Category Archives for "End of Day Analysis"

Finally a breakout

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
The S&P500 surged to new highs, decisively breaking the 1,900 barrier.  Volume was below average, but above last week’s lethargic pre-holiday levels.

MARKET SENTIMENT
Either this is the start of the next rally leg, or one last gasp before demand dries up and we slip into the traditional summer doldrums.  Today’s breakout was largely derived from European strength following expectations of more monetary easing by the European Central Bank.  While easy money is drying up in this hemisphere, the party continues on the other side of the globe.  In reality, this is a half-empty/half-full development.  Markets are addicted to cheap money, but central bankers reliance on stimulus shows these experts don’t have confidence in the underlying economic fundamentals.

Supply and demand wise, lighter holiday volumes make it easier for smaller trades to move the market.  Today we broke through well-defined technical levels, causing many traders to buy the breakout and/or cover their shorts.  Every other time we approached these levels, demand dried up as few buyers were willing to chase these prices.  Will this time be any different?

Market rallies are built on stocks recovering from oversold levels following a bout of irrational pessimism, or they coast higher on complacency and the assumption good times will continue indefinitely.  Its been a long time since trade was dominated by fear and pessimism, meanings this strength comes from the assumption of good things to come.  The best trading opportunities come from going against the herd.  If the herd believes we have nothing to worry about, then we should be worried.  Expectations of clear sailing mean most are fully invested and the lack of fear means there is ample capacity for a wave of panic to take hold.

TRADING OPPORTUNITIES
Expected Outcome: At the upper end of a summer trading range.
Big money managers often take time off in the summer and the junior associates rarely have the authority to initiate new positions.  This lack of demand is why summer volumes are often light and we typically trade sideways.  With so many managers dreaming of the beach, it seems unlikely they will chase this market, especially since we are mostly flat for the year and there is no pressure to keep up.

Alternate Outcome:
Traders have an intrinsic fear of heights and while they are not fretting over headlines, these record highs make them nervous.  That reluctance to own makes the market under owned and will be the catalyst for the second half of the year rally.

Trading Plan:
Buying breakouts and selling weakness has been the surest way to financial ruin in this choppy, sideways market and so far we haven’t seen anything to suggest this breakout will turn out any different.  Until proven otherwise, buy weakness and sell strength.

Plan your trade; trade your plan

Gyrations continue

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks took it on the chin as they crashed through the 50dma in early trade, but just managed reclaim this widely followed technical level by the close.  Thursday broke the string of apathetic trade and finished in above average volume.  This is the third time we tested the 50dma in recent weeks and up to this point buyers have come to the market’s rescue.

MARKET SENTIMENT
The 1,850/1,900 trading range is alive and kicking despite repeated attempts to depart it.  Neither bulls nor bears built the critical mass necessary to sustain a move out of this range.  Every time demand evaporated near 1,900 and supply vanished near 1,850.  Today’s move pushed us into the lower half of the range where dip buyers snapped up shares and stopped the selloff just under the 50dma.  For bulls it is encouraging to see selling stall instead of accelerate after violating an important moving average.  That shows many traders are more willing to buy and hold these levels and few were rushing for the exits.  But selling pressure is only half the equation.

While most owners are content holding stocks at these levels and their confidence prevents days like today from turning into a stampede for the exits, the bigger concern is those with cash remain reluctant to buy 1,900.  Tight supply is always helpful, but lack of demand trumps it every time.  If bulls cannot persuade those with cash to buy these highs, eventually the market will crumble under its own weight.

TRADING OPPORTUNITIES
Expected Outcome:  Falling back into the heart of 2014’s trading range.
While stocks might bounce temporarily off the 50dma as a small contingent of eager dip-buyers dive in, larger pools of money remains reluctant to chase these record highs.  This is further compounded as we move into the slower summer season.  Without buyers, expect this dip to continue.  But don’t mistake these normal market gyrations for a crash.  So far there is nothing to suggest this is the 10 or 20% correction bears have been calling for.  If we cannot hold 1,850 we will likely test the 200dma, but that would be a better place to buy stocks than press a short.

Alternate Outcome:
Every dip this year has been a buying opportunity and each time the size of the selloff shrinks as buyers rush in sooner and sooner.  It was a 100-point dip in January.  April saw a 75-point selloff.  And so far this one has gone 40-points.  If the selloffs continue getting smaller, we likely saw the worst of this move.

Trading Plan:
Expect dip buyers to temporarily prop up the market near the 50dma, but few value investors will be seduced by a 1.6% discount from all-time highs.  We likely need to fall further before those with cash find deals too good to resist.  If the market bounces Friday, it is a better place to close out long positions than buy the dip.

Plan your trade; trade your plan

Struggling with 1,900 again

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks slipped from record highs on ever decreasing volume.  The market closed under 1,890 after topping 1,900 for the first time on Monday.  But just as interesting is how this was the fifth consecutive day of declining volume and finished as one of the lowest volume days of the year.  The market is at the upper end of the recent trading range and still well above prior support at the 50dma.

MARKET SENTIMENT
Stocks continued 2014’s trend of stalling as we push toward 1,900.  The market is clearly attracted to these levels as it keeps coming back to them, but it never mustered the follow through necessary to break past this milestone.

Monday’s historic trade was all the excuses a tightly coiled market needed to explode higher in a frenzy of breakout buying and short covering.  The fact that we stalled and pulled back shows us that the market is not in the mood to explode higher.  This is valuable information for any trader that trades risk/reward.  If we eliminate explode higher, that leaves us with grind higher, grind lower, and collapse lower.  Two of the three are negative and one is extremely negative.  Given the outcome skew to the downside, this is a less favorable place to own stocks, let alone buy them.

