Category Archives for "End of Day Analysis"

PM: Running out of buyers

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Stocks ran up  at the open on encouraging developments out of Europe, rising to the increasingly important 1565, but quickly lost steam and slid nearly 20-points by late morning.  Volume was again below average and continues the recent pattern of restrained trade.

MARKET SENTIMENT

Today’s selloff was reminiscent of a market disappointed by bad news, not on the receiving end of good news.  We had a Cyprus resolution and over the weekend and many predicted all-time highs were a done deal.  After the first few minutes of trade, it looked like they were right, but then buying completely dried up and stocks tumbled.  The news will try to explain it as this or that, but the truth is we simply ran out of new buyers.

So far Cyprus is setting up a sell the news trade.  We didn’t get a short-squeeze or momentum buying on the heels of early strength and encouraging news.  The market simply stalled and rolled over.  This is a big flag for bulls.  The market bounced countless times over the last three-months, each rebound consuming a chunk of available buyers.  After a certain point, no matter how great the news, the market will top when it runs out of buyers  I can’t say for certain this is what happened, but it seems more likely than not.

TRADING OPPORTUNITIES

Expected Outcome:
There is a lot of risk in this market.  Without a doubt we could continue higher, but before placing a trade we have to understand the risk/reward.  The market might have another 25-points of upside here, clearing all-time highs at 1576, but we could also be on the verge of a very typical, normal, and healthy 5 to 10% dip.  Typically we will see three 5% dips and one 10% pullback in any given year.  (20% dips are less common, occurring once every 3.5 years on average)  Even if this is a garden variety 5% dip, that is 75-points.  Making trades with 75-point risk for 25-points profit will send a trader to the poor house pretty quick.

Alternate Outcome:
No matter what the signals say, we are still within 1% of the highs and the up-trend remains in tact.  Predicting anything but a continuation is going against the trend and is often the low-probability trade.  Picking tops is risky, and not many people do it well.  But there is a difference between picking a top and taking the chips off the table.  It is very aggressive to short this market, but taking profits after such a nice run is extremely conservative and is what successful traders do with worthwhile profits.  We are in this to make money and the only way we can do that is selling our winners.

Stay safe

PM: Down-Up-Down-Up

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Markets bounced back, but will it last?  AAPL finally broke above the 50dma for the first time in nearly 6-months, does this mean the worst is behind us?

MARKET BEHAVIOR

Stocks bounced back on Friday, completing a four-day pattern of down-up-down-up.  We finished nearly where we started and this volatility did nothing but humiliate bulls and bears who reacted to these gyrations.  Volume was the lightest in over a month and 17% below normal.

MARKET SENTIMENT

The market is within ten-points of all-time closing highs and many pundits predict a Cyprus resolution will finally push us over the top.  They will only be right if that is the unexpected outcome.  If it is widely expected, it is already be priced in and the market will quickly move on to the next obsession.

The frustrating thing about meeting expectations is it doesn’t move the market.  People position their portfolio based on their expectations of the future.  If everyone expected Cyprus will be a non-issue, they already looked past Cyprus when positioning their portfolio this week.  When the Cyprus issue is resolved, since it was widely expected, no one will adjust their holdings based on this news, and without new buying and selling, the market will not react.  This single concept is the bane of fundamental and news traders because they expect news or data will cause the market to move one direction, but it often moves another simply because that news and data was already priced in.

If we take Cyprus out of the picture, what are we left with?  A fairly bullish market.  No one is talking about Sequester, Debt Ceiling, or slowing growth anymore.  Even these Euro fears are isolated to an island of 800,000 people and the PIIGS hardly get a mention (Portugal, Ireland, Italy  Greece, and Spain).  If you followed the news the last few weeks, you wouldn’t even know Asia exists because they don’t get any coverage.  Where did all the worrywarts go?  If everyone is positive, should the contrarian be worried?

TRADING OPPORTUNITIES

Expected Outcome
I have a hard time coming up with a good reason to own this market other than momentum.  Without a doubt trends are more likely to continue than reverse, but at the same time, every rally must top.  I embrace cynicism with open arms and have been bullish this entire rally from the November lows.  Here is a quote from my November 15th post, the last down-day before the market bounced for good:

“The selloff has coiled the spring for an upside move pretty darn tight and the smallest bit of good news is bound to set of a gigantic bear trap.  On the other side, a huge number of skittish sellers have already sold, meaning the  potential supply is dwindling by the day.  This is setting up for a fairly asymmetrical trade where the upside potential is larger than the downside risk.  There is no reason to jump out in front of this meat grinder, but wait patiently for the right opportunity to snap up heavily discounted shares from emotional sellers and their pain will be your gain.”

I am not a bear, I am not a bull, I’m an opportunist.  I am not perfect, but I am pretty good at this stuff, and right now I am nervous.  That doesn’t mean this market cannot go higher, and in fact my I was fairly constructive of the market on November 14th, just before we had one last selloff, but hopefully no one is going to nit-pick missing the bottom by a couple of days.

I don’t have a crystal ball and many of my earlier calls have been aided by a healthy dose of luck, but this market just makes me nervous.  Maybe I am early here, but I’m okay with that.  I would rather be out of the market wishing I was in, than in the market wishing I was out.

Alternate Outcome:
The conservative trade is always to get out early and that is what I did.  I pulled the plug over a week ago at 1555 and the market rallied higher after I sold, but I also missed out on the last week of volatile swings and have been looking for my next trade ever since.  My goal is to get out early and I clearly did that here, the question is just how early.  Did we already put in the top on the 14th?  Will we set a new all-time closing high?  How about the all-time intraday high?  What about 1600?  All of those are possible and I sacrificed profit by selling too early, but it is impossible to get the top, so either we sell too early or we sell too late.  I like selling too early because I am in a better position to identify the next high-probability trade when I am sitting on cash instead of worrying if I should sell or hold weakness.  Obviously the alternate outcome is a continuation from here and I am watching closely for signals that I should get back in.

AAPL daily at end of day

INDIVIDUAL STOCK

AAPL finally did it, it traded above the 50dam for the first time since October 5th.  For such a momentous occasion, volume was suspiciously light.  Without a doubt low-volume could be a positive signal because it shows a huge pool of cynical buyers waiting in the wings to buy this stock.  But that ignores the fact it is downright difficult to find an AAPL bear among the throngs of AAPL defenders.  If I am reading sentiment correctly, the bullish attitude in the stock indicates the low-volume breakout is already running short of buyers before it even makes its first breakout.  Clearly I am biased here, but I have serious doubts about the sustainability of the rebound and view the next $20 as an opportunity to sell strength.

How to trade this, the momentum is clearly higher and a nimble speculator could ride this higher for another $20.  But if buying is coming from short-term traders buying the breakout, expect the move to be short-term as they quickly lock in profits.   A bigger concern is failing to hold the 50dma shows a lack of follow on buying and likely means we are headed lower.

