for and they are dumbfounded by the market’s lack of a reaction. How could such bearish news result in this small of a dip? Easy, everyone who feared the Russian escalation sold a couple of weeks ago during the dip to 1,900.  With all those worrywarts long gone, that means anyone still holding stocks isn’t afraid of the Ukrainian crisis since they already demonstrated a willingness to own stocks through the previous dip.  While the media can hype up the story all they want, if owners don’t care to sell the fear, stocks will hold firm in spite of the noise. The time to sell the Ukrainian crisis was when it first developed. Now that it’s old news, the market doesn’t care. If bears are looking for something to takedown the market, they need fresh and unexpected headlines.

Volume continues to be pathetic leading up to the three-day weekend. Labor Day is the traditional transition from summer trade to the more serious fall session, ultimately leading to year-end positioning. Big money managers that spent the summer at the beach house are returning to work and the decisions they make will determine how we close the year.  Will they feel compelled to chase the market and continue bidding prices up to record highs? Are they content with their portfolio and will coast into year-end?  Or do they see valuations getting a little too rich and start locking-in profits? While we don’t have the answer to these questions now, at least we know what to look for in coming weeks as September trade sets the tone for the fourth quarter.

Stocks continue trading near 2k and show both a lack of breakout buying and profit taking.  But pausing more often leads to a continuation than a reversal, so we should expect the next move to be higher. But if this is the start of the next leg higher, or one last short-squeeze before reversing lower has yet to be seen.  By mid-September we should have a better view on what big money is thinking and how they are positioning for the rest of the year.

Jani

2,000

By Jani Ziedins | End of Day Analysis

End of Day Update:

Break out the party hats, the S&P cracked 2k for the first time.  The market came a long way from the 666 doldrums in 2009 and with the benefit of hindsight, all the predictions of doom and gloom were grossly exaggerated.  Maybe the Fed’s intervention saved us, or maybe it was the resilience of the human spirit.  Either way it shows it is better to bet on the market than against it.  Further, I have no doubt this secular bull is not even halfway done, but that is the long-term view, as traders we are more interested in what comes next.

While the market is clearly higher than it was a couple of weeks ago when it sank to 1,905, bears desperately cling to a few glimmers of hope even as we make record highs.  Today’ volume was pathetically low.  The only day in recent history undercutting today’s low was July 3rd’s half-day.  We were also unable to close above 2k when breakout buyers failed to flood the market following this momentous occasion.  Summer’s traditionally low-volume often leads to more erratic moves since it gives a larger voice to smaller players.  The real question is what will happen when big money returns after Labor day.

With the VIX back in the 11’s, whatever fear sprouted from the Ukrainian and Iraqi crises has clearly vanished.  While the 90-point plunge did a good job purging weak holders, it seems like we returned to nearly the same level of complacency.  While complacent owners are often bullish because their reluctance to sell keeps supply tight, we have to wonder how many prospective buyers have not already bought into the invincible rally.  While markets can top in a dramatic inverted V pattern, more often they end with a double-top or head-and-shoulders.  Very few people see a top coming and either fail to lock-in profits when times are good, or they assume every dip is buyable.  The recent rebound further reinforces the widely held view that every dip is buyable, but by the time everyone knows something, it soon stops working.

While I don’t have a crystal ball, it seems the market is at a critical juncture and either we end the year dramatically higher or dramatically lower .  Will buyers continue to chase prices to record highs?  Or will smart money start locking-in profits in coming weeks ahead of the inevitable pullback?  It won’t be long before we have our answer.  If the market continues marching higher, join the bandwagon, but another dramatic sell off in the near-term will be a big warning sign to anyone who is paying attention.

Two-years ago the market was afraid of its own shadow and traders would scramble for the exits every other week.  Now it seems civil wars and sanctions against some of the world’s largest oil producers hardly raises an eye.  My how far sentiment has swung in a couple of years.  While everyone knows the market will pullback at some point, the hard part is figuring out exactly when it will happen.  Is it next week, next month, or next year?  I think the next few weeks will go a long way to telling us how the year will end.