Volume remains exceptionally light as few are changing their mind.  Those that own stocks keep holding and those with cash remain disinterested in chasing.  While it is encouraging to see the market continue holding these levels, if we cannot find buyers soon, the market will fall under its own weight.

TRADING OPPORTUNITIES
Expected Outcome:  Stalling at the upper end of a trading range in a traditionally slow time of year
Bulls had the perfect setup to extend the rally, but the market failed to take the bait.  Without explosive upside, at best the market will grind higher and it only gets worse from there.  It is hard to justify owning risk here with such limited upside.  The most bullish outcome will be trading sideways until the rally resumes in the fall.  If that’s the case, we don’t get paid to own risk (ie stocks) over the summer.

Alternate Outcome:
When in doubt stick with the trend.  This is the bull that just won’t die and it is far more likely to continue than reverse.

Trading Plan:
The best trade of 2014 has been buying strength and selling weakness and this market is not giving off signals this is changing here.  Anyone sitting on profits should lock them in and for the aggressive, this is the best shorting opportunity in some time.  But don’t mistake a normal and routine dip back into a trading range for a market collapse.  Counter trend trading is the hardest way to make money in the markets and bears should take profits early and often.

Plan your trade; trade your plan

1,900

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stock broke 1,900 for the first time in history, but only held that level for an hour before settling back into the high 1,890s.  Volume was again lower as fewer people are trading these levels.

MARKET SENTIMENT
The breakout to record highs failed to trigger a surge of buying and the day largely passed with a yawn.  Venturing into social media shows how married people are to their outlook and unwilling to change regardless of the evidence.  There is nothing thoughtful or insightful coming from most people, but the intelligent trader can use these clues to look under the surface.

Markets move when people change their mind.  They adjust their portfolio to reflect their new outlook and this buying and selling moves markets.  But when market participants are so stubbornly entrenched, we trade sideways because no one is changing their mind.  Threats of war in Eastern Europe don’t give bulls pause just like the strongest hiring binge in two years doesn’t sway bears.  This behavior means headlines no longer matter since both sides refuse to acknowledge anything that contradicts their preconceived bias.

If news won’t sway traders, what will move this market?  Boring old supply and demand.  Everyone knows markets go up and down, but most people identify with bulls or bears and assume any move in their direction will keep going.  But the truth is the market trades sideways far more often than it makes directional moves.  While tight supply driven by owners’ confidence and unwillingness to sell pushed us to record highs, dwindling volume suggests few are willing to buy the breakout and this market will likely stall on weak demand.  Summer is a historically lethargic season and the market will likely continue trading sideways for months to come.

TRADING OPPORTUNITIES
Expected Outcome: Running out of steam at the upper end of a trading range. 
Markets broke 1,900, but it didn’t trigger a frenzy of breakout buying or short covering.  At the same time it didn’t set off a wave of profit taking and shorting.  Most likely the market will continue trading sideways until something comes along to shake this gridlock.  Either that will be panic over some kind of economic calamity or buyers will venture back in when nothing bad happens for an extended period of time.  Until then, the best trade remains buying weakness and selling strength.  The move to record highs makes this a better place to lock in profits than initiate new positions.

Alternate Outcome:
Consolidations clear the way for moves higher.  Most often they are pullbacks, but often sideways trade is all it takes to refresh a market.

Trading Plan:
Buy weakness and sell strength.

Plan your trade; trade your plan

Record Close

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks had a good day as the S&P500 made a record close and the NASDAQ continued its bounce off the 200dma.  Volume was restrained and the lowest we’ve seen in recent days.

MARKET SENTIMENT
This move to record highs dumbfounded bears who remain convinced this market should have imploded months ago.  Where does this strength come from when so many distrust this market and Eastern Europe is on the verge of war?  The answer pretty straightforward, confident owners.  Contrary to popular opinion, complacency is bullish because confident owners don’t sell and that keeps supply tight.  We’ve seen a bloodbath in the most speculative stocks, but a 30% pullback in many of these names only drops us back to levels from a few months ago.  When a stock goes up 50% in a short period, 30% pullbacks are normal and should be expected.

While I don’t buy into the doom and gloom scenarios flying around, it is hard to get excited about this market.  We are approaching the summer lull and it will struggle to find strong demand when big money managers are on summer vacation..  The most likely outcome is the market will remain range bound until fall, but since we are at the upper end of the range, we could easily see a 50 or 100-point selloff and still be within it.

TRADING OPPORTUNITIES
Expected Outcome:  At the upper end of a trading range
While we could easily break 1,900 on Tuesday or later this week, how we trade after is what matters.  The most bearish scenario is a frenzy of breakout buying and short covering that launches us through 1,900, but those gains quickly evaporate as wider demand dries up.  Failing to hold the breakout likely means we will retreat back into the heart of the trading range.

Alternate Outcome:
The more people distrust this market, the more bullish a contrarian is.  While there are plenty of reasons for this market to sell off, we cannot ignore its strength.  When the market disagrees with us, we are the ones who are wrong.

Trading Plan:
This market struggled with 1,900 all year and this time will likely not be any different.  Given the limited upside during the traditionally slow summer months and the material downside if we slip back into the heart of the trading range, it is hard to justify the risk/reward of owning here.  This is a safer place to be taking profits than buying the breakout.  If we hold 1,900 I’ll reevaluate, but if it fails to hold this level, I’ll look closely at shorting the move back into the trading range.

Plan your trade; trade your plan

Deja Vu

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks took investors on another wild ride.  This time we surged higher midday but gave it all back by the close.  We are seeing enthusiastic moves, but few last more than a couple of hours as we remain stuck between 1,860 and 1,890.  So far the market is holding above the 50dma, but there are only so many times we can test it before it gives way.