Stay safe

PM: Can we still make all-time highs?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Stocks couldn’t hold yesterday’s gains and closed under 1550 and the struggle to break all-time highs continues.  AAPL saw midday strength fade into the close as the stock is still looking for the incremental buyer.

MARKET BEHAVIOR

Stocks dipped and ended near 1545.  The all-time closing high is proving more difficult than anyone expected when we finished just two-points shy of that historic mark last week.  Volume was below average today and continues the trend of apathetic trade.

MARKET SENTIMENT

It’s not often we see the market dip nearly a percent on light volume.  There is something quite unusual about the lack of selling by holders as we break key technical support at 1550.  Are they are asleep at the wheel?

Light-volume means different things at different stages in the market cycle.  Low-volume dips always signal holders are resisting the temptation to sell into weakness.  As the rally is bouncing off previous lows, the market is primarily made up of value investors who trust their analysis and are less concerned with daily fluctuations.  This is why they willingly hold through volatility early in the rally.  Later on these value investors are replaced by momentum chasers as the rally continues breeding complacency the higher it goes.  But the key difference is on the buying side.  Early in a rally, cynicism rampant and these traders resist the young rally, meaning there is still ample supply of buyers available to push the market higher.   Late in the rally, most of the cynics have changed sides and jumped on the bandwagon, meaning there are few buyers left.  More simply, markets rally in the face of fear and decline on the back of complacency.

TRADING OPPORTUNITIES

Expected Outcome:
It is increasingly likely we won’t set new highs.  The market was rebuffed two-times after closing above 1560.  Friday might be the last shot we have at this historic level, but even then that milestone is a better short entry than breakout buy.

Alternate Outcome:
1550 is providing a sticky level and the market has bounced back from several dips below it already.  Part of the reason volume was so light today when we dipped through 1550 is Tuesday’s violation of this technical level already triggered most of the stop-losses, meaning there was less selling this time.  To continue higher, the market needs to prove it can break and then hold 1565.  The trend is still higher, but this late in the game it needs to show me it still has legs.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL’s midday strength faded into the close.  I’ve stopped paying attention to rumors so I really don’t know what caused the midday surge.  It seems the market is also increasingly cynical of these big intraday moves since this one didn’t even hold through the close.  Rumors of new products or cash distributions are the boy who cried wolf.  One of these days it will be true, but by that point the market will have stopped listening.

The 50dma is still the technical level to follow and breaking above this will trigger a wave of momentum, swing, and dip buying.   Ride the trade higher, but take profits early because these short-term traders will sell after a $40 move up to technical resistance.  On the other hand, failing to reclaim the 50dma shows no one is interested in buying the stock and it will breakdown to new lows, most likely $400.

Stay safe

PM: Rally on

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Markets shook off previous worries and have their sights set on all-time highs again.  AAPL could not hang with the market and continues struggling with the 50dma.

MARKET BEHAVIOR

Markets bounced back from Cyprus induced weakness and closed less than 10-points from the all-time closing record.  Volume was lighter than yesterday’s selloff and continues the trend of below average trade.

MARKET SENTIMENT

This market is persistent.  No matter what headline is thrown at it, it bounces back hardly missing a beat.  Of all the bad news this rally shrugged off, it was unlikely it would be taken down by banking problems in a tiny island most didn’t even know was part of the Euro Zone.  Today’s rebound confirms most traders either don’t care or assume it will be resolved without wider implications.  Right or wrong, we trade the market and this is what it thinks about Cyprus.

Resilience in the face of countless negative headlines shows just how committed holders have become.  They are stubbornly holding for more gains no matter what they say on CNBC or write in the WSJ.  Their holding is the source of the light volume, if holders are not selling, there is nothing to trade.

Today’s flat trade after the opening gap is also telling.  It shows shorts were not driven from this market in the typical relentlessly climbing short-squeeze.  Either shorts are confidently holding on, or they just aren’t there.  Given the lack of recent short-squeezes triggered by new highs and unexpectedly bullish employment news indicates most bears have either changed sides and joined the bull bandwagon or given up and gone home.   Either way this is a significant shift in sentiment and trader positioning.

Bouncing back from Cyprus is just one more reason for bulls to relax and enjoy the ride.  This market is gaining wide recognition as the rally that just won’t quit and no one needs to worry about anything because everything is under control.  And that is exactly what I am afraid of.

TRADING OPPORTUNITIES

Expected Outcome:
The rally remains intact.  I can’t tell you if we will see 5, 10, 25 or 50 points of upside from here, but I suspect it will be on the lower end of the range.  This market has become too easy for bulls and obvious for the casual observer.  It has also beat bears into submission to the point where they are not even trying anymore.  At this point it is hard to imagine people becoming even more bullish on this market and the last of the buyers are finally streaming in.

1565 and 1576 are the levels everyone is watching and I actually wonder if we will see a wave of selling hit the markets at those levels since there are so few left to buy the breakout.  It will be interesting to watch how the market responds to these levels, assuming we get there.

The high-probability trade remains sitting this one out and waiting for the next trade, likely shorting the completion of this head-and-shoulders pattern.  I wonder if sell in May comes early this year and if we fall to 1400, we could actually see a Summer rally this year.

Alternate Outcome:
This market could continue higher if the new-high headlines hit Main Street and triggers an influx of new investment from the general public.  While this will happen over time, it won’t occur at a rate high enough to affect the near-term trade.  The great rotation out of bonds and other secure investments into equities will take many years and will drive a secular bull market, but it will not be enough to avert the normal dips, pullbacks, and corrections every market experiences.

While I am out of the market waiting to get short, I will watch for strength carrying over into the second quarter.  I will consider going long again if it looks like there is more sustainable support and strength left in this market, but it will have to prove it to me first.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL didn’t share in the markets good day, but that’s nothing new since AAPL disconnected from the market months ago.  Without a doubt this stock will find a bottom.  Have we already passed that point, or are we standing on another trapdoor?  We can actually start thinking about Q1 earnings because that is the next major catalyst guaranteed to happen.  Dividend/buyback/product launch might or might not happen and we can’t plan on these events.  It seems Q1 and Q2 expectations have been ratcheted down a fair bit, but that is likely offset by the high level of optimism remaining in the stock.

For a trade, if the stock cannot reclaim the 50dma, there is little support for a continuation and expect lower prices.  If the stock breaks above the 50dma, it will be a major milestone and look for swing, momentum, and dip buyers to flood the stock trying to make a quick buck.  But these traders are not loyal to the company and will bail after a $20-$40 move.  We should do the same because there is a monumental supply of regretful owners that are praying to get out at break-even and this will slow any potential rebound.

Stay safe

PM: Three days in a row

By Jani Ziedins | End of Day Analysis

S&P500 daily at 1:12 EST

PM Update

Stocks weakness continues.  Is this the end of the run?  AAPL is trading well for a change, what should we expect?

