Category Archives for "Intraday Analysis"

AM: Relief

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:22 EDT

AM Update

MARKET BEHAVIOR
Stocks found support at 1560 and recovered half of yesterday’s losses by midday.  This pause breaks the runaway selling and gives nervous and indecisive traders time to evaluate the situation.  Holding 1560 is encouraging, but the critical level is former resistance at 1570.  We need to break back through this barrier to revive the breakout.

MARKET SENTIMENT
Nervous longs are breathing a sigh of relief as the selling ended and we reclaimed a big chunk of yesterday’s losses.  This is yet another example of the market rewarding indecision.  While it’s been the “smart” trade for a while, failing to act will inevitably get very expensive as indecisive and stubborn bulls give back all their profits when one of these dips fails to bounce.

Rebounding after such strong selling is typical, the bigger question is if real buying will follow the initial relief rally.  The biggest clue is holding and adding to the rebound in coming days.  Unsustainable bounces often fail within a couple of days and we should refrain from buying the dip until it demonstrates real, institutional buying and proves it is more than active traders trying to pick a bottom.

The market remains within 2% of all-time highs, showing the coiled spring is still to the downside.  That can easily continue under such circumstances, just be aware the potential for an explosive move is lower, not higher.

TRADING OPPORTUNITIES
Expected Outcome:
Things often stop working when too many people know about it and buying the dip feels that way, but it is hard to argue with the market.  We are breaking 1570 as I write this and the market keeps wanting to go higher.  My suspicions of this rally remain and there is no reason I want to own it here.  We will see a five to ten percent pullback at some point this year, whether we are on the verge of that pullback or still months away is still up for debate.

Holding above 1570 through Thursday shows this market found buyers and is ready to move higher.  Failing to hold 1570 means buyers are becoming scarce and lower prices are expected.

Alternate Outcome:
Buyers love buying this market and it is a dangerous game to argue with them.  This market will correct at some point, but that will only happen after buyers run out of money.  So far they continue jumping on every dip and until this changes, expect the rally to continue.

AAPL daily at 1:23 EDT

INDIVIDUAL STOCKS
GLD had a modest bounce from yesterday’s lows, but is struggling to add to those gains.  Selling in Gold reached extreme levels and it will bounce at some point, but the forced liquidations by over-leveraged institutions will likely continue for a while longer.  This selloff is ruining careers and companies, but it is hard to feel sorry for arrogant men who made millions while losing mountains of money for their clients.

AAPL bounced with the market and continues the sideways trade ahead of earnings next week.  I don’t really expect the stock to do much unless bulls jump on a juicy rumor or the price dips under $419 and triggers a wave of stop-loss selling.  This will be a really interesting earnings release to watch since growth expectations are nonexistent.  Are they finally low enough that AAPL can beat investor expectations?  This stock will get its relief rally, I just don’t know if the bottom will be $420 or $350.  Next week will tell us a lot and trading the subsequent surge or plunge might be the safer than gambling on the earnings.

Plan your trade; trade your plan

AM: Failing support

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:22 EDT

AM Update

MARKET BEHAVIOR
Stocks pulled back in early trade and are under 1570.  This level was recent resistance, which is supposed to become support following a sustainable breakout.  Given the strong gains last week, a pullback this week is expected.  The question is if this weakness is buyable or an early warning to get out.

MARKET SENTIMENT
The rally turns five-months old tomorrow.  We’ve seen a few dips along the way, but they are getting smaller and smaller as dip buying becomes the norm.  Early in the rally many were predicting a crash around every corner.  Traders were afraid of the market and sold ahead of the inevitable Fiscal Cliff meltdown.    When most sell before an event, they take the pressure off of the actual event and we often bounce when the news is less bad than feared.  Fast forward five-months and traders are climbing over each other to buy every dip and their enthusiastic buying prevents any real weakness from developing.  We transitioned from a market people were afraid of to one they cannot get enough of.  If markets rally in the face of fear and decline on the back of complacency, it seems like we are close to a turning point.

Sentiment is a fuzzy thing and it doesn’t give hard buy and sell signals, it simply indicates probabilities.  Is the market more likely to continue here or is pullback in the near future?     As much as people look for the magic bullet in the market, the red-light/green-light indicator, there is no such thing.  Everything in the market is fuzzy.  If this were easy, everyone would be rich.  We will never be able to predict the tip, but we can weight the probabilities of a continuation versus a pullback given the shift in sentiment.