MARKET SENTIMENT
This market has everyone chasing their tails and reactive traders are getting carried out in body bags.  The problem is most of the market is trading with a bias.  Bears sell every dip and bulls buy every rally.  With these whips, that guarantees buying high and selling low.

The reason we are stuck in this range is each side is so entrenched that war with the worlds largest energy producer or the best employment report in years is enough to convince people to change their stubborn outlook.  Bulls are bullish and bears are bearish regardless of what is going on around them.  Why this matters to the rest of us is markets only move when people change their mind and start buying or selling to reflect that new outlook.  I have no idea what will break this logjam, but it needs to be bigger than war or the strongest hiring binge in years.

TRADING OPPORTUNITIES
Expected Outcome: Stalling near the upper end of the trading range
Summer is often a slow time of year because most big-money decision makers are on vacation and the junior traders don’t have the authority to initiate large positions.  Expect the sideways trade to last until everyone comes back in the fall.  But since we are at the upper end of the recent trading range, sideways could include a 100-point dip to the 200dma.

Alternate Outcome:
As turbulent as recent trade has been, the longer we hold these levels, the more likely it is the resolution will be to the upside.

Trading Plan:
Anyone who’s been reacting to these swings has been getting chewed up.  Without an exploitable edge, the best trade is to not trade.  Unless buyers step in to save this market, expect it to fall back into the heart of the trading range, but without a fundamental catalyst this won’t lead to the larger correction many are calling for.

Plan your trade; trade your plan

Intraday Volatility Continues

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
It was another whipsaw day.  We gapped higher at the open, crashed through the 50dma within an hour, bounced back into the green by midday, and finally closed at the high of the day.  We covered over 50-points in this back-and-forth and continue the trend of violent intraday moves.  This was the third dip under the 50dma in the last 30-days.  Each time we bounced back, but there are only so many times a bull can tempt fate.

MARKET SENTIMENT
While it is encouraging to see the market bounce off the 50dma, sustainable rebounds typically explode higher and don’t look back.  This one keeps stalling after the brief dip-buying frenzy abates.  Lack of follow through suggests few with cash are willing to spend that money near record highs.  The market has been buoyant on the confidence of owners who are unwilling to sell regardless of headline risk or weak price-action.  The lack of owners rushing for the exits keeps supply tight and makes it easier for modest dip-buying to prop up the market.  But if we keep running out of new buyers every time we approach 1,900, even tight supply will not be able to save this bull.

This market feels fragile.  We had the best employment report in two years, but prospective buyers were unimpressed and instead focused on the half-full fine print.  If they wouldn’t buy that headline, I cannot think of anything else that would get them excited enough to bid up prices.  If good news leaves us flat, it makes me nervous to think about what would happen when we get bad news.  With so few active buyers, it wouldn’t take much selling to send prices tumbling lower.

TRADING OPPORTUNITIES
Expected Outcome: Stalling near the highs of the trading range
Limited upside and huge downside is a great place hold cash.  Making money in the markets is easy, the hard part is keeping it.  The key to long-term success is not giving back our profits by forcing a trade when we don’t have an edge.

Alternate Outcome:
The longer we hold these levels, the more likely this consolidation will breakout to the upside.

Trading Plan:
It feels like we are skating on thin ice and it is best to leave this market to the gamblers.  The disciplined trader will wait for the odds to fall in his favor.  If something spooks this market, that could finally trigger the selloff everyone’s been waiting for.  But since momentum is higher, it is best to wait for the first cracks to form before trading against the up-trend.

Plan your trade; trade your plan

Sell in May

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks slipped nearly a percent and find themselves just above the 50dma.  Volume recovered from Monday’s lethargic levels and was back near average.

MARKET SENTIMENT
Monday’s bounce off the 50dma lacked broad participation as shown by the anemic volume.  Today we gave it all back when buyers failed to step up and defend these prices.  While most owners are confidently holding stocks and not selling this weakness, it is becoming harder and harder to find people willing to buy near record highs.

Many think the escalating situation in Ukraine will lead to further weakness, but the market has long priced in Ukraine and it is already ancient history.  Anyone who understands politics knows neither Putin nor Europe can afford to impose material economic sanctions or embargoes on each other.  Both sides need each other too much and while these events grab headlines, they will have little consequence to corporate earnings in this country.  The market rallied when Russia invaded and captured Crimea and eastern Ukraine is just as economically trivial.  Anyone who fears these headlines sold weeks ago and there is no one left to sell the escalation.

But just because one thing doesn’t cause something else doesn’t meant they are not correlated.  (causation, correlation, and coincident) While few owners are actively selling these headlines, it is one of many reasons prospective buyers are not in the mood to bid up prices.  Tight supply can hold the market up for a surprisingly long time, but there comes a point when even that cannot compensate for diminishing demand.  Right now it feels like we are approaching that point.

As we creep toward the summer season, many senior money managers at big institutions are getting ready for summer vacation and not in the mood to initiate new positions.  This is why more often than not summer trading is so unremarkable.  While the senior decision makers are on vacation, big money doesn’t buy or sell in material volumes.  This means we will likely drift sideways until they come back to work in the fall.  Of course “sideways” is relative and simply means staying within the recent range between 1,750 to 1,900.  While a 150-point dip still technically counts as sideways, that is anything but boring.

TRADING OPPORTUNITIES
Expected Outcome: Upward momentum stalls as buyers become harder to find
Last Friday’s stronger than expected employment report was more than enough excuse to jump-start this bull if it was poised to surge higher.  The fact that we stalled instead shows few are willing to buy this market no matter how encouraging the headlines, so it appears like prices need to come down a bit before new money will venture in.  This is far from the crash many are predicting and is little more than a normal and healthy dip back into the heart of 1,800/1,900 trading range until this fall.