Jani

Just under resistance

By Jani Ziedins | End of Day Analysis

End of Day Update:

Buyers jumped back in following yesterday’s minor dip.  Volume was modestly higher, but still well under average as the trend of apathetic trade, or more accurately a lack of it, continues.  Owners are comfortable owning and few are selling the strength.  Those that don’t believe in this bounce already sold it, with the more bold going short.  And most with cash are reluctant to bid up prices in anticipation of future gains.  Those factors conspired to leave us slightly above the recent 1,910/1,940 consolidation.  While today was technically a breakout, the lack of follow-on buying was uninspiring.  Of course the more widely followed and significant level is 1,950.  That has history going back to early June and will likely generate far more trading activity than a minor break of 1,940.

Tuesday evening I said Wednesday would be a big day because either we breakout to the upside, or slip back into the consolidation.  And wouldn’t you know it, the market made a liar out of me by doing neither and instead creeped higher, but fell shy of a 1,950 breakout.  Being so close to a major technical level is too tempting for market makers and bots to not push us through, triggering all the automatic breakout buying and short-covering that would follow.  But what happens after that is what we are most interested in.  Do we find support and continue higher, or is this the last gasp of the rebound before retreating back into the consolidation?

If I am right/wrong:
At this point the market could go either way.  We are nearly exactly in the middle of the 1,910/1.990 trading range that began in mid-May.  At the halfway point it is hard to claim we are overbought or oversold.  Without an edge one way or the other, the best trade is to wait for a better trade.  If forced to choose, at this point I would stick with the up-trend simply because that is where the momentum is.

Trading Plan:
Holding above 1,950 and ignoring fearful headlines is bullish.  Stalling and retreating back into the trading range is not necessarily bearish, but at best it means the rally needs more time before continuing.  Looking ahead, most likely the real trading opportunities will come after Labor Day and everything before then is just noise.

Jani

What comes next?

By Jani Ziedins | End of Day Analysis

End of Day Update:

And on the third day the market rested, giving up a fraction of a percent following a two-day, 30-point rebound.  Volume continues falling off a cliff as every day over the last five finished with less volume than the day before.  Some claim low volume is bearish, others say it is bullish.  But what we know for sure is traders are growing comfortable with their positions and simply waiting for the market to make its next move.

Wednesday is an important day.  Either we breakout and reclaim 1,950 support, or the rebound stalls and we fall back into the consolidation.  Obviously a breakout is bullish, but slipping back into the trading range is not necessarily bearish.  It could mean the market needs more time before resuming the up-trend.  But the risk is the longer we stay inside the trading range, the more vulnerable we are to slipping under 1,900 support and triggering all the technical stop-losses littered under this widely followed level.  That could kick off another round of emotion selling.  But rather than fear this, we should embrace it because it will likely form a capitulation bottom and set the stage for a sharp, and profitable, rebound.

The one warning I have bulls is rebounds from oversold conditions snap-back with ferocious force.  Trading between 1,910 and 1,940 for nearly two weeks shows the market is clearly not stretched to unsustainable levels.  Either that means we have more selling left before finally reaching extreme levels, or the market is content hanging out here and we should expect a more protracted consolidation.

If I am right:
Most of the time markets trade to extremes, meaning there is a good chance we will slip even further before this pullback is done.  Often corrections find support halfway through the move as dip-buyers rush in and prop up the market.  But if we cannot find a more diverse pool of interested buyers, demand dries up and we stumble into another leg lower.  Failing to escape from this consolidation in coming days leaves us at greater risk of one last leg lower.

If I am wrong:
It’s been a fearful couple weeks and we’ve seen quite a bit of turnover as ominous headlines scared out the weak and replaced them with confident traders willing to buy the dip.  Retaking and holding 1,950 support will show the worst is behind us, at least in the near-term.

Trading Plan:
At this point the market could go either way and we don’t have an edge in coin-flip style trades.  Bulls can stay long, bears can stay short, and those out can stay out.  But soon I expect we will get more clarity from the market as it reveals what it is thinking.  From there we can find a trade with better odds.

Jani

Rebound or false bottom?