MARKET BEHAVIOR

Stocks closed under 1550 for the first time in nearly two-weeks and extended the losing streak to three-days.  The market finished down a modest quarter-percent, but that overlooks the wide intraday range that briefly dipped to 1538.  It will be interesting to watch 1550 in coming days to see if previous support turns into overhead resistance. Today’s selling finally registered above average volume, only the second day in over a week to trade elevated levels, but 5% above average is hardly panic levels.

MARKET SENTIMENT

This is the first time the market traded down three-days in a row this year and signals a potential shift in personality.  Previous dips rebounded with an exclamation point, yet it seems this selloff is picking up speed.  While the rally is not dead, a change in behavior is noteworthy.

We’ve been watching a potential head-and-shoulder top develop over the last few weeks.  A retreat under 1500 could bounce and form the right shoulder before continuing lower.  If, and this is a big if, we are in a H&S top, expect the market to slide as far as the 200dma and a return to 1400 would be a fairly typical 10% pullback.  I have no idea if the market will reach these levels, but it is certainly worth knowing what the downside risks are.

Recent volume is telling as both rallies and dips have been on unusually light volume.  The restrained trade shows holders continue holding no matter what direction we go.  This scarce supply is driving prices higher instead of the more typical strong demand.  Selloffs have also been limited because few holders are dumping shares in market weakness.  Holding through every dip this year has been rewarded with new highs and traders have been conditioned to wait for inevitable rebound.

TRADING OPPORTUNITIES

Expected Outcome:
1550 is the key level to watch.  Closing above this levels likely means we will finally takeout all time highs at 1565, but that is not a sign of strength, simply delaying the inevitable.  A lot of traders are comfortable with this rally, as seen by the lack of elevated selling into recent weakness.  Many have been lulled into complacency because every other dip bounced back, but there is always that final dip that doesn’t bounce and we are closer than ever to it.

The conservative trade remains sitting in cash. It’s been a great few months and the only way to win this game is locking in worth-while profits.  The aggressive trader is looking for a short entry.  A short here with a stop around 1555 sets up an attractive risk/reward.  Seven points of risk to at least 50-points of profit.  This trade has both high-probability and favorable risk/reward on its side.   Nothing is guaranteed in the markets, but it is hard to beat this setup.  If we are early, take our 7-point loss and keep looking for the next opportunity.

Alternate Outcome:
Without a doubt this market will top at some point.  There are many indications this is the top, but often markets continue longer than anyone expects.  Clearly that happened as we already far exceeded calls for a pullback going all the way back to January 3rd.  There is no reason this cannot be another head fake designed to fool bears and shakeout weak traders before resuming the uptrend.

The easiest way to identify an uptrend is by obviously watching it climb higher.  Rallying to and holding 1565 shows support for this market and continued strength into the 2nd quarter will invalidate many of my justifications for selling here.  The single greatest strength we have as individual investor is our ability to jump in and out of the market as conditions warrant.   If we sit through dips we give up the only advantage we have in this game.

INDIVIDUAL STOCKS

AAPL daily at 1:13 EST

AAPL hit its head on the 50dma, but managed to contain losses to just a quarter-percent.  Not a bad day given the size of losses we’ve seen in recent history.  Greg pointed out an interesting observation in the comments from this morning’s post that all of AAPL’s weekly closes have been at the extremes of the market’s range.  The “pain trade” as he insightfully pointed out.  We have to go back two-months before finding a week where we closed in the middle of the range.  There is no telling how far this pattern will continue, but it could provide interesting insight into trading weekly moves.  This week is shaping up as another rally week and a break above the 50dma make for an interesting swing-trade, but if we see a breakdown, look for the stock to test and even exceed the weekly low.

AMZN is trading poorly.  There are only so many times a stock can test the 50dma before breaking it.   The next stop is the 200dma.    The last time the stock broke under the 200dma, it took 5-months to recover it on stronger than expected earnings.  But even in the face of this weakness, I still don’t think the stock is breaking down because there are still far too many cynics and shorts.  I don’t think it makes a good trade but it is interesting to watch and talk about.

Stay safe

PM: Where’s the volume?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Stocks bounced back from early weakness, but volume was noticeably absent.  What does this say about the market and where it is headed?  AAPL’s strength is impressive, but is it sustainable?

MARKET BEHAVIOR

Stocks sank at the open, the biggest drop since February 25th’s massive reversal.  As volatile as the day was, volume ended surprisingly light, 12% under average.  In spite of all the headline drama, not many people were adjusting their portfolios on the heels of Cyprus news or the market’s weakness.

MARKET BEHAVIOR

Cyprus gave the financial shows a lot to talk about, but the intraday strength and low-volume shows not many traders are worried about it.  There was an initial surge of selling, but that worked through the system in a matter of minutes, allowing the market to rally near break-even by midday.  Stocks could not hold the rebound and closed in the middle of the day’s range, but not a bad day given how much hype there was over the Cyprus deposit tax.

What does this price action tell us?  Holders are still willing to hold through both negative headlines and weakness.  At times this is a virtue and others it will get us into trouble.  Over the last few months holding volatility has been rewarded as each dip bounced back to new highs.  The difference is many of those dips were on elevated volume as traders bailed en masse, fearing it was the start of another market collapse.  This time volume is below average showing traders are no longer afraid of dips.

The market is weak and traders are indifferent, does this present a contrarian trading opportunity?  By itself that doesn’t mean much, but taken with all the other signals we received lately, it sure feels like this market is living on borrowed time.  New highs and unexpected employment strength is no longer triggering short squeezes, showing shorts are finally giving up.  The rally is four-months old and covered a respectable 16%.  We are coming up on a new quarter and potential shift in market personality.  Plus a few others we’ve covered in recent posts.  Is it different this time?  It sure feels like it.

TRADING OPPORTUNITIES

Expected Outcome:
I’ve been extremely bullish on this market from the lows in November, but there comes a time in every rally when we need to get off.  We are in this to make money and can only do that by selling our winners.  This is not trying to pick a top, but saying its been a good ride and it is time to look for the next trade.  The market could very well continue a few percent higher, but the risk/reward has changed and staying in this market no longer puts the odds in our favor.  We will continue watching the market for consolidation, signaling this market has refreshed itself and will gladly buy back in if the conditions warrant.

The aggressive trader needs to be looking for a valid short entry.  Stocks can only bounce so many times before their luck runs out and this market is pushing it.  Holders willingness to hold means when the market finally starts sliding on seemingly benign news, we have finally run out of buyers and no matter how resolute holders are, without demand prices will continue declining.

Alternate Outcome:
Each dip refreshes the market because it flushes out weak holders and creates a new pool of potential buyers.  February’s dip to the 50dma was highly productive and could be a mid-rally dip on our way to much higher highs.  But rather than blindly holding on here, we need the market to prove itself.  Recovering 1560 and holding it for a couple more days supports a continuation to all-time highs.  How much more upside is left will be determined by watching how the market’s response to the new highs.  Obviously selling off is not helpful to the continuation, but so is surging higher on large volume.  Both these scenarios show we are running out of buyers.  The most sustainable trade will be sideways consolidation while holding support.