Alternate Outcome:
Volatility and headline uncertainty is flushing out anyone with a weak stomach.  This churn refreshes the market and leaves us with a solid foundation of confident owners who are unfazed by negative headlines or modest weakness.  When they refuse to sell, that keeps supply tight and props up prices.  Even when demand is light, prices continue to rise if supply is even more scarce.

Trading Plan:
Near record highs is a better time to be taking profits than adding to positions.  Long-term holders should sit through the sideways trade, but they would be better served waiting for better prices before adding to their favorite positions.  Swing traders should already be taking long profits and watching for a short entry.  Shorting a bull market is one of the hardest ways to make money, so be nimble and take profits early and often.

Plan your trade; trade your plan

False sense of security

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks gapped lower at the open, but recovered those losses before midday.  Early weakness bounced off the 50dma, holding this widely followed technical level.  Volume was one of the lightest of the year and shows few were participating in today’s move.

MARKET SENTIMENT
Early weakness was driven by escalating conflict in Ukraine, but so few people sold the news that we bounced back in little more than an hour.  But at the same time, just as few people bought the dip, showing there isn’t much engagement in this market on either side.

Most who own this market are content holding and those sitting in cash are uninterested in buying in.  While the reluctance of owners to sell kept supply tight and propped up prices, we are starting to see signs demand is falling off.  This market has stalled multiple times in the upper 1,800s and has been able to break through the 1,900 barrier since early March.  Normally consolidation is constructive and suggests higher prices, but Friday’s lethargy following one of the strongest employment reports in multiple years shows few are willing to pile into this market near record highs.  While many claimed the headline beating employment numbers were undermined by the fine print, that was just the excuse people used to avoid buying this market.  While the market recently maintained a half-full outlook, the way it responded to this employment report was definitely half-empty.

Contrary to popular opinion, complacency is bullish because it means few owners are interested in selling no matter what headlines come across the wire.  The resulting tight supply is a big tailwind for prices.  But supply is only half the equation.  Weak demand trumps tight supply and there are signs we are approaching this tipping point.  If no one wants to buy, prices fall no matter how confident and optimistic owners are.

TRADING OPPORTUNITIES
Expected Outcome:  Momentum is stalling near old highs.
We are slipping into the frequently listless summer trading season and those with cash seem uninterested in initiating new positions near these record highs.  Without new money, prices will invariably weaken and we will slip back into the heart of the 1,800/1,900 trading range.

Alternate Outcome:
Four months of sideways chop is refreshing the market and building a base for the next move higher.  While flat bases typically take longer to form than more dramatic selloffs, we’re largely unchanged since the start of the year and four months is a decent consolidation, especially one that includes two one-hundred point selloffs.  While it seems likely this market will continue resting through the summer doldrums, there is no reason we couldn’t get an early start to a fall rally.

Trading Plan:
The complete lack of excitement surrounding Friday’s blowout employment headlines is a clear signal this market is not poised to explode higher.  For bulls that means this is a better place to take profits than add new positions.  Swing-traders could use this lack of strength as shorting opportunity if the market stumbles back into the heart of the trading range.  But any short trade here is simply exploiting the natural ups and downs, not getting ahead  of a market crash.  We are in a range bound market and both sides should take profits early and often.

Plan your trade; trade your plan

Awaiting Employment

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
It was a quiet day ahead of Friday’s employment report.  We stayed within a +/- 5-point range and closed flat for the day on light volume.  Today 1,880 acted as support and 1,890 was resistance.

MARKET SENTIMENT
It’s been years since the employment report had a lasting impact on equities.  While we often see intraday volatility, the last couple years the market has continued marching higher on both good and bad employment numbers.  Sometimes good was good and other times bad was good, but it never really mattered because within weeks the market was back to climbing higher.  Now that we are threatening to break 1,900 for the first time, will this one be any different?

As we hold near record highs in the face of slowing economic growth and turmoil in Eastern Europe, the market’s outlook is clearly “half-full” as it ignores the bad and embraces the good.  Recent volatility also did a good job flushing out weak hands and replacing them with confident owners willing to buy the risk.  While a beat or miss on employment might be the toss of a coin, the market’s reaction to it won’t be.  Either traders are looking for an excuse to sell, or they are looking for an excuse to keep holding.  No matter what Friday’s result, they will find a justification to do whatever they want to do before the numbers were announced.  Since the ball has been in the bulls court, expect the market to react more favorably.  Granted anything can happen within the volatile hours and days following the employment report, but after the knee-jerk reaction works its way through the system, most likely the bullish market will remain bullish.

TRADING OPPORTUNITIES
Expected Outcome: Pushing toward record highs but don’t expect a sustained breakout until the Fall
Bears are hoping Friday’s employment will save a losing trade, but if they don’t get their prayers answered, expect short covering to push the market higher.

Alternate Outcome:
Many are predicting an upbeat employment report and missing the mark will trigger a knee-jerk reaction of selling.  If the market crashes through key technical levels, expect the selling to accelerate.

Trading Plan:
There is not a lot to do here.  It is too late to buy and too early to short.  If the market implodes on employment, bears could try their hand at shorting, but be wary of a bounce and take profits early and often.  If we breakout to new highs, that is a better opportunity for bulls to lock in profits than initiate new positions.

Plan your trade; trade your plan

Drifting Higher

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Another calm day as the market rallied modestly following the Fed’s policy statement and continued Taper.  Volume was above average and continues the streak of elevated trade following Monday’s rebound.

MARKET SENTIMENT
Stocks shrugged off shockingly slow first quarter growth before the bell and took the afternoon’s continued Taper in stride.  This further reinforces the notion that anyone who would have sold negative headlines is already out of the market.  Those left either held through Ukrainian drama and economic uncertainty, or bought the dip in the face of it.  These owners showed a willingness to hold risk and that confidence kept them from hitting the sell button today.  If they didn’t succumb to a dip under the 50-dma Monday or 0.1% growth Wednesday, they will likely be hard to shake free regardless of what the market throws at them and the resulting tight supply props up prices.

