Category Archives for "End of Day Analysis"

PM: Sequester time

By Jani Ziedins | End of Day Analysis

PM Update

Stocks held yesterday’s big gains, but late selling on sequester worries is giving traders second thoughts.

MARKET BEHAVIOR

Stocks traded higher through the day but fell apart in the last two-hours, finishing near flat.

MARKET SENTIMENT

The market cracked after the Senate rejected two sequester proposals, but as worrisome as the last hour looked, the market still finished near Wednesday’s highs.  No doubt selling will continue Friday as the automatic sequester cuts kick in, but most of the weak holders already bailed in the recent dip, meaning a large part of that nervous selling already happened.  Everyone knows sequester is coming and most have so little confidence in our politicians that a breakdown in negotiations will surprise few.

Sequester gridlock could weaken the market, but it will come from a lack of willing buyers, not a flood of sellers.  Anyone who can’t stomach volatility sold earlier this week.  Remaining holders are more calm and confident and won’t stampede for the exits at the first signs of trouble.

Sequester cuts or not, the economy will continue improving no matter what happens and the stock market will quickly move past this drama.  Obviously cuts in govt spending won’t help the employment situation and it will delay the recovery, but we will get past it and any dip will be another buying opportunity.  If a financial meltdown, 10% unemployment, and European Contagion couldn’t kill this bull, what are the chances some govt spending cuts will?

TRADING OPPORTUNITIES

Expected Outcome:
It will be interesting to see how weak the market is on Friday if a deal fails to materialize.  Will it be a 15-point dip or a 50-point plunge?  My money is on the former, but that is what stop-losses are for.  Most of the paranoid are already out of the market so I don’t expect a mad rush for the exits.  Between unemployment, money printing, deficit spending, stimulus, Obama’s reelection, the Fiscal Cliff, Debt Ceiling, and now the Sequester, anyone who thinks these things are a big deal is not in this market and their opinion no longer pressures market prices.

If sellers keep their cool, the future of this market rests in buyers’ hands.  Look for initial reluctance, but that hesitation will fade once the world holds together and life goes on.  The key level of support is 1500 and the rally remains intact as long as we hold this level. There are just a few weeks left in this quarter and the pressure will be on for underperforming money managers to catch this market.  Expect their buying to fuel the next leg of this rally.

Alternate Outcome:
If the Sequester negotiations get particularly nasty and entrenched, this could lead to more serious govt funding issues down the road (debt ceiling).  As we saw last week, the herd can panic on seemingly benign news from halfway around the world.  A sequester impasse could trigger another stampede for the exits if everyone starts selling just because everyone else is selling.  I don’t expect this, but we have to be prepared and stick with our stop-losses just incase.

INDIVIDUAL STOCKS

AAPL is barely holding $440 and broad market weakness will send it to a new low.  The stock would have bounced already if it was unsustainably over-sold, meaning it’s not oversold yet.   Stocks often bottom in a ‘V’ and if AAPL is going to do that, it needs to form the left side of the ‘V’.  Most likely there is one last flush lower before this stock will finally demoralize the hopeful and find a bottom.  Any long-term holder needs to be mentally prepared to sit through this kind of volatility.  The worst thing will be riding this stock all the way down, only to bail out just before it finally rebounds.

Stay safe

PM: Game on

By Jani Ziedins | End of Day Analysis

PM Update

The rally is back on after stocks decisively recaptured 1500 and closed above 1515.  But on one of the biggest days of the year AAPL was MIA as investors were underwhelmed by investor day.

MARKET BEHAVIOR

Stocks had a good day, recovering most of Monday’s plunge.  Volume was average, but lower than the recent down-days.

MARKET SENTIMENT

Amazing the difference a couple of days make.  Monday afternoon markets were collapsing and bulls were on the menu.  Today the rally is back on and bears are in the fryer.  This is a very impulsive market and anyone listening to his gut is getting torn to shreds.  There was a ton of money to be made, but it took a cool head and a plan, something in short supply when the herd is stampeding one way or another.

Bears took solace from today’s light-volume and warn of lack of conviction, but like anything in the markets, there are two ways to look at it.  Stocks move on supply and demand, nothing more, nothing less.  Within supply and demand, we have 4 constituents that move prices; aggressive buyers, aggressive sellers, reluctant buyers, and reluctant sellers.  Most people intuitively understand the first two where people yell “buy, buy, buy” or “sell, sell, sell”.  This excitability is exhibited during high-volume moves.  But the market also moves on low-volume too.  This is when holders are unwilling to part with their stock at present levels, or buyers are unwilling pay current prices.  Today’s low-volume rally showed unwillingness from holder to let go of their shares.  This reluctance to sell limited supply and resulting scarcity drove prices sharply higher.

The last few days of selling flushed out many weak holders and the buyers who stepped in acknowledged the risk and are more comfortable sitting through some volatility.  Because these new holders are less likely to get spooked out of their positions, their resolve takes out supply and puts a floor under the market.  This is exactly what happened Tuesday.  Today’s 20-point surge further reinforced this phenomena as holders were rewarded for sitting through the dip.  Combine these factors and we have a core group of holders that is far less likely to sell into future volatility.  The interesting thing is this reluctance to sell volatility actually eliminates volatility because supply no longer floods the market.

As we’ve been discussing for weeks now, this market is not going to fall apart on news.  We’ve seen quick dips on the Fiscal Cliff, negative GDP, and now turmoil in Europe, but every time it was a buying opportunity.  We have sequester around the corner, but this is widely telegraphed and while it won’t be pretty, no politician wants to go down with the ship and it will get taken care of.  Anything short of a complete breakdown will just be a sideshow and the market has already priced in some delay.

If this market won’t fall apart on bad news, what’s left?  Running out of buyers.  As more people buy this rally, there are fewer left to buy it.  Once everyone is on the rally bandwagon, we no longer have new people to keep pushing prices higher.  This week’s decisive rebound went a long way to convincing people that the only way to trade this market is from the long side.  And while they are right, they are also late.

TRADING OPPORTUNITIES

Expected Outcome:
Stick with what is working.  The market clearly wants to go higher and look for new highs in coming weeks.  Today’s 20-point rally was huge and a modest pullback to digest these gains should be expected.  But given the decisiveness of this rebound, a dip back under 1500 is a serious failure and most likely signals the end of the rally.

This morning’s break above 1500 was obviously a good entry point, but for those that missed it, it is harder to get in now the market has moved this far.  Look for a dip back to 1510 and use that as an entry point.  No matter where you got it, a stop-loss just under 1500 is a good idea.

The next question is how much further will this go.  Barring a meltdown, 1530 is all but a done deal and 1550 is highly likely.  New all-time highs at 1575 is also on the table, but we need to see the market move ahead sustainably.  If the prices race ahead without taking a break, that will signal exhaustion and the end of this rally as it sucks in the last of the available buyers.  But a more measured and deliberate rally that takes its time is more sustainable and could carry us as high as 1600.  We will revisit the price-action and sentiment at 1550 to determine if we should hang on or take profits.

Alternate Outcome:
The market is an equal opportunity humiliator, zinging both bulls and bears over recent days.  While bulls have the upper hand, this could be one last bull-trap before collapsing on sequester worries.  In markets like these, we have two options, staying on the sidelines, or picking sides.  I’m on the rally side, but recognize that I could be wrong and will use a stop-loss under 1500 to get me out.

INDIVIDUAL STOCKS

AAPL sold off on one of the strongest market days of the year when Cook failed to impress traders at investor day.  There were rumors of stock splits and hopes of giving money to shareholders, but the wishful left empty-handed.  From a sentiment point of view, it is interesting watching the stock respond so strongly to rumors.  A few weeks ago it rallied to $485 before Cook spoke at a conference.  Yesterday it rallied $10 in minutes on rumors of a 10 for 1 stock split.  This reeks of desperation as bulls grasp at straws and jump on any rumor that comes around.  This shows there is still too much hope left in this stock.  When all the faithful already own the company, who is left to buy?

Stay safe

PM: Buy or sell?

By Jani Ziedins | End of Day Analysis

PM Update

The market took a break after yesterday’s major slide and AAPL bounced ahead of Wednesday’s investor day.

MARKET BEHAVIOR

Stocks reclaimed a portion of yesterday’s selloff, but remain under 1500.  Volume was just 1% lower than yesterday’s plunge, showing a fair number of shares changed hands.  The 0.6% bounce was enough to recover the final minutes of Monday’s panic selling, but the market refused to climb above 1500, an obvious technical level for anyone who even casually follows stock charts.