TRADING OPPORTUNITIES
Expected Outcome:
Stocks are testing support at 1570.  This is a perfect level for dip buyers to rush in and support the rally.  If a person believes in a continuation, this is where they need to suck it up and buy the weakness.  But buying the dip seems obvious and is becoming a tired trade.  Dip buyers only have so much money and eventually there is a dip they no longer have the money to buy.  That is the dip that doesn’t bounce.  I was a bit premature in getting out of this market, but that doesn’t make the core analysis invalid.  I still am reluctant to own this market and expect wider selling before the rally will refresh and resume.

Alternate Outcome:
Traders love buying the dip and we need to look for that same trade here.  After the fear driven selling abates we need to reclaim and 1570 to prove buyers still believe in this market.   Falling back into and getting stuck in the previous trading range is not encouraging for such a young breakout.  The next obvious level for support is 1540 and the 50-dma.  Hold this level and the dip buying bandwagon continues.  If we break this level, watch out below.

Bull and bear alike need to watch 1570 and 1540.  Move and hold above, the rally still has legs; break under and this is the long predicted pullback.

INDIVIDUAL STOCKS
AAPL is struggling with $420 again and a break under the recent low of $419 could set off a wave of stop-loss selling ahead of earnings.  But the more selling that takes place ahead of earnings, the less downside there will be after earnings.

Plan your trade; trade your plan

AM: Modest selling

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:20 EDT

AM Update

MARKET BEHAVIOR
Stocks opened weak on the first dip since last Friday’s low.  Some selling after five-days of gains is normal and expected.  The market is finding support at 1580 in mid-day trade and the breakout remains intact as long as we hold 1570.

Gains over the last five-days were the largest we’ve seen since the start of the year.  Accelerating gains after such a long run is something to be wary of, but while they are impressive, they have not materially broken the upper trend line.

MARKET SENTIMENT
This week was another example of buying the dip being the right trade.  Many were anticipating a larger selloff, making the rebound more likely.  All the profit-taking in March’s consolidation was unable to weight on the market.  The result was higher prices once that selling exhausted itself on last Friday’s disappointing employment.

It’s become painfully obviously this market will not breakdown on news.  The only thing left is running out of buyers.  This means we will slide lower while everyone is still looking up and is a more difficult turning point to spot than a clear shock to the system.

The shift will occur when pessimists give up fighting the tape.  These are the last people willing to embrace the rally and thus the last buyers to keep this thing moving.  The picture is a little more complicated when we include international investors fleeing precarious economies and bond investors warming up to equities again.  Chances are those that fled the Cyprus’ fallout have already done so.  If they were not motivated enough to move immediately after events, they are even less likely now the situation is calming down.  As for bonds, they are coming back and rising prices takes pressure off of bond holders.  The last buyer I can think of is the incremental IRA investor sending in his contribution before the April 15th deadline.  How many of these above buyers can we count on in coming weeks to continue pushing this market higher?

No matter what the Fed does, equity prices will only go higher when people actually buy equities.  When everyone is in equities because they think prices will continue higher is exactly when they top and nose over due to lack of demand.  Until Ben starts buying stocks, his influence over the equity markets is dependent on equity investors buying into the hype.

TRADING OPPORTUNITIES

Expected Outcome:
I still don’t feel comfortable with this market, but holding above prior resistance at 1570 shows the breakout is alive and well.  We are at the upper end of the trading channel.  A break above this trend-line will signal exhaustion and should be sold, not bought.  A modest dip to the lower trend-line could be another buying opportunity as long as we hold key support levels.

Alternate Outcome:
While the trend is solidly intact, it is hard to embrace this rally after five-months of gains and an unbroken streak of rebounds.  We are also in the fifth-year of the larger bull market. While everything looks good, that is what always happens at tops.  I still believe in the secular bull, but every decade long run has bounds dramatic of weakness.

INDIVIDUAL STOCKS
AAPL retreated to $430 and is largely trading sideways ahead of earnings in two-weeks.  Unless we get leaks and believable rumors, expect the stock to stay around these levels because neither bulls nor bears are likely to change their mind in coming days.

NFLX is higher on a day the market is selling off.  Look for short-covering to continue pushing this stock higher, assuming the broad market holds up.