Again the risk/reward is not in our favor here, but we need to keep an open mind that February’s dip was just the midpoint in a larger rally.  Continued strength into next quarter will be a strong indication that this rally has legs.

INDIVIDUAL STOCKS

AAPL daily at end of day

AAPL came back to life on speculation of a dividend increase.  We heard this before, but much like a broken clock, if we wait long enough, eventually it will be right.  Tomorrow is the one-year anniversary of AAPL’s dividend and bulls are hoping it would be an ideal time to announce an increase.  Maybe it will finally happen, or maybe it is just another rumor put out by stock manipulators and embraced by desperate holders.

Does increasing the dividend address the reasons the stock is 35% off the highs?  Steve Jobs was notorious for his disdain for shareholders and the stock rallied strongly in spite of his lousy capital allocation strategy.  The real reason the stock peaked in September because it ran out of buyers.  Everyone who wanted AAPL already had as much as they could hold and there was no one left to buy.  Only after the stock started selling off did people mentioned concern over iPhone5 sales and increased competition.  These were just excuses used to justify the selloff, not the other way around.

To reverse the slide, AAPL needs to fix what lead to the selloff.  It needs is to find buyers.  As long as everyone continues defending AAPL, it means everyone still believes in the story and these people already own all AAPL they can hold.  The question any AAPL bull needs to answer is who is the next buyer?

The stock has a date with the 50dma in coming days and breaking through this technical level could lead to a wave of momentum buying, but these are traders not investors.  Expect these buyers to jump out for a quick buck when the stock comes against resistance between $485 and $500.  At best this stock ended the selloff and is entering a trading range, meaning the best trade is buying the dips and selling the rallies, but I still don’t buy it.  AAPL bulls outnumber bears by a large margin and this skewed sentiment means lower-lows are still likely.

Stay safe

PM: Embrace or shun this market?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Markets closed modestly lower, is this a healthy pause or the start of the end?  AAPL took off today, but does this move have legs?

MARKET BEHAVIOR

The market gave back some of Thursday’s breakout and failed to set a new all-time closing high on Friday.  Instead of just 2-points away, we are now 4-points from the record.  Volume was off the chart, largely because of futures and option expiration (quadruple witching).

MARKET SENTIMENT

Friday’s gigantic volume showed a fundamental shift in many traders’ risk profiles as both speculative and hedging options expired and future contracts were settled.  Many traders who were previously indifferent to downside volatility because they had put protection are now flying without a safety net.  This fact alone will add volatility to the market because these traders are now more sensitive to weakness.

Maybe it is a coincidence, but the last time we saw this level of turnover was Sept 14th, the market’s exact top-tic before the Fall selloff. Taken by itself, this is a trivial piece of information, but combining it with other factors sets off all kinds of warning flags.  This this rally is 4-months old.  We are approaching the end of the quarter. We have the left shoulder and head of a H&S pattern.  People are afraid to short this market as seen in the lack of short-squeezes on blowout employment and new highs.  All the experts are predicting another 25 to 50-points in this rally before pulling back.  Volume is tapering off because holders are holding for larger gains (greed) and buying is drying up (running out of buyers).  The market shrugs off bad news (sequester and negative GDP).  And half a dozen other reasons I can’t remember right now.

As comfortable as people feel, this is the riskiest the market has been since the November lows.  The paradox of the market is people are most afraid during the safest period following a dip and aggressive in the riskiest period following a large run-up.   I have no idea what the market will do next week, but I fear this market more than I have in many months.  My paranoia might be premature, but I’m okay with that.

TRADING OPPORTUNITIES

Expected Outcome:
It is hard to be constructive on this market.  Today was the second close above 1560 and another couple closes above this level on Monday and Tuesday means we are likely to make a run at all time highs above 1575.  But as traders we have to ask ourselves if 15-points of upside is worth 100-points of risk.  As far as we’ve come, there are two people in the market right now.  The greedy holding out for more and the late buying just before the top.  Is that the company we want to keep?  Or should we be looking for an exit?

As individual investors we only have one advantage in this game.  Big money has the resources, experience, and inside contacts we cannot compete with.  The one thing these guys cannot touch is the nimbleness of our size.  We are  in and out of trades in seconds where it takes big money weeks to build and exit positions.  The best use of our size advantage is pulling out when the clouds are building and the odds are against us.  If we sit through market turmoil, we give up the only advantage we have in this game.

Alternate Outcome:
The dip to the 50dma last month flushed out many weak holders, clearing the way a continuation higher.  There  easily could be another 100-points of upside left in this rally.  No one knows what the market will do and all we can do is trade probabilities.  Given all the clues we have, is the market more likely to top in the near future or continue higher?  Obviously I think the high probability outcome is topping, but because of our nimbleness we are not committed to one trade.  We can easily change our minds when new information invalidates our previous thesis.  The safest trade here is to lock in profits, but for those that want to see if there is more left in this rally, move your trailing stop-up to 1545/1550.

INDIVIDUAL STOCKS

AAPL daily at end of day

AAPL had a phenomenal day and regained levels we haven’t seen in since February.  But one day doesn’t make a trend and we need to see AAPL continue proving itself before it becomes a worthy buy candidate.  The first minor technical level to reclaim is $455, a minor peak last month on the way lower.  This would be a modest victory as the stock notches its first higher-high since the selloff began, but the real level to watch is $485.

Without a fundamental catalyst reigniting AAPL’s growth, it is unlikely the stock will trade above $485.  Dividend and buyback are nice, but they don’t change the growth story, only blowout earnings or a revolutionary new product will do that.  Can AAPL reinvent its product line again, or is it just another Sony, AOL, PALM, NOK, or BBRY? (all the most innovative companies of their day)

Stay safe

PM: Two-points shy

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Another new high as the market moves beyond support at 1550.  How much longer can we keep this up?

MARKET BEHAVIOR

Stocks had another strong day, closing within 2-points of the all-time closing high.  Volume was a little below average, but made a comeback from the previous three-sessions of extremely light volume.

MARKET SENTIMENT

This is getting interesting.  The after four-days of support at 1550, the market broke through 1560.  As we discussed, markets reverse fairly quickly, so four-days at this level made a continuation more likely than a selloff.  The question is where do we go from here?  Breaking 1565 is all but a given, what’s next?

It seems like everyone is expecting the rally to continue a bit further before rolling over.  Some predict 1575, others 1600, and even a few think 1625.  The one estimate I have yet to hear is imploding tomorrow.