MARKET SENTIMENT

Buyable dip or dead-cat bounce?  That’s the million-dollar question.  The market bounced off 1500 half a dozen times over the last few weeks, does it have one last helping hand for the market, or will former support turn into resistance?

1500 is the line in the sand.  Rallying above this key level will trigger a short-squeeze and send the market higher on a wave of short covering.  Momentum traders will jump on the bandwagon, helping propel the market through 1510.  Recovering the majority of the selloff will put peoples’ minds at ease and the rally continues.  Or the market bumps its head on 1500 and the selloff continues.

TRADING OPPORTUNITIES

Expected Outcome:
I still think the market has new highs in it, but what I think doesn’t matter and we need to follow the market’s lead.  A break above 1500 is buyable and a break below 1475 is shortable.  In the meantime, look for the market to oscillate between these levels.  It‘s entirely possible we see a third-wave of selling take us to 1475 before we finally bottom, reclaim 1500, and make new highs.  The obvious breakout trade is often too easy, so anticipate a head-fake or two along the way.

Take this time to plan your trade.  Will you buy a break above 1500?  What will your stop-loss be?  What profit target are you looking for?  Will you short resistance at 1500?  What stop will you use?  What is your profit target?  What about a break below 1475?  Plan your trade and trade your plan.

Alternate Outcome:

The expected trade is an eventual rebound to new highs, but this market could easily be topping.  The bears have reams of data showing how horrible the world is and they could be right.  We trade with stop-losses because it is impossible to be right every time.  Success isn’t about how much money we make when we are right, but how little we lose when we are wrong.

INDIVIDUAL STOCKS

Finally something new to talk about with AAPL.  The stock popped $10 after rumors surfaced that Cook will announce a 10 for 1 stock split at Wednesday’s investor day.  I’m not sure why people are so excited about this; maybe they are just bad at math.  When I was a kid, my dad was teaching my brother and I about money.  He offered to trade my 6-year-old brother’s $1 allowance for three-quarters.  My brother thought more was obviously better and took my dad’s offer.  That’s what I think of when people get excited about stock splits.

People will argue $45 is far more accessible than $450 and it will let little guys buy the stock, adding to demand, and pushing prices higher.  Of course on the other side, $450 is far more prestigious and impressive than $45.  Of all the exciting and innovative tech companies out there, how many have a stock price less than $100?  If AAPL is desperate enough to cater to the 20-year-old investor demographic, that will be a major turning point in a once proud company.

I have little doubt the stock-split crowd will bid up a split, but that is a selling opportunity, not a fundamental catalyst.   Far more interesting will be details of what AAPL plans to do with its cash hoard, but since the company has a history of under delivering in this regard, expect the market to be disappointed yet again.

Investors are waiting for more pioneering innovation out of AAPL.  The stock is lagging because competition is catching up, and in some cases exceeding AAPL.  Stock splits and dividends ignore the real reason AAPL’s stock is lagging.  Without addressing the root cause, expect the lagging to continue.

Stay safe

PM: The Plunge

By Jani Ziedins | End of Day Analysis

PM Update

The biggest down day since early November sent a chill through investors.  Was this simply a technical selloff that will recover quickly, or the start of something more sinister?

MARKET BEHAVIOR

Dramatic selloff in the markets with an intraday range exceeding 2.25%.  This was the biggest drop since the Wednesday following the election.  Volume was 15% above average, but lower than the selling volume last Wednesday and Thursday.

The market clearly sliced through support at 1500 and is now just 10-points above the 50dma and the 1475 high from last fall.

MARKET SENTIMENT

There was no legitimate fundamental reason for the selloff today.  The financial press is pointing to polling out of Italy, but everyone knows Euro Contagion is the Boy Who Called Wolf.  It’s been three-years without a collapse and we will still be talking about an ‘imminent’ collapse next year too.

The real story is sellers selling because everyone else was selling.  Herd psychology triggering this stamped plain and simple.  The market opened innocently enough, gapping up 0.5%, but quickly ran out of buyers after short-squeeze buying dried up.  By late morning it was stair-stepping lower on Euro concerns and the last hour was a mad rush for the exits as prices cratered when buyers failed to show up.

Much of the selling was technically based, especially in the last hour as the market broke substantial support near 1500 and automatic stop-losses triggered a cascading wave of selling.  Potential buyers were just as spooked by the selling and chose to wait and see.  Without buyers the market fell through a trapdoor.

Where does today’s selloff leave market sentiment and how are people positioned?

The interesting thing is today’s massive move came on relatively light-volume and was the lowest volume of the last three down-days.   While the drop was dramatic, the actual level of selling is decreasing and suggests fewer people are bailing out.  Today’s big drop had more to do with reluctant buyers than a mad rush of sellers.  If selling continues slowing down, that will create a near-term bottom and short covering will bounce the market higher.

This massive plunge from record highs and swelling volatility replaced complacency with fear. Any weak holders likely sold in today’s bloodbath.  But if the nervous are running for cover who is buying?  Buyers acknowledge the risk of further downside, but think the selling is overdone.  These new buyers are far more comfortable holding volatility and their resolve will give us more stability going forward.  Of course ‘more’ is a relative term and while volatility will continue, don’t expect another selloff of today’s magnitude in the near future.

TRADING OPPORTUNITIES

Expected Outcome:
Clearly my call to buy the 1500 dip last week was premature and as I often say, early is the same thing as wrong. Further, I might not even be early if the market continues selling off, but that is what stop-losses are for.  We identified 1505 as a valid entry and 1495 as the bailout.  While the trade worked beautifully until 10am this morning, the stop-loss got us out for a modest loss this afternoon.  As we discussed last week, a dip under 1500 was a realistic outcome and that made 1475 the next logical level for support.

There is no reason for the average investor to be playing these dips because it is too easy to get run over by the herd.  But if someone wants to trade the expected rebound, wait for the market to regain 1500 and use 1495 as a stop-loss.  The upside is a new high above 1530 and will most likely continuing past 1540.  5-points of risk for a 30-point gain is a very favorable risk/reward.  Waiting for the market to recover a key technical level avoids the risk of catching a falling knife and leaves a trader on the sidelines if the market continues breaking down.

Alternate Outcome:
If the expected outcome is a buyable dip, the alternative is a crash through 1475, breaking 1450, then 14245, and finally 1400. Expect a technical bounce at 1475, but if the market cannot regain 1500, look for more downside and that is where the short should be put on.  Don’t short this market here, wait for the bounce.

INDIVIDUAL STOCKS

NFLX held up surprisingly well relative to the rest of the market.  Its 0.3% loss is practically an up day when the indexes lose 1.8%.

AAPL actually didn’t do too bad, simply mirroring the indexes 1.8% loss.  The thing to watch is if it recovers when the market recovers or if it continues ratcheting lower.

AMZN failed to hold the 50dma.  High beta-stocks like AMZN rarely work when the market is falling apart and is why understanding what the broad market is key part of trading individual stocks. If the market bounces back, look for AMZN to follow.

Stay safe

 

PM: Bulls fight back

By Jani Ziedins | End of Day Analysis

PM Update

The market ended the selling and found support at 1500, bouncing back to resistance/support at 1515.  AAPL stopped the losing streak, but is just leading on hopeful holders and NFLX is taking a much-needed break.

MARKET BEHAVIOR

Stocks recovered all of Thursday’s losses and finished at the highs of the day.  Volume was fairly average, but quite a bit less than the elevated selling over the previous two-days.

The last few days of trade brought volatility back to the market and most tops involve elevated volatility leading up to the reversal point.  That doesn’t mean the market is about to collapse, we just need to be aware we are approaching that point.

Today shows 1500 continues to be a point where buyers are willing to step in.  The market finished at 1515, a level that provided both resistance and support going back to the beginning of the month.

MARKET BEHAVIOR

Today’s rally ended the selling streak and rewarded holders that sat through the weakness.  Low-volume show few were excited to buy, but more noteworthy is fewer were willing to sell as supply dried up and the market bounced hard.

All the hype that said this was the start of a big selloff spooked out most weak holders.  Once the paranoid finished selling, longer-viewed investors that already sat through the Fiscal Cliff and a negative GDP report were not spooked by some meeting minutes.  That bodes well for the continuation and supports the thesis that this market will top due to running out of buyers (optimism), not negative headlines (fear).