LNKD daily at 1:21 EDT

LNKD recovered from early weakness and reclaimed $180.  The bounce off of $175 shows there are more willing buyers at these levels than sellers.  Holding LNKD here is only for the bravest of the brave, but shorting this stock here is just plain foolish.

AMZN added to yesterday’s break above the 50dma.  With so many bulls and bears trading the breakout/breakdown, the smart plays has been swing-trading the up and down.  This probably won’t change until earnings where we will finally see a more directional move.  My inclination would be to wait for earnings and trade resulting move.

GOOG is largely mirroring weakness in the indexes.  What was AAPL’s loss has been GOOG’s gain.  If AAPL disappoints on earnings, look a large portion of that money to come GOOG’s way.

Stay safe

AM: Is this time different?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:11 EDT

AM Update
Stocks are challenging 1600.  Is that the next major milestone on our way higher?

MARKET BEHAVIOR
Stocks continued the rally, running up to 1597 before easing off the highs by mid-day.

MARKET SENTIMENT
Stocks covered nearly 60-points since Friday’s opening low.  This is the fourth surge of ~60-points over a few days since the market bottom in November.  The first was the rebound off the November lows.  The second was the Fiscal Cliff pop over New Years.  The third followed February’s dip to the 50-dma.  And we are in the middle of the fourth.

The common trait is they came on the heels of an aggressive selloff and widespread fear.  The November lows dipped 100-points over a month.  The selloff into the end of the year slid 50-points before bouncing on December 31st.  February slumped 45-points before bouncing.  Last week only pulled back 33-points from the highs before surging 60.

Prior selling is what fuels the next rally.  The selling leading up to this pop is the lowest we’ve seen and makes me question how much fuel is in the tank.  The strongest surges occur early in a recovery when the market is most oversold.  Almost five-months into this rally we are many things, but oversold is not one of them.  Coming this far on the heels of modest selling makes me wonder if there is enough buying left to power another sustainable leg higher?  I don’t see it and I remain reluctant to chase this market here.

Clearly I was early in jumping off the rally bandwagon, but it is impossible to know just how far the crowd will push these things.  And they might not even be done, at this rate we would blast through 1650 next week.  I’d love to catch those gains, but I don’t feel comfortable with this market and I will continue to sit out until it starts behaving in a way I understand.  I’m okay missing additional upside because chasing something I don’t understand is nothing more than gambling.

TRADING OPPORTUNITIES

Expected Outcome:
Stocks keep marching higher, but everything indicates the market is skating on thin ice.  This is great for those willing to take a chance, but it only ends well if they know when to lock in profits.  Eventually one of these dips will not bounce and many traders will give up all their gains waiting in vain for that bounce.

Alternate Outcome:
Am I falling into the trap of tunnel vision by allowing my skepticism of this rally to skew my analysis?  Undeniably I’ve been wrong, but the question is if my analysis is fundamentally flawed, or simply early.  Obviously there is demand at these levels because buying is the only thing that can push prices higher.  One possible mistake is I am looking for an intermediate top, which occur more quickly.  Major tops take longer to develop and run up higher before finally breaking down.  I certainly hope this is not the case because I am a medium-term bull, but the longer it takes for this market to top, the bigger risk there is to the downside.  It was a long time ago, but things were quite pleasant in the Fall of 2007 prior to one of the biggest bear markets in history.  I don’t believe we are in a similar situation, but the higher this market goes without correcting, the more it scares me.

INDIVIDUAL STOCKS
AAPL is trading sideways this morning and modestly in the red.  It is unlikely we will get new fundamental information prior to earnings, but rumors could moving the stock ahead of time.  Of course given all the previous rumors of dividends, product launches, and stock splits that never materialized, market will be far more skeptical of unsubstantiated rumors.

NFLX is trading above recent resistance at $170.  At this point is seems the selling exhausted itself and the stock is looking to retest the 50dma.  If the market holds up, this is a far more interesting buy than short.

LNKD daily at 1:17 EDT

GOOG’s fallen out of favor and missing the markets move to all-time highs.  Is this part of the divergence that leads to a broad market top, or just a single stock getting sent to the dog house?  GOOG appears to be the biggest beneficiary of AAPL’s selloff.  Further AAPL selling, especially if it is due to losing market share to Android, will see much of those proceeds find a new home in GOOG.