High-fliers have been hit hard in recent weeks, but blue chip stocks held the larger market near record highs.  Unsustainable markets, like the dot-com bubble, often see people dump safe stocks to chase speculation.  In this situation, we have the opposite.  Traders are fleeing obnoxious valuations and embracing consistent performers.  That is rational behavior, not a prelude to a crash.

TRADING OPPORTUNITIES
Expected Outcome:  Coasting higher on the back of short covering.
The S&P500 is one point from breaking near-term resistance at 1,885 and that will send some bears running for cover.  The rest will be flushed out when we break 1,900 for the first time in history.  But after shorts and breakout buyers finish buying this strength, the market will likely stall as follow-on buying fails to materialize.  We’ve struggled to extend last year’s rally and the summer doldrums are often a poor time to find support from big institutions.  Most likely the “buy weakness, sell strength” trade will remain the best trade through the summer.

Alternate Outcome:
Recent volatility cleared a lot of weak holders from the market, building the foundation for the next move higher.  Sometimes we need 6 months of consolidation, other times less.  If the market holds 1,900 following a breakout to new highs, this market could defy conventional wisdom and have a strong summer season.

Trading Plan:
Dip buyers should already be in and bears are better served waiting for a better entry point.  Long-term investors should continue holding, but wait for better prices to add to their favorite positions.

Plan your trade; trade your plan

Calm returns

By Jani Ziedins | End of Day Analysis

End of Day Analysis

MARKET BEHAVIOR
Volatility virtually disappeared on a calm climb 0.5% higher Tuesday, a welcome break following Monday’s 60-point whipsaw.  There was a little movement in the first couple hours, but after that the market settled into a couple of point range just under 1,880.  This level morphed into a ceiling we bumped into several times and were unable to break through.

MARKET SENTIMENT
Everyone who wanted to sell already sold and the lack of reactive trading allowed the market to calm down climb higher without much fuss.  There is a finite supply of owners that can be spooked out by gloomy headlines and near-term volatility, and it seems we reached our limit when Monday’s price-action undercut recent technical levels.  That was the signal for the last of the hopeful holdouts to cut bait and once they finished selling, the market rebounded on the absence of selling.  Reacting to pain often flushes traders out at the exact wrong time and that appears to be the case for anyone who sold the dip under 1,860.

While we ran out of sellers, the next question becomes, who will buy this rebound?  The near-term answer is shorts getting squeezed, momentum traders, and breakout buyers will provide lift to 1,900, but after that it is harder to identify the incremental buyer.  In prior tests of record highs, demand dried up and we stumbled lower.  Are buyers finally ready to embrace these fundamentals and political headlines?  I’m not so sure this is the start of the next rally leg.  More likely the sideways trade will continue until big money managers return from summer vacation this fall.

TRADING OPPORTUNITIES
Expected Outcome: Challenge recent highs, but struggle to find new buyers needed to sustain the move.
While recent predictions of a 20% correction appear premature, not bad doesn’t automatically mean good.  We saw large gains last year and it is perfectly reasonable to trade sideways for an extended period.  Barring some headline catastrophe, the summer will probably be relatively uneventful as we continue trading between the 1,800ish/1,900ish levels.

Alternate Outcome:
The market chopped around since the start of the year and that goes a long way to consolidating last year’s gains.  Fear and respect for the market has returned to relatively healthy levels and those contribute to building a foundation for the next move higher.  While that move might come this fall, it could also be here earlier than anyone expects.

Trading Plan:
Buy weakness and sell strength.  The best time to buy this market was when everyone was scared, not as it breathes a sigh of relief.  As we push toward the highs, this is a better place to contemplate taking profits than initiating new positions.  While we likely have more upside, use a trailing stop to protect recent profits.  Bears need to wait a little longer before challenging this rebound.

Plan your trade; trade your plan

Cleared for takeoff

By Jani Ziedins | End of Day Analysis

End of Day Analysis

MARKET BEHAVIOR
It was a volatile but productive day.  Stocks surged higher in early trade, imploded and sliced through support, and rebounded back into the green by the close.  The volatility saw us move more than 60-points intraday and trading volume was the most enthusiastic we’ve seen in some time.

MARKET SENTIMENT
If someone was bored Monday, clearly they were not paying attention.  The price action was as dramatic as it gets and left both bulls and bears bloodied.  It seduced dip buyers with early strength, crushed their soul with a 30-point collapse, built up the hopes of the bears before smashing them to pieces with a late day rally back into the green.

While it was tough to be optimistic midday, the strong close on high volume was as bullish of a sign as it gets.  The best capitulation bottoms undercut recent support, sending optimists scrambling for cover.  This surge of selling eventually exhausts supply and we bounce higher when shares become scarce.  That was exactly what happened today and likely means 1,900 is easily within reach.

TRADING OPPORTUNITIES
Expected Outcome:  Push toward all-time highs
Today’s move was as bullish as it gets.  We flushed out weak owners and replaced them with confident buyers willing to own this weakness.  If anyone could hold this volatility and fear, there is little that will scare them and they are in it for the long haul.  When the majority of the market becomes uninterested in selling, supply tightens and prices head higher.

Alternate Outcome:
While it is hard to be bearish given how the market traded today, failing to build on these gains will be a huge warning flag.  Undercutting 1,850 over the next couple days means the lows in mid-April are in jeopardy.  We’ve been given the green light to go higher, but if the market cannot rally following this textbook capitulation bottom, then plenty of downside remains.

Trading Plan:
The selloff is over and shorts should cover if they haven’t already.  Swing traders can hold on for a test of old highs, but I’m still not convinced this move will lead to another large rally leg.  Instead, expect the sideways trade to continue into the Fall and take profits early and often.