TRADING OPPORTUNITIES

Expected Outcome:
I still expect the market will make new highs before the end of the quarter, meaning we have at least another 15-20 points of upside left.  In reality the market will likely blow past the old high of 1531 as it triggers a new wave of short-covering and breakout buying.

Don’t get me wrong, I am not a raging bull and think the market is in the process of topping, I just don’t think the top is in yet.  For various psychological reasons markets most often reverse in double-tops, head-and-shoulders, and exhaustion surges.  So far I don’t see any reason this time will be different.  That means Tuesday’s high is not the top and the high-probability trade remains buying the dip.

Alternate Outcome:
Today’s rally could be a head-fake to suck in bottom-pickers before steamrolling them with another crushing down-day on Monday.  I don’t dispute the real possibility of another horrible week.  There are no grantees in the market and every trade involves risk, the difference is the savvy trader uses probabilities to move the odds in his favor.  I could be wrong about buying this dip, but that doesn’t make it a bad trade.  Savvy traders manage risk by looking for the high-probability trade and using stop-losses to protect against unexpected losses.

If weakness continues next week, look for a dip to 1475, but that will be another potential rebound point.  Failing support at 1500 doesn’t kill this rally, but dropping through 1475 does.

INDIVIDUAL STOCKS

AAPL finally saw its first up-day since Cook crushed investor’s hopes for an increased dividend/buyback.   If people are buying this bottom, I have a bridge to sell them.  I shouldn’t be so flippant because so many people are stuck in this trade, but I’ve warned about this for weeks now.  I was sucked into the AAPL earnings story just like everyone else.  The difference is I took my lumps after earnings came out, realized my investment thesis was flawed, sold out, and moved on.  We are in this to make money, not own stocks.  If something isn’t working, stop doing it and find something that is.

NFLX ran into some selling the last couple days.  Holding out for more than a 100% gain is just plain greedy.  It was obvious the stock would continue higher after earnings, just like it is obvious it will pullback after hitting ~$200.  That doesn’t mean the story is dead, the stock simply needs to catch its breath.  Look for a pullback to at least $160 before resuming the rally higher.

Stay safe

PM: Holding 1500 for now

By Jani Ziedins | End of Day Analysis

PM Update

Stocks find support at 1500 and finish off the day’s lows.  Is this the last chance to bail out before crash, or another golden buy-the-dip opportunity?  AAPL still cannot find a buyer and will likely see another leg lower before finally bottoming.

MARKET BEHAVIOR

The slide continued and the market tested support at 1500.  It briefly traded under this key level, but was able to regain it by the end of the day.  Volume was elevated as selling flushed another round of previously complacent holders out of the market.

The absence of a huge wave of stop-loss selling after dipping to 1497 is encouraging.  The other benefit is this knocked out stop-losses right under 1500, relieving potential selling pressure going forward.  If we dip under 1500 tomorrow, it will be less of an event because many of those stop-losses are gone.  If the market cannot hold 1500, the next level of support is the 50dma around 1475.

MARKET SENTIMENT

Is this selloff just getting started and we should load up on shorts, or are these the last gasps of selling and we should buy-the-dip?

Last week I talked about the need to lighten up and take profits, and seven-consecutive up-weeks is about as far at the market goes without a red-week.  I didn’t say these things would lead to market crash, but a healthy and normal pullback as part of continuing higher.  So far I’ve been right about the first part and the second part still on track

The dramatic dip over the last two-days combined with the uneasiness many have had with this market lead to a large number of weak holders bailing out   Shorts are also pouncing on what they see as the obvious trade lower.  What is the most unexpected outcome after the biggest two-day losses in months?  New highs, and that is where we are headed.

If we hold 1500 Friday, that means most of the selling has already taken place.  Without new supply to keep pressuring prices, there is no place to go but higher.  Once the market recovers 1530, look for shorts and underweight traders to scramble on board the rally bandwagon, but ironically their buying will bring us one step closer to the dip that doesn’t bounce back.

TRADING OPPORTUNITIES

Expected Outcome:
Rallies don’t simply roll over and die.  The change of power from bulls to bears is a messy process that includes lots of volatility.  We are seeing some of that volatility here, but we have not seen the last of the new highs yet.  I am not a raging bull, just an opportunistic trader.  I know markets don’t top like this and most often we see double-tops and head-and-shoulder reversal patterns.  The thing about both of these patterns is the market makes a new high after the initial selloff.  As the opportunistic trader, that means the high probability trade remains buying-the-dip.

Obviously we need to be careful when dealing with volatility like this, but if the market holds 1500 tomorrow, consider buying and holding through 1540 and using 1495 as a stop.  Depending on where we open, this is a pretty favorable risk/reward; 10-points of downside for 35-points of upside.  Of course if the market cannot hold 1500 in early trade, all bets are off and look for the market to test 1475, but then 1475 becomes the next buying opportunity.  If we cannot hold 1474, the rally is dead.

Alternate Outcome:
The market can keep sliding and that is a fact of life.   It doesn’t matter how creative and thoughtful our analysis is, the market is going to do what it wants to do.  We always need to use protective stops to mange risk incase we get the trade wrong.  But even if the market continues lower tomorrow, I still think this makes for a poor short.  If anyone is lucky enough to have short profits, harvest some of those gains because they might not be around much longer.

INDIVIDUAL STOCKS

AAPL is back under $445.  The quick rebound everyone was hoping for is deader than dead and it will take a long period of healing before this stock recovers.  In fact there is probably one last flush lower before this stock finally finds a bottom.  The stock peaked on the nice round number of $700 and it might finally bottom on the nice round number of $400.  Of course that is one of the better outcomes.  A 50% selloff to $350 is not out of the realm of possibility as many high-fliers drop 50, 60, even 70% after peaking.  What cannot get any cheaper usually does.  People will point to the fundamentals, but the company and the stock are not the same thing.

Even with all the broad market weakness, AMZN is still hanging above the 50dma.  There is not a lot of cushion left, but the expected rebound in the indexes will drag AMZN along with it.  This is a speculative trade and not many people should own it here, but please don’t short it.  There are far easier ways to make money than argue logic with the market.  Same goes for LNKD and NFLX, what cannot go any higher usually goes higher.

Stay safe

PM: Shaken nerves

By Jani Ziedins | End of Day Analysis

PM Update

Today’s dip cleared the air of complacency and is making traders fearful again.  Is this the real selloff or just another buying opportunity?

MARKET BEHAVIOR

Biggest selloff of the year, down 1.25% and finishing at the day’s low.  While 1.25% is noteworthy, it isn’t nearly as dramatic as some in recent memory that dipped multiple percent.  Volume was 20% above average and typical of a selloff that takes out several layers of stop-losses.

The market broke through minor support at 1525 before ending a few points under 1515.  The next major support level is 1500 and is more meaningful because it goes back nearly a month.  If we trade near this level, be wary of a dip under because a huge pile of automatic stop-losses will push a wave of new supply on the market.  If we still cannot find a floor there, the next level is the 50dma down at 1475.

MARKET SENTIMENT

We finally have the selloff everyone’s been waiting for, and that is why this isn’t the real deal.  No doubt we could see further weakness, but this rally will most likely end in a double-top.  While Tuesday set a new high, a 0.7% gain on average volume is hardly exhaustion.  But even if the rally is not dead, that doesn’t mean we should rush out and buy stocks because an intermediate dip could easily take us back to 1475.

The excuse for today’s selloff was dissent in the Fed minutes over when to withdraw stimulus.  This is a two or three-year story, not an imminent change in Fed easy-money policy, but just a hint of withdrawing liquidity was enough to send already paranoid traders to the exits.  After that, selling accelerated as we tripped automatic stop-losses.

Today’s dip rattled the market and it led to a lot of selling.  We are left wondering if this is just another buy-the-dip opportunity or the start of something larger?  While I can’t give you answers right now, there are clues we can look for to guide our trading over coming days.

TRADING OPPORTUNITIES

Expected Outcome:
We have one of two likely outcomes, finding support tomorrow and bouncing back to 1530, or selling continues and we don’t find a bottom until 1475.  If the cascade of selling ends and we rebound, the rally is back on and look for a new high next week.  But if we keep taking out stops, don’t try to bottom-fish and let the market continue shaking out weak hands.