LNKD is surging higher and just shy of making a new all-time high.  While not a technical 50-dma bounce, the stock is clearly finding support in the area and wants to continue higher.

Remember, 50% of a stocks move comes from the broad market.  If we see the markets breakdown, get out of these speculative stocks and look to buy them back after the market finds a bottom.

Stay safe

PM: All time record!

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update
Stocks broke out to new highs.  Will we continue higher, or is this just one last head-fake before the inevitable correction?

MARKET BEHAVIOR
This was the third largest up-day of the year as we smashed record highs.  Volume finally rebounded, but was only average for such a monumental move.

MARKET SENTIMENT
Markets did it again, they humiliated bears for the umpteenth time.  I was bullish for most of the rally, but even I didn’t expect it could go this far.  Previous tops since 2009 developed quickly and this one is stretching on.  That means either 1) this is not a top, or 2) this is a different kind of top and the resulting correction will be different too.

Markets marched relentlessly higher since the opening low on Friday, acting like a giant four-day short-squeeze.  I’d love to say this was real buying, but it is hard to find a catalyst to justify this move other than people buying simply because everyone else was buying.  We haven’t removed a major issue weighting on the market or eliminated a tail risk everyone was fearing.  We didn’t receive unexpected good news proving the economy is far stronger than anyone expected.  We haven’t uncovered compelling insight the future is better than already forecast.  People are simply following the herd and buying because everyone else is.  The last time traders did something simply because everyone else was back in the post-election selloff and we know how that ended.

I really want to believe in this breakout, but I just can’t find a redeeming quality in it other than it is going up.  Obviously I’m wrong, but I’m okay with being wrong if it means staying out of a market I don’t understand or feel comfortable with.

TRADING OPPORTUNITIES

Expected Outcome:
Over a month ago we said one way this rally could end is a strong surge higher.  50-points over 4-days probably qualifies as a strong surge.   The reason surges at the end of long run exhaust a market is the last of the crowd finally rushes into the trade, leaving no one else to buy.

Part of this market’s resilience stemmed from confident holders refusing to sell in the face of weakness.  That kept supply tight and allowed us to rally on light volume.  But how much higher can we go before these investors start locking-in profits?  At some point demand will not be able to keep up with supply and that will be the top.  Obviously we are not there yet, but that day is coming.

Alternate Outcome:
The world is an ugly place.  US equities and Treasuries are not doing well because they are fundamentally sound, but because they are the least bad place for global investors to park their money.  The only reason we look so good is because everyone else looks so bad.  If a person focuses on the qualities of our market in isolation, of course they look poor, but take a step back and it makes sense why there continues to be demand for our equities and debt at these historic levels.  Until there is a viable alternative currency and market in terms of liquidity and safety, everyone will have to hold their nose and buy what we are selling.  Europe was the closest alternative but their financial problems eliminated them from contention.  Its been a long time since Japan was investable.  And it is illegal for foreigners to invest in Chinese companies directly or hold large piles of yuan and they run a surplus so there is little government debt to buy.  None of these global dynamics will change anytime soon, so expect wealthy foreigners to continue pumping money into our markets.

Look for recent resistance at 1570 to act as support.  As long as we hold above this level, look for the rally to continue.

INDIVIDUAL STOCKS
AAPL had a nice comeback and is above $430.  Expect resistance at the 50dma as the stock  trades in a range ahead of earnings in two-weeks.

AMZN daily at end of day

AMZN continues to struggle with the 50dma.  Inability to march ahead is a concern for bulls.  Like most stocks, everything hangs on earnings.  Given the slowing gains and high valuation, there is more downside risk than upside opportunity.  A pop higher would send shorts running for cover, triggering a few day short-squeeze, but a disappointing report could trigger a far larger selloff.  This is a highly speculative trade and option spreads are a good tool to manage risk.

LNKD’s 50dma is catching up to the stock and look for it to provide support.  This story is similar to AMZN in terms of valuation and short interest, the difference is LNKD’s run is far younger than AMZN.  Every move has a lifespan and there is more life left in LNKDs young run.

NFLX was absent from today’s record breakout, but this consolidation is good.  It flushed out chasers and tempted bears to get even more short.  Both of these are setting the stage for another explosive move higher, likely taking out $200 as long as the broad market holds up.