Plan your trade; trade your plan

Why the selloff didn’t continue

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks traded quietly ahead of the three-day weekend.  We continue holding recent gains and remain above prior support at 1,850 and the 50dma.  This bounce recovered more than half of the recent 80-point sell off and puts the market on more solid footing.

MARKET SENTIMENT
The selloff for no reason was met by the rebound for no reason.  Big moves are driven by traders changing their outlook on the future due to unexpected headlines.  Smaller moves are the result of the natural ebb and flow of supply and demand.  The recent selloff was nothing more than a modest pullback when demand dried up near 1,900.  While the selloff felt dramatic and spooked many traders, nothing happened over the last couple weeks that changed traders’ economic expectations.  Those that expected the economy to continue improving two-weeks ago still feel the same today.  We didn’t get fundamental data that made big money managers adjust their economic outlook lower and is why we bounced sooner than many predicted.

Last week’s reactionary selling wasn’t due to people thinking the economy was taking a nose dive, but because they thought the market was going to take a nosedive.  That a key piece of information technicians miss when they lump all trading activity together in a chart. Supply and demand moves are smaller and more common than fundamentally driven ones.  While many were calling for a 10 or 20% correction likes we’ve seen in years past, what these prognosticators forget is those corrections were driven by dramatic headlines that forced traders to adjust their economic outlook.  Euro Contagion and the downgrade of US debt threatened the viability of our financial system and is why those headlines lead to big selloffs.  Traders were no longer confident about what the future held.  This time around we didn’t have gut-wrenching headlines backing up this selling and is why I felt fairly confident this move would bottom while others were predicting we were falling off a cliff.  While the chart looked scary, we lacked a fundamental reason to drive confident owners out of the market.  While this weakness spooked out impulsive and reactive traders, there was little substance to rattle the nerves of more confident owners.

TRADING OPPORTUNITIES
Expected Outcome: There is still more upside left in this rebound, but it is unlikely to lead to a new rally leg.
Traders are breathing a sigh of relief as the emotion driven selling abates.  We will likely see more buying next week as people feel more comfortable owning this market and they chase the bounce.  While this move largely puts fears of a 20% correction behind us, the coast is not clear.  The market will likely remain in a trading range through the summer.

Alternate Outcome:
Big declines often have multiple false bottoms along the way and this weeks strength could just be a sucker’s rally.

Trading Plan:
It is a little late to buy the dip.  The best trading opportunities come from the most uncomfortable situations.  Buying after four up-days is hardly uncomfortable.  We will likely see a few down days next week that flush out the late dip-buyers and tempt the bears to go short.  While I still think there is more upside in this rebound, most of the easy money is behind us and the next couple dozen points of upside will be more bumpy.

Plan your trade; trade your plan

Huge intraday reversal

By Jani Ziedins | End of Day Analysis

End of Day Analysis

MARKET BEHAVIOR
Fascinating day as we traveled well over 60-points intraday.  We surged higher at the open, collapsed near recent lows by midday, only to see us race back up to the early highs by the close.  Volume was elevated and one of the busiest days we’ve seen this month.  We finished a hair under the 50dma and just a few points from prior support near 1,850.

MARKET SENTIMENT
Did today’s trade signal a capitulation bottom?  It sure felt like it.  Early strength pushed us to the 50dma, a technical level that often acts as overhead resistance.  Bearish traders used this mark to open the floodgates and their selling sent us down 30-points.  But as just quickly as the selling started, it exhausted itself and we rallied 30-points on tight supply.  No doubt this whiplash carried most reactive traders out on a stretcher.

This volatility is cathartic as it flushed out weak traders and seduced bears to short with both hands.  All that selling clearly pressured the market, but the frenzy stalled midday when there was no one left to sell.  When we run out of sellers, supply dries up and there is nowhere to go but higher.  And this strength is likely to continue given our proximity to the 50dma and 1,850.  Modest gains Wednesday could send shorts scrambling for cover and set off a dip-buying frenzy.

TRADING OPPORTUNITIES
Expected Outcome: We most likely put in a bottom to this modest selloff.
The most profitable trade of 2014 has been buying weakness and selling strength.  It appears this is no different.  The best time to buy is when everyone fears we will continue lower.  Anyone expecting lower prices already sold and they were replaced by confident dip-buyers willing to own the risk.  Purging weak-hands and infusing strong-hands is the best way to turn this market around.

Alternate Outcome:
Every dip is buyable until the one that isn’t.  While I still believe we need a headline event to dramatically lower investor’s expectations of future profits and earnings, sometimes fear is all it takes to turn confident owners into panicked sellers.  Even as this volatility flushed many weak holders, without a doubt we could easily see another leg lower before this is all done.

Trading Plan:
The best trades are often the hardest to make.  Buying recent weakness was not easy and will likely turn out to be the right trade.  Shorts should consider locking in profits, or at the very least protect themselves with a trailing stop.  Dip-buyers should get ready to ride the short-squeeze higher.  Since we are in the middle of a holiday shortened week, we should expect continued volatility due to lighter than normal volume.

Plan your trade; trade your plan

Finally time to buy the dip?

By Jani Ziedins | End of Day Analysis

End of Day Analysis

MARKET BEHAVIOR
Stocks sliced through any semblance of support as the selloff continues.  We fell over 80-points from the all-time highs set last Friday.  This includes breaking the 50dma Thursday and continuing lower on Friday.