This market will eventually set a new high, the only question is if that is next week or next month.  Double-tops are one of the most common topping patterns and probability-wise we should expect this trade.  After that second top we can start looking for a bigger shorting opportunities, but until then take profits on shorts early and often.

Alternate Outcome:
Sometimes markets top without much fuss, but those are rare.  Usually we see elevated volatility accompanied by one last surge higher, a double top, or a head-and-shoulders.  Rarely do bulls simply give up and roll over without a fight.  While today could be the start of a bigger selloff, heading straight down from here is not the most likely outcome.

INDIVIDUAL STOCKS

AAPL closed under $450 and has been down six-days in a row.  When the stock hit $485 last week, holders were most hopeful of a rebound when they should have sold.  The market loves to play head games and the most successful traders expect this; buy when you don’t want to buy and sell when you don’t want to sell.  If AAPL cannot find support at $450, new lows are just around the corner.  This is a swing-trading stock right now, not an investing one.  If you want to make money here, buy the dips and sell the rallies.

The market brought everything down with it, especially high fliers like NFLX, LKND, GOOG, and AMZN.  When the market has a bad day, there are few places to hide.  Look for these high-beta stocks to go down further than the market if broad weakness persists.

Stay safe

PM: All is well with the world

By Jani Ziedins | End of Day Analysis

PM Update

The rally continues and all is well with the world.

MARKET BEHAVIOR

Stocks jumped to fresh highs and finished at the top of the day’s range.  Volume was slightly above average.

MARKET SENTIMENT

The market is running in clean air, meaning we don’t have overhead resistance from regretful owners looking to get out at break-even.  Everyone with a diversified portfolio is sitting on profits and that is a big reason traders are willing to hold through modest pullbacks.

Many traders were burned by selling the post-election/Fiscal Cliff dip.  They also bailed after the Fiscal Cliff pop went “too-far, too-fast”.  But as the rally continued, most who sold anytime over the last several months have come to regret that decision.  Fool me once, shame on you; fool me twice, shame on me.  The sellers that bought back in and those that held through the dips are more confident in the market than they have been in quite some time.

What this means for the rest of us is this market will not collapse in a wave of panic selling.  It rallied on negative GDP and it clearly knows sequestration is just around the corner, but it doesn’t care.  If those headlines won’t spook this market, anything short of a terrorist nuclear bomb detonation will not dent it either.

If this Teflon market won’t fall on news, the only thing left is running out of buyers.  The calm and steady climb higher is seducing the remaining holdouts and momentum chasers and shorts covering provided much of the buying today on a headline-free jump to new highs.  This market is no longer trading on fundamentals, but supply and demand.  Holders are not selling and former cynics are chasing.  This is a recipe for price increases, but it is also a short-lived phenomenon.  We will eventually run out of chasers and the last people in the door will have little profit cushion, causing them bail at the first signs of weakness.

This chasing rally can last for weeks or even months, so don’t short this market.  But if we know what we are looking for, we will be better positioned to trade the top when it finally happens.

TRADING OPPORTUNITIES

Expected Outcome:
There are two things the market can do tomorrow, continue higher or pullback to support and consolidate.  A continued surge is unsustainable and will end in an exhaustion top.  A modest pullback to support will spook out some of the momentum traders and tempt bears to re-short this market.  That repositioning clears the way for the sustainable grind higher.

Either way we are getting closer to the end of this run and it is better to be taking profits than initiating new positions.  The time to buy was two and a half months ago when the world was ending, not now when everything seems fine.  There is some upside left in the market, but holding out for top-dollar is often a fool’s game.  We are in this to make money and you can only do that by selling winners.  It is hard to close a position making money, but if the most successful traders sell too early, maybe we should do it too.

I sold half of my SPX trade late today.  I had a trailing stop that let me ride up to the close, but ending at the day’s highs made me take some profits off the table.  We could see this continue higher tomorrow and that will probably get me out of the rest of my position, but if we pullback and find support for a few days, I will look to buy back in.

Alternate Outcome:
Without a doubt this market could go higher and I probably sold too early, but that is what a disciplined trader does.  If this rally is sustainable, there will be other opportunities to get back in.  If it runs up in an exhaustion top, I’ll miss a few dollars of upside, but I would probably end up selling too late and miss the top anyway.  At least when I’m out of the market and have a clear head, I will be better positioned to look for the next trade.

INDIVIDUAL STOCKS

AAPL fell under $460 early and while it recovered from the day’s lows, it was unable to close above $460.  Some of the focus on price levels seems arbitrary, but the power comes from other people trading these same levels.  If everyone looks at $460 as support and places their stop-loss at $459, when the stock dips under this level, it sets off a chain reaction of stop-loss selling.  That is exactly what sent AAPL to $453 in early trade.

Between $460 and $485 the stock is in no-man’s land.  If it cannot regain $460, look for new lows.  If it climbs above $485, look for a run back to $500.  $500 will be a major milestone and significant resistance, but if it breaks through and holds above this level, the rebound is real.

AMZN turned premature shorts upside down again.  In cases like this is it better to be a little late to avoid getting whipped around.  AMZN is a legitimate short, but wait for the stock to dip under the 50dma first.  As long as it holds above this level, the stock is still a buy.

NFLX is within a couple of dollars of $200.  We are getting close to the end of this run and look for a pullback and consolidation before continuing higher.  I still wouldn’t short this stock, but taking profits here after it ran 100% in a few weeks is the smart move.

GOOG is making new all-time highs in an apparent, “what is bad for Apple is good for Google”.  GOOG is a money-printing machine, but most people forget they don’t make any money selling Android phones; it all comes after the fact from mobile search.  Google’s financial statements don’t care if you buy an Android phone or an iPhone, because both use Google as the default search engine.  This can change as we saw with Apple producing their own mapping application, but after that fiasco, I suspect Apple will think long and hard about replacing Google’s search on the iPhone.  Until then don’t get too excited about Android market share gains on the iPhone because it will not translate to the bottom line.

Stay safe

PM: Complacency creeping in

By Jani Ziedins | End of Day Analysis

PM Update

The S&P500 finished the week nearly where it started and volatility dropped off dramatically.  AAPL is testing support at $460 and AMZN is trying to find a direction.

MARKET BEHAVIOR

Stocks traded flat again with support near 1515 and resistance at 1525.  This was the fourth-day within this 10-point range  as volatility virtually disappeared   Obviously this cannot last and it will be interesting to see if the rally uses this quiet period to launch another move higher, or a plunge lower to shakeout complacent and greedy holders.

MARKET SENTIMENT

The market is stuck in this tight range because 1) no one is buying and 2) no one is selling.  Obviously this is only figurative because we had 37 million shares change hands on an options expiration Friday, but for every seller there was an equally willing buyer.

It will be interesting to see how the market trades next week since many trader’s put protection expired today.  This could make it easier to shake these previously steady holders out of their position and would add to down-side volatility next week.  But this factor might be mitigated by the increasing complacency and greed felt by current holders.  Every dip since November has been a buying opportunity and anyone shaken out in a bout of weakness was made to regret that emotional impulse as the market bounce back not long after.  This shame over selling prematurely makes traders less likely to sell the next dip and explains a lot of the recent reluctance for holders to sell dips.

Obviously complacency and greed is a key component of a market top, but they do not lead to a top immediately. A prevailing sense of complacency and greed brings in the last of the reluctant buyers and that forms the top of the market.  Even though we are getting complacent here, there are still reluctant traders left to push the market higher.  Their final buying will likely trigger that last surge higher before the market corrects.

TRADING OPPORTUNITIES

Expected Outcome:
While we are still looking for one last push higher, we might see another dramatic selloff along the way.  The market hates being easy and right now it is pretty darn easy to buy-and-hold.  I have little doubt some heart racing volatility is around the corner, but it won’t get too carried away, maybe a precipitous drop to 1505 before bouncing back.  Tops usually get more volatile as the battle between the bears and bulls evens out and the market’s indecision intensifies.  For those with a weak stomach, it would be far easier to sell into some strength and wait for the next buying opportunity.

Alternate Outcome:
The market could plunge, takeoff, or stay flat next week.  If this predicting stuff were easy we would all be rich right now.  We evaluate the situation, make our best guess, place our bets, and then wait for confirmation or invalidation, and that is what we need to do here.  There is no reason to trade this late in the market rally and often holding out for the last few dollars causes people to give back all their earlier profits.