We could hit 1575 on Friday easily with a short-squeeze and surge of breakout buying.  1600 is more of a stretch and I doubt we could keep this string of up-days going for another 40-points, thus it will take a couple of weeks and one dip to reach 1600.  1625 is even further and would take a month and a couple of convincing false selloffs along the way.  On the other side, we could drop to 1500 by next week and 1450 the week after since markets selloff far faster than they rally.

From here the market can go up, down, or sideways.  A sharp selloff likely means the rally is dead.  The market can only bounce so many times and we used more than our fair share getting to this point.  A dip under 1550 and finishing at the day’s lows is an interesting short entry with a stop above 1555.  A surge through 1565 and past 1575 tomorrow on huge volume signals the last buyers are chasing the rally.  This is a great time to lock-in profits and consider shorting when the market starts imploding.  Lastly, the only way we reach 1600 and beyond is if the market continues consolidating and grinding higher at a sustainable rate.

TRADING OPPORTUNITIES

Expected Outcome:
Anyone who missed this rally should not rush in since this is the riskiest the market’s been since the November lows.  If you waited this long, keep waiting for the next high-probability trade, most likely a short when this rally finally rolls over.  Anyone still in the market needs an exit plan.  Take profits early or use a trailing-stop to protect hard-earned gains.  From here 1545 is a decent a trailing-stop.

Given the above analysis, a decent trading plan is:
-Sell a strong move higher and look to short the subsequent breakdown
-Short a dip under 1550 with a stop above 1555
-Set a trailing-stop at 1545 and move it up as the market grinds higher
-If the above is too much, lock-in profits and wait for the next trade, likely shorting the breakdown

Alternate Outcome:
Many traders expect this market will rally another 25 to 50-points before rolling over.  If we want to be contrarian, we are left with two options, an imminent breakdown or marching ahead without a selloff.  Both are viable outcomes.  If everyone is looking for a top on a surge higher, it won’t happen because no one will chase it.  This could explain the modest breakouts seen the last couple weeks.  If no one chases, the market will run out of buyers without the obvious surge higher.

At the other extreme if these are too many reluctant buyers willing to buy every dip in an effort to catch this market, they will  keep pushing us higher far longer than anyone expects.  Using the above plan will help us trade anything the market throws at us.   There are no guarantees of in the market, but a sound plan moves the odds in our favor.

INDIVIDUAL STOCKS

AAPL continues trading between $425 and $435.  Churning at these levels for an extended period of time is one way to clear dead wood, potentially taking the place of another leg lower.  If we hold these levels and start rallying in the second quarter, AAPL might actually be buyable, especially if it does this in the face of a declining broad market.  Those are some big ifs, but it is possible.  Don’t rush out and buy the AAPL here because lower is still the high-probability trade, but failing to selloff would give this alternate outcome credibility.  But even if AAPL does rally, this is a trade and expect resistance at $485, especially if the rebound moves fast.

Stay safe

PM: More left in the tank?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

Stocks continue finding support, suggesting further upside.  AAPL still cannot get out of its own way and high-flyers keep flying higher.

MARKET BEHAVIOR

Stocks closed above 1550 for the 4th consecutive day and are building support for a potential continuation.  Volume was extremely light for the third-day as few are looking to buy, but even fewer are trying to sell.

MARKET SENTIMENT

Tops from unsustainable levels rollover fairly quickly.  The surge of buying pushes the price beyond what is reasonable and as soon as the euphoric demand exhausts itself, the market quickly reverses.  Present strength and support suggests there is upside left in this move.  If buying really was exhausting itself, we could not continue holding these levels.

This is a departure from what I’ve been talking about the last few days.  While the analysis showing this market is getting close to a top is still valid, recent price actions shows it is premature.  Market go further and longer than anyone expects and that seems to be the case here.  Picking tops is tricky business and there is no reliable way to do it.    The only thing we are left to decide is if we want to sell into strength on the way up, or wait for weakness and get out on the way down.   My style is selling early, but that is personal preference and everyone needs to figure out what works best for their personality and trading style.

TRADING OPPORTUNITIES

Expected Outcome:
We have to decide how much profit we need to be successful traders.  The market rose 3.3% the last two-weeks.  100% leverage doubles that return to 6.6%.  No one is going to get rich off of 6%, but what if we set a goal of capturing gains like this several times a year?    Nab a high-probability trade every other month and that adds up to a 47% ROI.  Do it once a month and it compounds to 115%!

Many traders have a hard time selling into strength because they can’t let go of missed profits when they cash-in too early.  What if waiting for those extra profits is what is holding them back?   Many would scoff at trading 3% swings in the indexes, but there is real money to be made in it.  We all have to ask ourselves why we are doing this.  Is it so we can brag to our neighbor that we bought AAPL or PCLN before they did?  Or are we in this to make money?  If the goal is making money, I’ll take boring 3% moves in the index all day long.

It is likely this market will continue higher.  We traded above 1550 for the fourth day and if it was going to breakdown it would have happened already.  If we hold 1550 again tomorrow, it is buyable for another dozen ponts higher.  If we break under 1550, that is likely the end of this rally; markets can only bounce so many times and this one is nearing its quota.

Locking-in profits here is preferable, but if a person must trade, buy support and sell a breakdown.  Keep any upside gains on a short leash, especially if the breakout is sharp and on high volume.

Alternate Outcome:
This could be the half-way point in a six-month monster rally.  There is no real reason for this market to breakdown other than running out of buyers, but the stock market rally and bond slide could keep pushing new money into stocks as the herd chases performance.  I am cautious at these levels because it seems like fear of a pullback is diminishing, but I will continue looking for signals that this move still has legs.

INDIVIDUAL STOCKS

LNKD daily at end of day

AAPL gave up a strong rebound to finish flat.  The stock rallied to $435, but hit its head sold off into the close.  What else is there to say but great company, lousy stock.  The inability to mount a meaningful rebound show the high probability trade remains lower.

AMZN, LNKD, and NFLX all added to their ridiculously obscene valuation.  The market often humiliates those that spend too much time thinking about what it should do and not enough trying to understand what it does.  There are very legitimate reasons why AMZN, LNKD, and NFLX continue higher while AAPL continues lower.  Understand what moves markets and the mystery vanishes.

Stay safe

PM: The streak ends

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

The streak ends, but it is too early to proclaim the rally is dead.  Another AAPL rumor comes and goes.

MARKET BEHAVIOR

Stocks made new highs in early trade, but couldn’t hold those gains and fell into the red by mid-morning.  From there the market chopped around, finishing near the midpoint between the daily high and low.  Volume was lower than average, but higher than Monday’s extremely light levels.

MARKET SENTIMENT

It was only time before the market ended its winning streak and we cannot read too much into today’s quarter percent decline.  The more interesting insight will come as the market responds to this selloff.  Was this just a pause on the way higher or the start of something more?  There are many signs the market is running out of buyers, most notably the lack of short-squeezes on strong employment or new highs yesterday and today.  Bears and cynics were a big part of the rally and it is a major shift in sentiment if they gave up fighting the rally.