By Jani Ziedins | End of Day Analysis

End of Day Update:

There was a little something for everyone today.  For bulls, this was another relief rally, adding 0.3% to Friday’s bounce.  For bears, we finished near the lows of the day as a lack of follow-on buying failed to fuel further gains.  While we finished near the upper end of the recent 1,910/1,940 consolidation, an early attempt to break 1,950 was rebuffed.  Ultimately few were motivated to trade today’s rebound and volume came in at the lowest level in several weeks.

The question on everyone’s mind, is the worst behind us, or is this just a bull trap before continuing lower?  If we use history as a guide, the last couple of times the market broke down, it temporarily found support before plunging one last time.  See the accompanying chart.  January 30th we traded to the upper end of a consolidation, but stumbled into a 60-point sell off two-days later.  Same thing happened to April 9th’s rebound, two-days later we were down 55-points.  The bullish takeaway from both plunges is they formed powerful capitulation bottoms that were excellent buying opportunities.

While some fear is dissipating as Western forces gain the upper hand in Iraq and Ukraine, markets remain on edge.  Another bad headline could send traders running for cover yet again.  But rather than fear the volatility, we should embrace it because one man’s panic is another man’s gain.

If I am right:
If buyers cannot push the market above 1,950, then we need to be wary of one last selloff.

If I am wrong:
If buyers shrug off further fearful headlines and continue bidding up prices, holding above 1,950 and the 50dma will signal the worst is already behind us.

Trading Plan:
As long as we remain inside the 1,910/1,940 consolidation, we are in no-man’s land and the market could break either way.  I would be reluctant to buy until the market proves the worst is behind us by reclaiming the 50dma.  If the market stumbles in coming days, that creates an interesting, but very brief shorting opportunity.

Jani

Bulls cannot get it done

By Jani Ziedins | End of Day Analysis

End of Day Update

Market Analysis:
Even with the wind at their back, bulls could not get it done and early strength faded into yet another down-day. It doesn’t matter what the financial press attributes this weakness to because we know the truth, no one wants to buy this market.

Every day the market is flooded with hundreds of pieces of news and data. Some of it is bearish, some of it is bullish, and most of it is irrelevant. But in the short-term, none of it matters because most traders simply look for an excuse to justify their preconceived bias. If they are bullish, they will find plenty of reasons to buy. A bear will find countless number of reasons to dump his stock. Allegedly the market sold off on a slight variation of Russian and European news that’s been making the rounds for months. Who cares why the market sold off, the only thing that matters is what people are thinking and how they are positioned.

We are still in a long-term secular bull market and this is just another buyable dip on our way to record highs, but we need to exercise restraint in the near-term. The inability to escape the lower reaches of this trading range proves we are not yet oversold. We all know the market always overdose it, so we need to wait until it reaches those extreme oversold levels before calling a bottom. While some use complicated mathematical formulas to calculate overbought and oversold levels, the only thing that matters is what the market thinks. We’ll know when we’ve gone too far because, it will snap back with decisive speed and ferocity. Groping for a bottom for five days is anything but ferocious.

If I am right:
Watch out for another leg down. This slow motion crash isn’t enough to shake free those hanging on by their fingertips.  We need something more spectacular to send the last of the holdouts scurrying for cover. Breaking under 1,900 support will trigger an avalanche of technical stop-loss orders and the swiftness of that automatic selling will convince others to join in the dash for the exits.  But rather than cascade into the collapse everyone fears, this will be the dying gasp of this correction before we capitulate and bounce higher.

If I am wrong:
The longer we hold near the lows, the more likely it is we will crash through support, but there is a chance this slow motion selloff is convincing enough fearful owners to sell to more confident dip-buyers.  If we churn over an extended period of time, we might not have enough fearful owners left to trigger another emotional selloff.  This is a much more ambiguous bottom and it is impossible to pick a nearby point where it would be clear I was wrong.  I wouldn’t trust this sideways consolidation unless it stretches on for a few more weeks or finally holds above 1,950.

Trading Plan:
The longer we hold near the lows, the more likely it is we’ll see another leg lower.  Shorts can hold on for another leg lower and dip-buyers need to keep their powder dry until we have that capitulation bottom.  Longer-term investors can ride this out, but they should wait a few days before adding to their favorite positions.

Jani