INDIVIDUAL STOCKS

AAPL dipped to $460.  While not a long-term support level, it has been a key level since earnings last month, initially providing overhead resistance and now acting as support.  There are many people trading this same level, so a dip under could trigger a wave of stop-losses and short selling, intensifying pressure on the stock.  If the stock bounces here and breaks above $485, that would qualify as making higher-highs and higher-lows, which would be extremely bullish.  Unfortunately sentiment wise there is still too much optimism and hope in the stock to have realistically put in a long-term bottom.

LNKD and NFLX continue inching higher on the backs of pessimists.  Short these at your own peril.

AMZN pulled back to the 50dma but found support for the time being.  A lot of traders are watching this level and look for a move in either direction to pick up speed as swing-traders jump on whichever bandwagon shows up first.

Stay safe

PM: Another new closing high

By Jani Ziedins | End of Day Analysis

PM Update

MARKET BEHAVIOR

Stocks opened at 1514 and rallied through the day, finishing above 1520.  While we missed a new intra-day high, it did notch a new closing high as the slow grind higher continues.

MARKET SENTIMENT

As the market inches higher, the calls for a pullback get quieter by the day.  I don’t think everyone is sold on this market, but the cynics are not nearly as vocal after getting their nose relentlessly bloodied day after day.  This is all part of the normal progression through the life-cycle of a market move.  With each passing day bears and cynics are throwing in the towel and joining the rally bandwagon.  Their buying is the fuel that is propping up this market, but once the last have changed sides, demand will dry up and the market will finally nose over.

TRADING OPPORTUNITIES

Expected Outcome:
While there are no clear signals to sell yet, we need to be increasingly vigilant.  This market will top in coming weeks and we need to be ready for it.  It might happen as early as next week or it could drag on through the end of the first quarter, but either way the writing is on the walls .  Look for the inability to hold support or the biggest weekly price gains since this rally began.  Those will be the signs to get out.

Fund managers are judged by their quarterly performance and the longer the rally goes, the less time managers have to catch the market before the end of the first quarter.  A pullback will be a huge relief for many professional money managers, but will most likely be the reason it won’t happen.  Managers behind the eight ball are buying every dip in an effort to catch this market, but if you get too many people buying dips, there are no dips to buy.  That behavior explains why the move higher has been so smooth.

Alternate Outcome:

Clearly there is no rule that say rallies can only last 12 to 16 weeks and obviously there are countless examples over the last 100 years that lasted a lot longer.  But trading is a game of probabilities and we need to trade the most likely outcome.  It is entirely possible this rally goes for a couple more months, but the odds are against it.

INDIVIDUAL STOCKS

AAPL is finding support in the lows $460s.  Holding here and using $460 as a stop is a reasonable way to trade the rebound.  But if the market breaks $460, look for a wave of stop-loss selling from a lot of other like-minded traders.  I’m still suspicious of this stock because supply and demand is stacked against it.  If everyone thinks this is a great value and already own the stock, where are the new buyers going to come from?

Stay safe

PM: Is this too easy?

By Jani Ziedins | End of Day Analysis

PM Update

New highs in an otherwise quiet day.   AAPL continues struggling for direction and high-fliers keep humiliating bears.

MARKET BEHAVIOR

Stocks traded up to 1525, fell to 1515, and finished the day back at 1520.   1525 set another new high and 1515 held recent support.

MARKET SENTIMENT

While we set another new high, don’t let the dull trade lull us into complacency.  The trend remains higher, but we could see near-term weakness test our resolve.  A pullback to 1505 should be expected and we need to plan on how we will respond.  Proactive traders could lock-in profits on the way up and look to buy after the market finds support.  Traders who like to sit through a little volatility can continue holding, but they have the harder task of  recognizing the difference between healthy pullbacks and topping.  And lastly, buy-and-hold should keep holding because that is what they do.  Of course even buy-and-hold investors benefit from shorter timeframe analysis because it helps them mentally prepare for the emotional dips that could tempt them into selling at the exact wrong time.

At most this rally has six-weeks left in it and we need to come up with an exit plan for taking profits.  So far we’ve resisted the temptation to get shaken out between too-high, too-fast and the volatile dips last week, but it will all be for naught if we stick around too long.  The November bottom was twelve-weeks ago and we have been above the 50dma for six-weeks.  While I’m still waiting for the high volume price gains, I am becoming increasingly suspicious of this market and inching closer to the door.

TRADING OPPORTUNITIES

Expected Outcome:
Stick with what is working, but start working on an exit plan.  We’re in this to make money, not own stocks, and we can only do that by selling and taking profits.  My preference is to sell early because it prepares me mentally to buy the next dip.  Holding past the top is always a head game because there is regret at not selling sooner and hope that prices will bounce back.  All of this clouds judgement and prevents a trader from identifying the next great trade.

Alternate Outcome:
Technically this rally could last forever, but practically speaking three to four months is the most these things go before they run out of new buyers and have a material selloff that refreshes the larger bull rally.  We’ve seen countless selloffs of 100-200 points over the last four-years and this year will be no different.  While the trade is obvious, getting the timing right is where all the money is made.

INDIVIDUAL STOCKS

Much like the market, AAPL rallied, sold off, and finished near flat.  Inability to break above $485 is noteworthy and while most are treating this as a fundamental and event-driven story, it really is still a supply and demand trade.  As long as everyone is promoting the attractive valuation, it means the hopeful have not been flushed out yet.  Why this matters is everyone who likes AAPL already owns it, meaning there are few new buyers left.  If someone isn’t interested at an obscene valuation, they probably won’t be impressed with a doubly-obscene valuation either.

AMZN popped today and the cynics were out in force.  That explains why the stock finished at the top of the day’s range.  AMZN is AAPL’s mirror twin.  Everyone loves AAPL and it keeps going lower while everyone hates AMZN and it keeps going higher.  This is totally irrational behavior if you look at it from a fundamental and valuation basis, but bring supply and demand into the picture and now it makes total sense.  AMZN isn’t done humiliating bears and look for the rally to continue.

NFLX and LNKD also rallied through the day and these stocks are trading like they want to go higher.  It will be a wild ride, but $200 is easily within reach for NFLX.  After it hits that milestone we will reevaluate sentiment and see if attitudes in the stock have changed.  $180 is in the cards for LNKD.  If there is one takeaway from these posts, please don’t short explosive stocks.  That is a great way to go broke.  These might or might not be a good buy, but they are definitely not a short.  But some people prefer to learn their lessons the hard way.

FOSL’s strength faded and it is retesting support.  Keep this one on a really short leash and any further weakness means institutional money is not supporting this stock.  Don’t go down with the ship if it cannot hold support.

Stay safe

 

PM: AAPL sells the news

By Jani Ziedins | End of Day Analysis

PM Update

The S&P500 made a new high as volume returned, further supporting recent levels.  AAPL fell after Cook disappointed the hopeful, and FOSL still looks interesting.

MARKET BEHAVIOR

Another new high as stocks broke 1520 on average volume and traders finally returned after two holiday-like volume days on Friday and Monday.  The intraday range was tight and the market is taking a break after last week’s volatility.  All good signs of support for these new levels.

MARKET SENTIMENT

Two things we know about this market, 1) it is not breaking down and 2) it is not taking off.  While fairly basic, these two characteristics are highly insightful.  Each dip last week bounced back decisively after an early flurry of selling.  The market found a bottom and rebounded because most holders are comfortable with their positions and not easily spooked by weakness.  On the other side, the rate of gains is fairly moderate as new buyers are only trickling in at this point.  There is no irrational chasing, simply pessimists joining the rally bandwagon a handful at a time.  This slow erosion of bears is what is pushing the market higher.

If those two characteristics are driving this rally, then we need to be on the lookout for a change in either.  Failing to hold support would be a big flag showing holders are not as confident.  On the other side, if we see a mad dash to buy this market, expect that buying to exhaust itself fairly quickly.

TRADING OPPORTUNITIES

Expected Outcome:
This is turning into a broken record, but keep doing what is working.  Often the market adopts a consistent personality for an entire quarter as fund managers fall into the same pattern.  This quarter is driven by big money chasing the market higher.  Next quarter could be volatile sideways trade and the quarter after that is the expected selloff.  This quarterly behavior isn’t the rule, but it happens often enough to be noteworthy and it potentially means we have 6-weeks left in this rally.

Alternate Outcome:
The days in this rally are numbered and we are on day and a few points closer to the end of this run.  Look for a change in character between not holding support, increased volatility, or a surge higher.