TRADING OPPORTUNITIES

Expected Outcome:
There is not much to do here except wait for the market to reveal its intentions.  Spending a couple more days between 1550 and 1555 will demonstrate constructive support and lack of meaningful selling.  At that point we can grab on for a ride up to 1565 and 1575.  But if the market fails to hold 1550, a larger pullback is in store.  The first level of defense is 1530, then 1525, 1515, and finally 1500.

The easiest trade here is locking in profits and letting the market tell us what it wants to do next.  We are fairly deep into this rally and these things have to end at some point.  Pushing our luck for another few points of upside is getting greedy.

Alternate Outcome:
Markets often go further and longer than anyone expects.  Clearly this market did that since the chorus started calling for a pullback two-and-a-half month ago.  I am probably early in taking profits too, but I always prefer taking profits early because it is a lot easier to identify the next trade when holding cash.  This is a personal preference and everyone needs to find what works best for them.  Trailing stops also work well for people who are reluctant to sell on the way up.

If we are only half-way through this rally, there will be plenty of time to get back in.  Holding 1550 shows the market is ready to continue higher.  If the market is finally running out of buyers, it will fall apart fairly quickly.  If the market holds these levels, we can always buy back in.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL continues jerking traders around.  This was the second time in two-weeks the stock surged on rumors only to give back all those gains the next day.  Holders are so desperate for a catalyst they embrace any rumor that comes along.  This is not constructive behavior found in stock that is ready to bottom.  Until the it breaks the cycle of lower-lows and lower-highs, the down-trend remains intact.  Broad market weakness will likely put even more pressure on AAPL, pushing it under $400.  These things go further and longer than anyone expects and I don’t see sings AAPL’s selloff is coming to an end.

Stay safe

PM: Good times keep rolling

By Jani Ziedins | End of Day Analysis

S&P500 daily at 1:26 EDT

PM Update

Stocks set a new high yet again, and AAPL had an interesting day.

MARKET BEHAVIOR

Markets rose for the seventh-consecutive day on the lightest volume in a month.

MARKET SENTIMENT

Sometimes low-volume is bullish and others it’s bearish.  Like everything in the market, there are two equally valid and opposite explanations for every observance.  Early in the rally low-volume signaled reluctance and cynicism and  these holdouts provided the fuel to push the market higher.  But now that we’ve risen this far, low-volume signals the market is struggling to find new buyers and we are approaching exhaustion.

Of course this is like reading tea-leaves and if the answer was obvious everyone would know what to do.  The best we can do is use clues to identify the high-probability trade.  We’ve risen seven-consecutive days and nine of the last ten as the market  surged 70-points in two-weeks.  The market made new highs on declining volume.  We had the perfect setup for a short-squeeze between Friday’s employment surprise and today’s new highs, yet few shorts ran for cover, showing shorts are finally shying away from this market.  And lastly we are in the final weeks of a very bullish quarter.  It seem the only thing keeping this rally going is reluctance of holders to sell (greed) and that can only carry us so far.

TRADING OPPORTUNITIES

Expected Outcome:
While momentum is clearly higher, the rally is on thin ice.  At the very least it needs to consolidate recent gains near 1550 before making a sustainable assault higher.  If the market keeps reaching for all-time highs over the next couple days, look for an imminent pullback due to exhaustion.

This is a good time to take profits and reevaluate.  Even long-term investors should consider locking in a portion of their gains and wait to buy those stocks back cheaper in a month or two.  The market ran 210-points since the November lows and it is extremely optimistic to expect the rate of gains to continue indefinitely into the future.

Selling winners into strength is one of the hardest things to do, but it is what separates the successful from the wannabes.  If the average retail investor waits to sell pullbacks and successful investors claim the secret to their success is selling early, you have to decide who you want to model your trading style after.

Alternate Outcome:
Individual markets are entirely unique and one similar example would implode here while another rallies 50-points.  No one knows what will happen and the best we can do is trade probabilities.  If the high-probability trade is a near-term top, then the alternate outcome is a continuation.

The market is clearly drawn to 1565 and we could easily hit that on Tuesday.  The all-time high is just a few ponts beyond that and wouldn’t be a stretch to get there. Hitting these major milestones could trigger a new short-squeeze, propelling the market even higher.  From there it could consolidate those gains before continuing even higher.  There are plenty of examples in the last 100-years where the market strung together six-month rallies and there is nothing to say it cannot happen here.

But the best trade is sticking with probabilities and locking in profits.  No doubt the market’s momentum will carry it higher, but it is impossible to pick a top, so we shouldn’t try.  If the market exhibits sustainable strength over the next week (consolidation), we get back in.  Until then, lets catch our breath and look for the next high-probability trade.

INDIVIDUAL STOCKS

AAPL daily at 1:26 EDT

AAPL had an interesting day.  The stock popped $10 intraday over just a couple of minutes on no news.  The rumor is some major player took a huge stake and that got everyone excited.  If it really was a major money manager, they should fire their broker for negligently running the stock up like this.  Most pros ease into their positions so they don’t bid against themselves like this and is why I doubt the validity of the rumor.  And even if a major investor plowed a ton of money into the stock, that doesn’t mean he/she has any better idea of where the stock is going than we do.  (assuming this is not illegal insider trading)

The bigger question is if this pop signals the bottom is finally in.  I’ve been fairly critical of AAPL since it collapsed after earnings.  Over the last month-and-a-half any strength has been a selling opportunity.  Has the stock finally run off all the bulls and reached a capitulation point?  I still say no.  Don’t get me wrong, I’m not an AAPL hater and they make fantastic products.  I’m even rooting for the stock because it is such an important part of investor confidence and a major component of the indexes.  But at the same time I have to be a realist.  To break the down-trend the stock needs to make a higher-high.  There is a minor high at $455 and a major high at $485.  Closing at $437 does nothing to break the trend lower and buying this bounce is simply bottom-fishing.

Going forward it seems likely the stock will trade $400 before $485, especially if we see broad market weakness  in the near-term.

Stay safe

PM: What just happened?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

An interesting day in the market that gives us more questions than answers.  AAPL’s underperformance continues and AMZN defies logic and reason.

MARKET BEHAVIOR

Stocks set new highs and closed above 1550 for the first time since 2007.  Today was the sixth consecutive up-day and eighth out of nine, covering over 65-points in two-weeks.  Volume was modestly higher on a day when the employment report came in far above expectations.

MARKET SENTIMENT

It was a fascinating day and leaves us a complicated sentiment puzzle to figure out.   Stocks gaped up at the open on strong employment numbers, but it failed to trigger a short-squeeze or follow-on buying and stocks slid into the red by mid-morning.  After just a few minutes under Thursday’s close, the market found a bottom and ground higher through the day.  Volume was surprisingly average given the level of disagreement between optimists and pessimists.  We had a compelling new data point, but it failed to change many people’s mind and cause them to change their positions.