MARKET SENTIMENT
It is hard for the financial press to come up with a justification for this selloff other than “profit taking”.  There are no fundamental headlines dominating trading rooms and it largely seems like people are selling for no other reason than everyone else is selling.  The high-flyers are taking it the hardest, down 20 and 30%.  Some claim the death of these mo-mo stocks signals the end of this bull run, but here is the thing, markets typically top when the hottest stocks continue higher while everything else drops back.  During the dot-com boom, brick-and-mortar companies were shunned while everyone was piling into speculative internet stocks.  Today we have the opposite.  The momentum darlings are down double digits while the broad market only slipped a few percent.  Is this the end of the bull market?  Not if we use history as a guide.

Stocks fall for only two reasons, waves of selling or lack of demand.  A rush of sell orders is the stereotypical selloff and fairly intuitive.  This is when everyone hits the sell button at the same time and that surge of supply overwhelms demand, crushing prices.  The less intuitive reason prices fall is lack of demand.  This is when most traders still believe in the market, but prices come under pressure because prospective buyers wait patiently for more attractive prices.  

Surges of buying and selling often see volume leap 30 and 40% above average, but over this 80-point slide, the most elevated volume we’ve seen was 8% above average.  That hardly qualifies as a mass exodus.  The lack of huge selling volumes suggests most owners are confidently sitting through this weakness and these price declines are largely driven by lack of demand.  This is important because it gives us insight into where we are headed next.  

TRADING OPPORTUNITIES
Expected Outcome:
There are two kinds of selloffs, those driven by fearful headlines and those that seem to fall for no reason at all.  This week’s selloff  lacks a fundamental catalyst and these mysterious selloffs are primarily caused by supply and demand imbalances.  All of the big selloffs people remember and fear are triggered by a fundamental catalyst that sent shivers of fear through the market.  Contagion, Default, Taper, Sequester, etc.  Confident owners need a boogeyman to shatter their confidence and turn them into sacred sellers.  So far we don’t have a boogeyman and that likely means this selloff will be more shallow since fewer owners will impulsively sell the fear mongering.

Alternate Outcome:
Sometimes we don’t figure out why a market is selling off until after it already happened.  If this market continues collapsing, the financial press will invent a reason.  While today’s selloff stalled just above 1,810, we could see a fresh round of emotional and reactive selling if we breach 1,800 next week.

Trading Plan:
The best profit opportunities are born from the most uncomfortable situations.  Buying the dip Wednesday after holding support was the easy, and wrong, trade.  Buying now that we’ve crashed through support is far more difficult.  And that is what likely makes it the right trade.  Without a fundamental driver, expect this selloff to stall soon.  Shorts should look to take profits and bold dip-buyers can take a chance.

Plan your trade; trade your plan

Sell the fear?

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks sold off for a second day, slicing over 50-points from Friday’s intraday highs.  We are just above the 50dma, but under 1,850 support.  Volume was elevated, but only just above average, so this move doesn’t qualify as a stampede for the exits.

MARKET SENTIMENT
Easy come, easy go.  Friday we set record highs following a respectable employment, but its been all downhill since then.  While there are no major headlines to speak of, many high-fliers are crumbling and that is dampening the mood in the rest of the market.  We haven’t seen major waves of selling indicating most owners are largely holding through the dip.  This weakness is primarily coming from the absence of demand as anyone with money was reluctant to buy all-time highs as we ran out of momentum chasers.

Typically there are two types of large selloffs.  The first is the familiar headline driven panic selling.  This is typified by overwhelming fear the market is about to crumble because some structural flaw has just been uncovered.  That doesn’t seem to be the case here since the best most people can come up to explain this weakness is “profit-taking”.  The other type of extended decline is the “stealth” selloff.  This is the one that sneaks up on us by lulling traders into complacency.  These are the declines that no one notices because they are trivial by themselves, but over time they add up.  The last-two days of weakness is many things, but stealth is not one of them.

The emotion and pain of the recent plunge sent most with a weak stomach running for cover.  Most of these are the late to the party momentum chasers and breakout buyers.  They are the ones that first showed losing trades and are the most likely to impulsively pull the plug.  Now that many of these flaky owners have jumped ship, they were replaced by more confident buyers willing to own the uncertainty and this is the start of the bottoming process.  This selloff will finally end when the supply of sellers dries up after all who were inclined to sell already sold.  Given how transfixed the market has been by the last two days, we are probably getting close to this capitulation point.

TRADING OPPORTUNITIES
Expected Outcome: A little more weakness before finding a bottom under the 50dma.
Short-term traders are well aware of this weakness and many sold as we undercut their stop-losses.  This autopilot selling is provided much of the downside pressure, but now that many of these traders are out of the market, that overhang has been removed.  What hurt us today cannot hurt us tomorrow.  While we likely have some traders barely holding on and slipping under the 50dma will flush this last wave out, once these stragglers sell, expect the market to run short of supply and bounce.

Alternate Outcome:
Nothing shatters confidence like losing money.  No matter how confident we are, when everyone else is rushing for the exits, it forces us to wonder if they know something we don’t.  All of us have our breaking point before we succumb to the emotional pressure and join the herd.  If the market doesn’t find a bottom shortly after breaking the 50dma, the selling will likely continue as previously confident holders start selling first and asking questions later.

Trading Plan:
The market will likely find support near the 50dma in coming days, but if it doesn’t bounce in a v-shaped rebound, it needs one last plunge lower before returning to 1,900.  Long-term traders should ignore this volatility, but short-term traders can look for an interesting entry point when the crowd is convinced we are on the verge of a dramatic plunge lower.

Plan your trade; trade your plan

Waiting for new highs

By Jani Ziedins | End of Day Analysis

End of Day Analysis

MARKET BEHAVIOR|
Stocks are just shy of all-time highs as the sideways trade continues.  Today was the last day of the quarter and volume was well under average yet again.  The market has largely traded between 1,840 and 1,885 since mid-February and Monday’s strength pushes us back into the upper half of that range.