I surprised a few people when I said I am 300% long S&P500 index funds.  While that sounds like a lot of risk, we cannot make a valid risk assessment based on leverage alone.  A huge move in the S&P500 is 2%, while a big move in AAPL is 10%.  When factoring in volatility, the risk in a 300% index position is not all that different from a 50% stake in AAPL.

But having said that, I trade what works well for me and that is swing-trading the indexes using leverage to spice up the returns.  I follow the S&P500 close enough that I often know when a trade is not going to work out even before it hits my stops.  This is the level of risk I am comfortable with, but it took years to work up to this level.  I always suggest people trade what they are most comfortable with.

INDIVIDUAL STOCKS

AAPL hit its head on $485 yesterday and sold off ever since.  We will see what the stock has in store for us tomorrow, but this is shaping up as a boiler plate sell-the-news trade.  Tim Cook seemed openly hostile to accusations of cash hoarding and it doesn’t look like the company’s stance will change in the near-term.  If this was the catalyst traders used to justify bidding up the stock, they need to close out once their original thesis proves invalid.  The stock can rally for any number of reasons, but an increased dividend seems less likely.  If the stock doesn’t come back to life on Wednesday, look for a retest of recent lows.

FOSL closed at the lows of the day’s trading range and almost closed the opening gap.  Even with the intraday selloff the stock still looks interesting as long as it finds support.  Often the more cynical traders are to a story, the more likely it is to work.  Just look at NFLX, AMZN, and LNKD for recent examples.  Look for support at $106 and the trade will clearly be broken if the stock dips under $102.

Stay safe

PM: Finding support

By Jani Ziedins | End of Day Analysis

PM Update

Resistance at 1515 is acting as support and look for the “overbought” market to get even more overbought.  AAPL closed the post-earnings gap, but where the stock goes depends entirely on what Tim Cook has to say.  Continue watching AMZN and LNKD from the sidelines, but FOSL is interesting.

MARKET BEHAVIOR

Stocks traded near Friday’s high on light volume as recent resistance at 1515 became support.  The market is at 5-year highs and there is no meaningful overhead resistance from regretful holders looking to get out at break-even because everyone holding a diversified portfolio is sitting on profits.  Last week saw an uptick in volatility, but today’s tight trade brought some calm back to the market.

MARKET SENTIMENT

While the market was in the red for most of the day, the losses were modest and volume light.  If anything this was more due to buyers holding back than any material selling.  This reluctance is bullish because it shows  a lot of traders have not bought the rally yet.  Often these things top in a big, high-volume surge and today’s quiet action was anything but that.

Today’s low-volume dip fits well with what we have talked about recently.  Holders are increasingly confident with each new high and less likely to sell while pessimists remain reluctant to buy.  Low-volume over the last two days was the result of no one selling and no one buying.  When holders are confident and sideline-watchers fearful of falling even further behind, there is only one direction to go and that is up.

Too-far, too-fast will eventually catch up with this market, but only after reluctant traders pile in.  The rally is fueled by investor pain and a continued rally will hurt the largest number of people the most.  The bull’s turn is coming, just not yet.

TRADING OPPORTUNITIES

Expected Outcome:
Keep doing what is working because there is no reason to sell this market.  These things go further and longer than anyone expects and that is exactly what we have here.  As long as the chorus is singing overbought and unsustainable, stay long.  Only after all the cynics have given up and joined the bandwagon will we be ready to pullback.  Supply and demand 101.

Alternate Outcome:
This market will top one of these days and I am 100% certain I will either be early or late.  There is a huge difference between trading probabilities and picking tops.  I’m good at probabilities, not so good at tops.  But that is why we build a plan and stick to it.  I know I can’t pick the top and I prefer getting out early.  I don’t know how much longer I will stay in this trade, but as long as things continue following my plan, I’ll stick around.

For those that are curious, I’m 300% long the S&P500 through a combination of leveraged ETFs and margin.  I find the indexes easier to trade because they don’t have the same event-risk found in individual stocks and it is a more pure sentiment trade.

INDIVIDUAL STOCKS

AAPL touched $485 but turned back and closed just under $480.  Tim Cook is speaking on Tuesday and AAPL traders will hang on every word, looking for a reason to buy the stock.  I’m in the sell-the-news camp because AAPL’s is historically stingy with details and its cash.  If I had to guess if Cook will exceed investor expectations or leave them wanting more, I’d bet on the wanting.  If the stock sells off,  get out and even look to short.  If investors love what Cook has to say, look for a test of $500, but expect major resistance at this level.  $500 was support for three months and it wouldn’t surprise me to see it act as resistance for a while before the stock finally breaks above it for good.

LNKD added to yesterday’s gains, putting even more hurt on the shorts that tried to stick it out.  The stock will consolidate, but look for the rally to continue from there.  NFLX’s recent price-action is an example of what LNKD could do.  As for a trade, I wouldn’t buy the stock here and I certainty wouldn’t short it either.

AMZN failed to hold the 50dma.  The stock isn’t dead yet, but it shows why the smart move is to wait for the bounce before jumping in.

FOSL looks like it is under accumulation after last week’s bounce off of the 50dma and it is still within buy range.  The stock gapped down last spring, but there is clean air up through $125.  This is a speculative play so anyone trading this should use an appropriately sized position and any broad market weakness will pummel a high beta stock like this.

Stay safe

PM: Low volume breakout is bullish

By Jani Ziedins | End of Day Analysis

PM Update

New highs from the S&P500 and the trend is clearly higher no matter how extended the experts say the market is.  AAPL is testing the gap, but is this a buy the rumor, sell the news trade?  LNKD is crushing bears and that will likely continue.

MARKET BEHAVIOR

Stocks broke to new highs on constrained volume.  The market finally cleared 1515, a level that has been overhead resistance since the start of the month.

MARKET SENTIMENT

Cynics will point to the low volume and say there was no follow through, but like everything in the markets, there are two valid explanations, one bullish and one bearish.  Conventional wisdom says low volume signals unsustainability, but it can also signal restraint.  Under current circumstances I see the low volume move as bullish because it demonstrates buying is still being held back and much like a dam bursting at the seams, we haven’t seen the big surge of buying when all restraint finally breaks down.

As we saw today, those on the outside are still reluctant to buy this market, but holders are getting more and more comfortable holding.  These holders are becoming less likely to sell and that takes supply out of the market.  On the other side of the equation, demand will pick up the higher we go as big money is forced to chase or risk being left even further behind.  Decreasing supply and increasing demand is a recipe for bigger gains ahead.  Today was only a preview of what is in store as more and more cynics jump on the rally bandwagon.

TRADING OPPORTUNITIES

Expected Outcome:
Stay with what is working.  The trend is clearly higher; the only question is how quickly the market moves.  A big jump over successive days will likely signal the end of this run.  Sideways trade means cynics are still holding out and that will extend the duration of this rally.

Alternate Outcome:
There are no guarantees in the market and no matter how good things look, we need to be prepared for the unexpected.  Every market tops and this one is no different.  Keep any eye out for topping behavior or signs of a breakdown so we can take our profits and look for shorting opportunities.

INDIVIDUAL STOCKS

AAPL is venturing into the gap on speculation regarding its cash hoard.  The question is if this is the rebound everyone is expecting or just another bounce before making new lows.  $485 is a widely followed level since this was the previous low.  How the stock responds to this level will tell us a lot about where it is headed.

I don’t see investors bidding the stock up on an increased dividend if they are still unsure of the fundamental story and suspicious of margins and earnings going forward, but this is just one man’s opinion.  Tim Cook is speaking next week and how the stock trades afterward will say a lot about the stock’s prospects.  A decisive move higher will support the rebound, but if the market doesn’t hear what it is hoping for and sells off, get out quick because it will likely make new lows.

LNKD hit a homerun today and its ridiculous valuation got even more ridiculous.  It is tough to recommend anyone buy this stock here, but I sure hope no one is foolish enough to try to short this thing.  Much like NFLX and AMZN, I expect this stock will continue higher.  What seems too high often goes higher and what seems too low often goes lower.

Stay safe

PM: Holding near recent highs

By Jani Ziedins | End of Day Analysis

PM Update

The S&P500 continues holding 1500 and the uptrend remains intact.  AAPL is whipping traders around, NFLX is crushing shorts, and AMZN looks interesting.