Lets breakdown what happened intraday to see if it gives us any insights into what people are thinking and how they are positioned.  The open gapped higher as a wave of buy-orders flooded the market in anticipation of a blowout day on the strong employment report.  Some was short-covering, others were headline traders, but within minutes this buying climaxed and the market reversed sharply, giving up 10-points in less than an hour.  This weakness on the heels of unexpectedly good news certainty left people scratching their head, but not long after the market found a bottom and chewed its way higher, finishing near the day’s high.

What happened here?  Obviously new buyers failed to show up after the gap higher.  The short-squeeze never materialized because shorts are afraid of this market after last week’s volatility tore them to shreds.  We might have even seen a bit of selling strength as the market finally broke 1550 and many traders felt six-days in a row was unsustainable.  This early weakness chased out the premature buyers and left others wondering if the market finally ran out of steam.  And to be honest, the market did run out of buyers.  It wasn’t dip buyers that saved the market today, but running out of sellers.  This entire rally is built on a foundation of unflappable holders and story added another chapter today.

The dip on great employment numbers, low-volume, and the slow grind higher kept bear hopes alive.  Cynicism remains and today’s employment report didn’t change anyone’s mind.  Reluctance from those sitting on the outside continues fueling this rally and the trend higher remains intact.  The one noteworthy absence was shorts and going forward we might not be able to rely on their buying each time we make a new high.

TRADING OPPORTUNITIES

Expected Outcome:
It appears sentiment stayed mostly the same in spite of today’s employment gains and the close above 1550.  This means we should expect a continuation at least temporarily.  We still need to be cautious of accelerating gains on increasing volume, but a pullback to 1545 and sideways trade next week will set the stage for more upside.

I moved my trailing-stop up to 1530 and don’t expect the market to touch this level until it is forming the right side of the head in a head-and-shoulders pattern.

Alternate Outcome:
I expect modest gains before topping in a H&S pattern.  That leaves two alternate outcomes, an immediate crash and a continuation higher.  Today’s dip on good news showed buyers are a scarce and even bullish news won’t get them off the sidelines.  We need to use a trailing stop-loss to protect recent gains from a market meltdown due to a lack of buying.

A more interesting idea is we are only half-way through this bull rally.  Last week’s pullback to the 50dma flushed out weak holders, clearing the way for a larger continuation.  It is not hard to find past examples of long rallies that had a midpoint check-back to the 50dma.  At this stage I am holding and looking for an exit, but both alternative outcomes are at the front of my mind and I am searching for any clues to support either alternative.  Next week will give us more clarity and help us identify the high-probability trade.

INDIVIDUAL STOCKS

AAPL remains stuck between $420 and $435.  Oversold stocks are like a rubber bands and snap back quickly.  Trading flat for a week moves us outside the window of a quick rebound.  AAPL’s trend of underperformance continued as the stock was only up a quarter-percent as compared to the index’s nearly half-percent gain.  Anyone still holding this stock because it cannot go any lower is about to learn a lesson in market extremes.  The market is full of great stocks and there is no reason to hold on last year’s big winner hoping for a bounce when there is so much more to choose from.

AMZN daily at end of day

NFLX continues trading above $175.  The longer we hold here, the more support the stock builds and the better chances are for a continuation.  I’d still be wary of a dip under $175 setting off a wave of stop-losses, but for the time being the stock looks good.  If someone absolutely must short this stock, only short after the stock breaks $175 and take profits at $160.

AMZN is defying skeptics, trading up to $275.  The overpriced stock that is supposed to selloff keeps holding up while everyone’s favorite stock continues breaking down.  Success in the market isn’t about investing in what should happen, but what will happen.  If too many people believe something, supply and demand will force the market to do the opposite thing.  AAPL and AMZN are perfect examples of contrarian trades.

Stay safe

PM: What will kill this rally

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

The market is consolidating gains ahead of employment, AAPL is still struggling for direction, and NFLX is building a base.

MARKET BEHAVIOR

Stocks traded flat on average volume, a nice support day for recent gains.

MARKET SENTIMENT

Neither buyers nor sellers were out in force.  Holders prefer holding for further gains and are not cashing in recent profits.  The under-invested are still sitting on their hands, hoping more than ever the expected pullback is just around the corner.

The Dow made new highs and many headlines doubt the sustainability of these gains, but so far there hasn’t been anything unsustainable about this rally.  Volume has been restrained and we checked back to the 50dma last week.  The rally has covered a lot of ground since the November lows, but that is what markets do.  The duration and size of gains are less than other rally legs over the last few years, so by that metric this bull is only  middle-aged.

Friday’s employment report is a major mile-marker and has the potential to wreck this rally.  Most would assume I’m referring to a horrible number that takes us down, but so far this market has proven immune to bad news,  even swallowing a negative GDP report without skipping a beat.  What is more likely to kill this rally is blow-out numbers sending the last of the holdouts scrambling for stock and finally exhausting supply of available buyers. Hitting 1575 over the next few days is more likely to kill this market than another dip to support. Markets often top on good news and a great employment report could be that news.

TRADING OPPORTUNITIES

Expected Outcome:
Expect volatility around employment, but there is greater upside potential than downside.  Last week flushed out most weak holders and buyers that bought in the face of weakness are far harder to rattle.  Current holders proved they will not impulsively rush for the exits and that confidence puts a floor under the market.  On the other side, a strong report will sent shorts scurrying for cover and convince holdouts to chase this market with both hands.  This will finally be our signal to get out.

Alternate Outcome:
Just because previous episodes of bad news didn’t crash this market doesn’t mean it is completely immune from shocking and unexpected news.  The key to breaking this market will be sending it sharply through previous support, triggering a massive wave of panic selling.  This is not a likely outcome given the market’s resilience to swift selling last week, but the higher we go, the more real this risk becomes.  As always, stick with our trailing-stops and don’t fight the tape if it is going against us.  Another dip under 1500 likely kills this rally leg.

INDIVIDUAL STOCKS

NFLX daily at end of day

AAPL gave up half of Tuesday’s gains when new buyers failed to show up and support the rebound.  The stock is still in free-fall and one day doesn’t make a bottom.  The most bullish scenario is a continued rebound to $455, a dip back to new lows creating a double-bottom, and then a slow and steady grind higher.  The less optimistic bottom is a sharper and deeper selloff leading to a ‘V’ bottom.  Either way expect new lows before this thing is done.  Whether that new low will undercut by $5 or $50 is still up in the air.

NFLX is bouncing along support at $175, but the more followed this level becomes, the greater the risk is if the stock breaks it.  A dip under $175 will likely set off a wave of stop-loss selling and send the stock back down to $160.  But this is actually bullish because it will flush out the late chasers and set the stock up for a rebound on the backs of short sellers.