MARKET SENTIMENT
Owners don’t want to sell and those with cash don’t want to buy.  This standoff leaves us trading sideways on low volume.  Holding these levels for several weeks gives the edge to bulls since markets tend to roll over from unsustainable levels fairly quickly.  Bears keep predicting an imminent sell off and while we might be approaching one, we need a material catalyst to kick it off, something that has so far been MIA.  To this point owners have ignored any and all bad news as they continue holding stocks and that reluctance to sell keeps supply tight, allowing this market to maintain current levels even on low demand.

While many shorts were chased out of the market in February’s rebound,  this sideways trade seduced many of them back in.  They shorted every dip to 1,840, but since many have stop-losses above recent highs near 1,885, that means many of these shorts have not been shaken out by recent volatility.  While those in cash might be reluctant to buy stock, shorts with automatic stop-losses above 1,885 will fuel a short squeeze and provide the lift needed to push us to new highs.

Whether this breakout is ultimately sustainable is in the hands of those sitting on cash.  Will they buy the breakout, or will they patiently wait for more attractive prices?  It seems like many of those that believe in this market are already in, leaving fewer left to chase a breakout higher.  Larger selloffs in recent years occurred in the low-volume summer months and sitting near all-time highs leaves us vulnerable to the inevitable bout of periodic selling.

TRADING OPPORTUNITIES
Expected Outcome:
The market is poised to hit all-time highs in coming days, but demand will likely dry up following the primarily short-squeeze driven gains.

Alternate Outcome:
The market is only up a handful of points since the start of the year and this sideways consolidation could be setting the stage for the next round of bull market gains.

Trading Plan:
As always, it comes down to timeframe.  Long-term investors can and should ignore these near-term fluctuations.  The one exception is deciding when to add new positions.  We are near all-time highs and patient, long-term investors will likely see better prices at some point over the next six-months.  There is no reason for these long-term investors to try to time the market with their existing positions, but they can hold off on making new purchases.

Intermediate investors can consider proactively locking in profits in anticipation of a pullback into the 1,750/1,850 trading range, or at the very least employ a trailing stop to protect recent profits.  More nimble traders can wait for the short-squeeze to all-time highs and short the market if it stalls shortly after.

Plan your trade; trade your plan 

Choppy trade continues

By Jani Ziedins | End of Day Analysis

End of Day Update

MARKET BEHAVIOR
Stocks retreated from early gains and finished just above 1,850 support as they continue bouncing around between 1,850 and 1,880.  Volatility is increasing as intraday ranges span more than one percent, but the market is not moving higher or lower as each gain or loss is quickly unwound the next day.

MARKET SENTIMENT
Owners don’t want to sell and those with cash don’t want to buy.  This standoff leaves us trading sideways as both demand and supply remain balanced.  Volume has been light, probably due to big money managers taking their kids skiing for spring break.  The big questions is what will happen when they come back to work.  Will they start locking in profits or bidding up the price of stocks?

Complacency is the rule as geopolitical conflict between Western Europe and the world’s largest oil producer largely goes unnoticed.  The best profit opportunities arise when the market overreacts to some fear mongering and owners give away their stock at steep discounts.  Those reduced prices compensate dip buyers for taking the risk, but near record highs there is little reason to own the risk since no one is willing to pay us for it.  While momentum is still higher, making money in the markets comes from balancing risk and reward.

TRADING OPPORTUNITIES
Expected Outcome: At the upper end of a trading range
Stocks have either stalled above 1,850 and are on the verge of reversing, or they are resting before making their next move higher.  And to be honest, I could easily see either outcome happening.  Sometimes we don’t have an edge on the market and it is best to wait for the next trade with better odds.  Everyone can make money in the markets, the hard part is keeping it.  The number one way people give back profits is forcing trades when there isn’t one.

Plan you trade; trade your plan

Yellen spooks the market

By Jani Ziedins | End of Day Analysis

End of Day Analysis

MARKET BEHAVIOR
It was a quiet day up until Janet Yellen rattled the markets with her first press conference.  Stocks plunged dramatically to 1,850, but found support at this key level and bounced off the lows by the close.  The intraday range stretched nearly 25-points, but the market finished down just 11.5 points.

MARKET SENTIMENT
Yellen was supposed to be more dovish than Bernanke, but her revelation that interest rates could be raised within six-months of the end of QE was faster than many expected.  This means we could see short-term interest rates increased as soon as a year from now.  But most likely the market overreacted to this news.  Number one, the Fed would only make this move if the economy is improving enough to withstand higher rates.  And two, going from zero percent to one percent still counts as stupid low rates by historic standards.  This is nowhere near the four and five percent rates that are used to throw cold water on overheated economies.

TRADING OPPORTUNITIES
Expected Outcome: Stocks are at the upper end of the recent range and vulnerable to falling back into it
As traders we should embrace market overreactions because that is what profit opportunities are made of.   If stocks were always priced appropriately, then we couldn’t make money except through dumb luck.  The question now becomes if the overreaction will be to the upside or the downside.  Will the market continue ignoring risk as it pushes to new highs?  Or will traders develop an irrational fear of Yellen and run for cover every time she steps near a microphone?  Given how quickly traders brushed off conflict with the world’s largest oil producer, I don’t expect the market to panic over Yellen’s comments either.  But rather than think for the market, we will let it decide for itself.  If the selloff builds momentum, we could see another Taper Tantrum like selloff.  If we hold these levels tomorrow, then the Fed meeting is already old news.  When the market gets upset, it is painfully obvious and it won’t take long to tell what the market is thinking.

Trading Plan:
If the market holds these levels tomorrow, we’ll probably drift up to 1,900 before demand becomes an issue.  Crash through 1,850 and previously confident owners might not remain so confident.  Be careful with long positions here since the upside is far more limited than the downside.

Plan your trade; trade your plan