MARKET BEHAVIOR

Stocks rebounded from early weakness and ended the day flat.  Volume was lower than Tuesday but still achieved respectable levels.  This was the 10th day the market traded at or above 1500 and it is creating solid, albeit volatile support around this level.

MARKET SENTIMENT

Bears and swing-traders tried to break this market after Tuesday’s strong rebound, but selling never picked up speed and the market finished where it started.  Bears inability to tempt holders into selling bodes well for a continuation.  Every attempted pullback shakes out weaker hands and this churn is what builds a foundation for the next move higher.

As much as people believe markets respond to fundamentals and technicals, prices only move because of actual buying and selling, also referred to as supply and demand.  Bears and bulls can talk until they are blue in the face, but it isn’t going to make a difference.  Only traders actually buying and selling move the market.  No matter how dire the headlines or substantial the bear’s case is, these last few selloffs failed to bring new supply to market, meaning current owners are fairly confident in their positions.  If current holders cannot be spooked out of the market, supply will tighten and prices head higher.

TRADING OPPORTUNITIES

Expected Outcome:
The ceiling at 1515 is the next hurdle for the market.  The market bumped its head on this level the last four days and no doubt bears have positioned their stop-losses just above this level.  If we break through, expect a short-squeeze to propel stocks higher.

The near-term trend is clearly higher and support at 1500 indicates the high-probability trade remains to the upside.  The bigger question is how much further this can go.  1525 is easily within reach.  1550 is also on the table.  We will be pushing toward all time highs as we move up to 1575.

Maybe we will hit resistance at 1550 and experience a brief pullback before making an assault on all time highs, I can’t really say.  We will take this one-day at a time and adjust our expectations with each new data point.  Going forward from here, sideways trade is supportive of a sustainable rally.  If the rate of gains picks up, look for a blow off top before pulling back.

Alternate Outcome:
Bears calling for a pullback will eventually be right and most likely it will happen when we least expect it.  Most often this is long after people have given up calling for a pullback and the last of the bears concede defeat and jump on the rally bandwagon.  But ironically the last bears buying signals exhaustion and the market rolls over.  While this is most often how things play out, we could also see fear of this market dry up supply in a self-fulfilling prophecy.  When too many traders are afraid of a pullback, they stop buying, and that triggers the pullback.

The big difference between those two scenarios is how deep and long the resulting pullback is.  A blow off top leads to a sharper, deeper, and longer pullback.  Buyers shying away from the market creates a modest dip that bounces back in days.

INDIVIDUAL STOCKS

AAPL had another roller coaster day.  Rumors of a dividend/buyback sent the stock up to $465, but it couldn’t hold those gains and closed down fractionally and the recent trading range of $435 to $465 remains intact.  The market will breakout one of these days, but in the meantime the best trade remains selling strength and buying weakness.  Anyone unwilling to sell their AAPL shares should consider selling options and take advantage of elevated premiums due to recent volatility.  Sell covered calls at the upper end of the range and puts at the lower end.  There is a lot of risk when selling options so this is best suited for experienced traders.

NFLX popped above recent resistance and added to its monster move, up 80% in just a few weeks.  Anyone lucky enough to be in this should consider taking some profits off the table.  The bigger concern is for anyone reckless enough to short this stock.  Momentum is clearly to the upside and while the stock could crash any moment, it could also jump above $200 tomorrow.  Someone not in this stock should resist the temptation to chase and instead wait for more stable support to form.  While this could continue higher, it could also come back $30 in the blink of an eye.

AMZN traded lower on light volume, but it is still above the 50dma.  Look for support and buy the bounce off the moving average.  The stock is getting extended, so don’t get greedy and take profits early and often.  For the bears, this stock’s day is coming, just not yet.  Remember early is the same thing as wrong, so wait for the right entry.

Stay safe

PM: Bears cannot dent this rally

By Jani Ziedins | End of Day Analysis

PM Update

The market had every excuse to collapse in an avalanche of selling, but it bounced back instead.  The trend is clearly higher.  AAPL could break into the gap on broad market strength, but don’t fall for that bull trap.  NFLX’s gains might not be sustainable over the long-term, but look for the stock to continue chewing up bears.

MARKET BEHAVIOR

Stocks bounced back and recovered virtually all of Monday’s losses.  Volume was above average and higher than yesterday’s selloff.  After a month of mostly steady and calm trade, the market has given us dramatic back-to-back-to-back reversals.  The market is still finding support at 1500 and the uptrend remains intact.  When in doubt, stick with the trend and that has been the right trade so far.

MARKET SENTIMENT

The market steamrolled bears that  jumped on the short bandwagon during Monday’s selloff in another example of the easy trade being the wrong trade.  A lot of people are rooting for this market to pullback, even collapse, but ironically they are the ones holding it up.  Bears and reluctant buyers create the demand needed to keep pushing prices higher.  As long as people don’t believe this rally, it will have an ample supply of buyers ready to chase or cover short positions.

Often people mistakenly think the contrarian trade is going against the trend, but it is really going against the crowd.  This is a small but important distinction because often they are different things.  Consensus is this market is overbought and prime for a selloff, meaning the contrarian trade is betting on a continuation, and that has been the smart position to date.

TRADING OPPORTUNITIES

Expected Outcome::
Bears gave it everything they had on Monday, but they couldn’t trigger wider selling.  Holders had every excuse to sell as the market broke under recent highs on a volatile down day, but bears were unable to shakeout many owners and supply dried up quickly.

The uptrend is clearly intact, the only question is for how much longer.  If we string together a couple more strong up days,  that will signal time to bailout and start looking for a shorting opportunity.  If the market calms down and consolidates in a sustainable way, look for a longer continuation.

Alternate Outcome:
This volatile trade could be the final gasps of the rally and we won’t see one last surge higher before buying dries up.  Watch support at 1500 and breaking this level over the next couple days will show bulls don’t have the support or follow-on buying to continue moving this market ahead.  A break of 1500 so soon after finding support will likely lead to a pullback to 1470 and possibly the 50dma.  How low a pullback goes largely depends on how quickly sentiment changes once the market starts selling off.  If the market stays stubbornly bullish, the dip will be deeper, but if panic follows any selling, look for a quick and sharp bounce.

INDIVIDUAL STOCKS

AAPL followed the market’s lead and bounced back from yesterday’s weakness.  The stock is forming a trading range between $460 and $435.  If the broad market surges in coming days, look for AAPL to break into the gap, but this is be a selling opportunity, not a buying one.

NFLX is holding recent gains nicely and this pattern is more conducive to a continuation than a top.  This trade looks like 2011 all over again with shorts betting against the stock and getting killed for it.  We might not see a new $300 high out of this move, but don’t short this thing because the trend is clearly higher and any strength will turn into another powerful short-squeeze.

Stay safe

PM: Biggest selloff of the year

By Jani Ziedins | End of Day Analysis

PM Update

Biggest selloff of the year and AAPL is flirting with recent lows.

MARKET BEHAVIOR

Stocks had their biggest down day of the year, but volume was surprisingly absent for such a large move.  This shows this was the product of too little buying instead of widespread selling.  The last few weeks of gentle updrafts have spoiled investors and any losses catch people by surprise, but selling is part of any rally and a few red days here and there are not fatal.

MARKET SENTIMENT

There are two ways to look at today’s restrained selling volume.  One view says the selling was limited and will dry up soon.  The other is we need a high-volume flush to revitalize this market and today’s low-volume doesn’t qualify.  We are left deciding which scenario is more relevant to this market.

It largely comes down to how spooked traders were by this reversal from Friday’s breakout.  If complacency rules and most traders are holding on and waiting for the expected rebound, then more selling is in store.  But if the dip spooked weak hands out and brought in agressive bears, we could see selling exhaust itself quickly as another short-squeeze propels us higher.

TRADING OPPORTUNITIES

Expected Outcome:
Selling is part of every advance.  While we are not at a major top, some selling here is normal and healthy.  I don’t know if we are in the middle of a test of 1500, 1470, or 1450, but I would bet on a rebound, not a crash.  The best thing to do is let the market tell us what it wants to do.  Finding support by midday on Tuesday is suggestive of a quick bounce.  If selling  picks up as we fail to hold 1496 and technical stop-losses are triggered,  look for support near 1480 or 1470.  A high-volume dip and reversal would be ideal for a longer continuation but not necessary for a modest bounce.