Stay safe

PM: Sell the breakout?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

New highs, but everyone is still waiting for the pullback.  AAPL finally bounced after selling off for 12 of the last 15-days

MARKET BEHAVIOR

Stocks launched ahead 1% and finished at fresh 52-week highs.  The interesting thing is stocks traded mostly flat after 11am , neither selling off nor adding to early gains.  Volume was higher than yesterday, but still only average.

MARKET SENTIMENT

I don’t follow the Dow because it is a poorly constructed index, but the media and non-investing public does, making it noteworthy from a broad sentiment standpoint.  The Dow set an all-time high today, eclipsing the old record from 2007 and is the first major index to achieve this momentous milestone.  The Financial Meltdown is officially history and this is a significant step in healing the emotional wounds scarring an entire generation of investors.  But this is a multi-year story and it will play out over the next decade as these shell-shocked investors start wading back into equities.

A lot of traders remain reluctant to buy the new highs and are waiting for the inevitable pullback.  It didn’t happen today, but maybe tomorrow, or so the logic goes.  The truth is we will continue higher until people stop waiting for the pullback.  Right now stock holders are feeling good about themselves.  Anyone with a broadly diversified portfolio is sitting on profits and are eagerly awaiting additional gains.  Traders out of the market are feeling the pinch as they wait in vain for the breakdown that still hasn’t happened .  Obviously no one want to chase a breakout to new highs, but how much longer can they watch the market go without them?

While the last three-days of gains were decisive, they came on low-volume.  This rally isn’t a story of frenzied buying, but scarce supply as holders are not interested in selling.  Sometimes low-volume is a warning sign, others it signals a continuation.  After repeated low-volume rebounds to new highs, I don’t need to tell you which one applies here.  Right now the savvy trader is embracing the low-volume rally and fearing the high-volume surge.  When the crowd finally rushes to buy, we will take our cue to exit.

TRADING OPPORTUNITIES

Expected Outcome:
The market can do two things here, surge higher or pullback and consolidate gains.  The surge will be the last gasps of this rally before it collapses in exhaustion.  A dip tomorrow and sideways trade through the remainder of the week signals a more sustainable continuation.  We will see more chasing going into quarter end, meaning there are still a few weeks left in this rally, but we could see a couple of days of weakness first.

Alternate Outcome:
We came a long way and a lot of people are long this market.  Last week’s pullback likely put in the left shoulder of a head-and-shoulder pattern, meaning we are getting close to the top of this move.  While I don’t think today set the top of the head, we still need to honor out trailing stops to keep us from riding a winner back into the dirt. Selling  last week took some downside volatility out of the market and while a dip to 1525 is reasonable, falling under 1515 is more worrisome and a good place to set a trailing stop.

INDIVIDUAL STOCKS

AAPL daily at end of day

AAPL bounced nicely and recovered a couple percent of the recent selloff.  While the bounce is interesting, buying it is still catching a falling knife.  12 of the last 15-days were negative and the stock shed over 10% in three-weeks.  The stock continues making lower-lows and lower-highs and is not a worthy buy candidate until it breaks this trend and finally makes a higher-high.  There is a minor high at $455 and a more meaningful high at $485.

Today’s bounce could continue higher on broad market strength, but the trend remains lower.  The market often moves in a direction that will humiliate the greatest number of traders.  It seems today’s bounce brought relief, meaning the pain trade remains lower.  The selloff will likely continue until AAPL is the most hated stock and everyone is embarased to admit they still own it.  We are not there yet.  It is a great company, the problem is no one is interested in buying the stock.

Stay safe

PM: Strength continues

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

The market is within a hair of new highs and another short-squeeze all while AAPL is setting new lows.

MARKET BEHAVIOR

Stocks closed above 1525 for the first time since setting a new high back on Feb 19th.  We sold off early, but recovered and finished up 0.5%.  This strength is putting recent volatility and weakness in the rearview mirror.  Volume was below average and the lowest since Feb 22nd’s short-lived bounce.   Everyone is watching the highs at 1531 and crossing that threshold is about as certain as anything in the markets can be.  The question is what happens after.

MARKET SENTIMENT

Cynics are finding it harder and harder to resist this market.  There are countless reasons to breakdown but it keeps defying gravity.  This comeback kid is making everyone feel safer and formerly hesitant buyers are finally coming around.  But the real story is confident holders staying put in the face of volatility and weakness.  A lot of critics point to these low-volume rallies, but we continue rising on tight supply, not strong demand.  Contrary to popular opinion, tight supply is sustainable and is why the widely expected pullback remains MIA two-months later.  In fact, high-volume is something to be feared at this stage in the rally because it shows we are consuming remaining demand at an unsustainable pace.

TRADING OPPORTUNITIES

Expected Outcome:
Being so close to new highs, expect most stock owners to keep holding for further gains and supply to remain tight.  Once we breakout, look for the short-squeeze to add fuel to the fire and most likely push us through 1540.  From there it will be a question of profit taking versus chasing.

We are getting close enough to the end of the quarter that many money managers can no longer wait for the expected pullback.  They will start chasing this market so they don’t have to explain to their investors why they missed this strong market.

Alternate Outcome:
This market came a long way and we get closer to the end of this run with each passing day.  The high-probability trade remains sticking with the rally, but we always need to cover our backside just in case.  The market is moving along nicely, but the nearest stop-loss is back at 1500.  Climbing a bit higher will let us move the stop-loss, but for now we have to deal with this extra exposure.  This makes initiating a new position more risky because it is harder to use a tight stop.  The time to buy the market was breaking through 1500.

INDIVIDUAL STOCKS

AAPL daily at end of day

On a day where the indexes are flirting with new highs, AAPL carved out a fresh 52-week low as the value stock that cannot go any lower keeps going lower.  AAPL is stepping down in $10 increments and today’s dip took us from $430 to $420.  Anyone stubbornly trading this stock on fundamentals is ignoring reality here.  It was a great buy at $600, then $500, and now it will likely test $400 in coming days.

The real problem for AAPL is being over-owned and there are no new buyers interested no matter how cheap it gets.  Regardless of how great the company, if no one wants to buy the stock it will continue sliding.  All the value investors out there need to ask themselves if they are willing to hold through a dip to $350 because this level is not out of the question.  A lot of high-fliers correct 50% and in spite of all the hype and fanfare, the same rules apply to AAPL too.

As for shorts, look for a dip to $400, but don’t get too greedy because we could see a bounce at $400.  Look to re-short the stock when breaks $400 if the bounce fails.  Of course if the stock starts imploding, hold it through $400, but be ready to lock in profits because it will be setting up a sharp ‘V’ bottom once the last of the hopeful have been forced out.

Stay safe

PM: Sequester time

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

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

S&P500 daily at end of day

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.

AAPL daily at end of day

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

S&P500 daily at end of day

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.

AAPL daily at end of day

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

S&P500 daily at end of day

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

S&P500 daily at end of day

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.

NFLX daily at end of day

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