Alternative Outcome:
Could this be the big top everyone’s fearing?  We have budget talks, deficit spending, money printing, high unemployment,  and a weak global economy.  It is possible, but unlikely one of these will crash this market.  Things that everyone is watching and talking about rarely become dangerous because there is so much awareness and time to solve the problem.  This is the exact reason Europe has been able to hang on for 3+ years.  But at the same time we cannot totally ignore the possibility if a black swan and that is why we trade with stop-losses.  Violating support at 1450 will invalidate the continuation thesis and we will reevaluate the market’s health if that happens.  Of course there is no reason a nimble swing-trader needs to wait for 1450 before getting out of the market.

INDIVIDUAL STOCKS

AAPL is trading just above $440 and a few dollars from the recent low of $435.  A lot of buy-the-dip traders put their stop-losses under $435, so expect selling to accelerate if the market breaks this key technical level.  Since everyone who is attracted to AAPL already owns it, I’m not sure how quickly AAPL will find support from new buyers if it triggers a larger wave of stop-loss selling.  The silver lining  is another wave of high-volume selling brings this stock one step closer to finding a bottom.  All the fearful and hopeful holders need to be driven off so AAPL can build a solid foundation of confident and steady holders that will not flinch in the face of further selling.  It is their steadiness that will finally allow AAPL to rebound.

Stay safe

PM: What weakness?

By Jani Ziedins | End of Day Analysis

PM Update

The S&P500 defies gravity and AAPL’s unbelievable valuation becomes even more unbelievable.

MARKET BEHAVIOR

The S&P500 responded decisively from recent weakness and threw everyone for a loop as it set another new high. Volume was slightly above average, but lower than recent days. This was the biggest up-day since the Fiscal Cliff pop, but 1% is hardly excessive.

MARKET SENTIMENT

While we need to be careful of a capitulation top, the lower volume shows the market has not sucked in the last the buyers yet. We are watching for a high-volume rally day because it signals the dam of reluctance has finally broken and the last surge of hesitant buyers is rushing in.

This market clearly wants to go higher and it will reveal how much higher in coming days. Successive up-days will signal the last rush of buyers before exhaustion, but if the market takes its time and exercises moderation, expect this to continue for a bit longer.

Everyone knows this rally is over-bought, but that is what keeps it moving higher. We need to keep a close eye on the level of cynicism remaining because it is the fuel that pushes us higher. Reluctant buyers become enthusiastic buyers the higher prices go.

TRADING OPPORTUNITIES

Expected Outcome:
Keep doing what is working; this market is defying all calls for a pullback and that will likely continue in coming days. While this market will eventually top and pullback, you cannot get in front of this. Shorts will get their chance, just not yet.

Buy-and-hold investors stick with your plan, but conservative swing-traders should look to lock in profits. Aggressive swing-traders can hold for more, but keep this trade on a short leash and move up your stops.

Alternate Outcome:
Next week will most likely set another new high and while we could be near a top, there is still plenty of cynicism to fuel a move even higher. If we see more basing and sideways trade next week, hold a little longer. Nothing is certain in the markets and one in hand is worth two in the bush, but you also cannot make money without taking some risks. We will learn a lot more about the mood of the market early next week and that will tell us how to trade this.

INDIVIDUAL STOCKS

AAPL is giving longs heartburn as it turned back from $460 and retested $450. The failure to break $460 is noteworthy and violating $450 in coming days will most likely signal lower prices in the near-term. In my unscientific observations, it seems like there are still a lot of AAPL supporters and those people need to be chased off before the stock will find a bottom. The most loved stock on Wall Street will need to become the most hated before this thing will turn around.

Stay safe

PM: Dip under 1500

By Jani Ziedins | End of Day Analysis

PM Update

The S&P500 is resting after the recent run up and AAPL lost its mojo.

MARKET BEHAVIOR

Stocks closed under 1500 on elevated volume. Today was the third down-day out of the last four as the hangover from the pervious euphoria is catching up with the market.

MARKET SENTIMENT

Everyone knows the market cannot go up forever, so some selling is normal and expected, but what we really want to know is if this is where the market rolls, over or if this is an opportunity to buy the dip.

So far the selling has been contained and not nearly as dramatic as one would expect after the headlines we’ve seen. Unexpected strength is bullish even when accompanied by down-days. This is not to say selling cannot accelerate to the downside, but if the market finds a bottom and support on Friday, that means near-term selling has climaxed and the rally continues. A lot rides on tomorrow and it will give us greater insight into where the market is headed.

TRADING OPPORTUNITIES

Expected Outcome:
Buy the dip if we find support, but if the market continues sliding, let it find a floor first. The uptrend will resume, but we might see better prices first. If the market decisively regains 1500 tomorrow, then it will be a good buy signal, but if weakness continues, look for support at 1490 or 1475.

Alternate Outcome:
The surge of buying might be behind us and the correction has begun. If tops were obvious, we’d all be rich by now, so we just have to trade what the market gives us. The market probably still has more upside, but we are late in the move and smart money is locking in profits and waiting for the next trade. No reason to force a trade either long or short here and the best call could be sitting this one out.

INDIVIDUAL STOCKS

AAPL is stuck under $460 and everyone should give up on the chances for a quick rebound after 6-days at these levels. In fact, we still might see new lows out of this stock as hopeful holders give up on the rebound. The best trade is stepping to the sidelines and waiting for the next tradable opportunity, either higher or lower from here. A break above $465 is buyable and under $450 is shortable, but take profits in these trades early and often because this is now a volatile trading stock and profits will disappear as quickly as you find them.

Stay safe.

PM: Modest decline

By Jani Ziedins | End of Day Analysis

PM Update

Markets broke the streak of up-days  but that is a good thing.  AAPL bounced today, but is this the real deal?

MARKET BEHAVIOR

The S&P500 dipped less than 0.2% and ended an impressive streak of eight up-days.  While the fractional decline doesn’t constitute material selling, it does break the streak and lets us move past the obsession with counting up-days.  Volume was right around average as holders were not spooked by modest selling and the market closed a hair above 1500.

MARKET SENTIMENT

This was the first time the market didn’t set a new closing high in nearly two-weeks.  Buying took a break simply because there was so much of it since the start of the year.  Trading would be easy if the market went up every single day, but we are not that lucky and actually have to work for our money.  Today was the second close above 1500 and it would be nice to see two more closes at this level to confirm support.  But at the same time, some selling here is normal, expected, and healthy.  I would be more concerned about the sustainability of this rally if we kept heading higher than if we dipped and found support.

Complacency is creeping into the market, but it is just starting and not pervasive yet.  There are still a lot of recent sellers watching this market rally without them and they are tempted to jump on any pullback.  Big money managers under-weight this market are also struggling with the lesser of two evils, getting left behind or buying the top.  But the longer they wait for the pullback, the more uncomfortable they become watching the market head higher without them.  It is easier to justify losses when the entire market dips than explaining why they failed to keep up with a rallying market.

TRADING OPPORTUNITIES

Expected Outcome:
It would be hard to count today as real selling.  The dip was minor and volume was average.  The market can refresh through either selling or sideways trading.  Today’s move was sideways and supportive of 1500, but we need to hold these levels a couple more days before we can stop expecting a pullback.

The market clearly wants to go higher and long-term investors should keep holding, but those out of the market or with shorter timeframes should wait a couple of days for the market to either pullback or build a solid base at 1500.

Alternate Outcome:
A sustainable rally goes two-steps forward, one-step back, but not every rally is sustainable or predictable.  We could continue rallying after today’s modest 0.2% pullback, but just because the market heads higher doesn’t mean we need to be part of it.  If the market doesn’t look sustainable, sit it out.  There are eleven months left in the year and there is no reason to force a trade that is less than ideal.

INDIVIDUAL STOCKS

We all know AAPL will bounce, the question is when.  It still sounds like most people are claiming AAPL is oversold and poised for a bounce and no doubt they will be proven right, but we have to ask when and how much before deciding to make this trade.  If a lot of nervous holders are waiting for that bounce, it won’t happen.  If swing-traders are buying the dip, it won’t happen either.  I’m suspicious of all the people who think AAPL is oversold and makes for an easy trade back up to $500.  No doubt it will get there, but it might need to go through $425 first.

People are very emotionally attached to this stock and I understand the reluctance to sell when it could bounce any day now.  Rather that just cut out, set an upside target and downside stop-loss.  Maybe $490 on the upside and $430 on the downside.  Then stick to these levels.