Stay safe

AM: We did it, the sequel

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:06 EDT

AM Update
Who thought we could use all-time highs and weak hiring in the same sentence.  Right or wrong, trader’s faith in the Fed is unflappable.

MARKET BEHAVIOR
The markets cleared all-time highs by a wide margin as they pushed through 1585 in early trade.  This was the last major record for the SPX and now we can move past the hype and focus on what comes next.  Over four-days the market rallied 45-points from the post-employment low and finally broke above the recent consolidation.

MARKET SENTIMENT
When in doubt, stick with the trend and that is clearly the case here.  While calls for a top will eventually be right, they were obviously premature.  The question is where do we go from these new highs?

The all-time high is purely symbolic because few traders actually sat for five-years waiting to get their money back.  Support and resistance levels work because these are where large groups of traders bought or sold.  Moving above or below these areas changes losses into wins and wins into losses.  Support and resistance less than a year old are the strongest because traders are still in these positions.  Levels older than two years are far less meaningful because most traders have long since moved on.  Anyone who bought the October 2007 highs sold a long, long time ago and no one is selling today to get out break-even.

The strong move off of 1540 is largely fueled by lack of supply from confident holders and demand due to short covering.  We have not seen a fundamental catalyst over the last few days justifying this move.  The most recent major headline was unexpectedly weak hiring and the best bulls can come up with is weak employment keeps the printing pressing running at full speed.  Technically the market checked back to the 50dma, held support, and then broke above the trading range.  No matter what anything else indicates, we win and lose exclusively on price and the price keeps going higher.

TRADING OPPORTUNITIES

Expected Outcome:
Either this is the start of the next leg higher, or the last exhaustion surge before rolling over.  I remain skeptical of this market, but it is proving far more resilient than I expected.  At this stage most of the demand is artificially driven by short-covering and tight supply from confident holders.  To sustain the move we need to see constructive consolidation where a wider pool of investors are willing to step in and support these levels.  If this is an exhaustion surge, the market will roll over quickly in the vacuum of follow-on buying.  Anything short of a collapse over the next couple days shows this rally is sticking around, but just because prices are headed higher doesn’t mean we need to be long.  Sometimes the best trade is simply sitting on our hands and waiting for the next trade.

Alternate Outcome:
Where will the next buyer come from?  Shorts are scrambling for cover and their buying will dry up soon.  The next buyer is the recent profit-taker looking to get back in.  After that is the international trader looking for safety and security of the US markets given the instability in the rest of the world.  And finally the crowded treasury market will eventually rotate back into equities.  There is ample supply of buyers waiting to push this market higher, the only question is over what time frame?  Can new demand come in fast enough to overcome the market’s natural tendency to pullback?  We will soon find out.

The one thing we do have to watch for is the longer this market goes without a material pullback, the larger the pullback will be when it eventually happens.  We could soar for another quarter or two, but that will be on Icarus wings.

INDIVIDUAL STOCKS
On a day like today, virtually everything is higher, even lagging stocks and indexes are popping.  IWM, GOOG, AAPL, LNKD, and AMZN are all strongly higher.  The broad market is often credited with 50% of an individual stock’s move and today it is lifting all boats.  The notable exception is NFLX struggling to get into the green.

Stay safe

AM: The bounce continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:51 EDT

AM Update

MARKET BEHAVIOR
Stocks are higher this morning as they bounced off of 1560 and currently above 1570.  If today closes in the green, it will be the first back-to-back up-day in over three-weeks.  The market fell to 1540 on Friday after a dismal employment report, but climbed steadily ever since.

MARKET SENTIMENT
Bears expected weak employment to trigger a wider breakdown, but this market remains oblivious to any and all negative headlines from pathetic GDP, to Sequester, and now weak hiring.  It is a challenge getting in to the psyche of traders as they buy every dip regardless of the reason or outlook.  Do they know something the rest of us don’t, or are they simply acting out of habit learned from every previous dip this year?

Obviously these moves go further and longer than anyone expects.  We heard calls for a pullback in the beginning of the year, but the market ignored all the naysayers and marched higher ever since.   Rationally we know this cannot last forever, but it is hard not to get swept up in the easy money of a steady and seemingly predictable rally.

The question we have to answer is if there is real demand for the market at these levels or if this bounce is driven by greedy holders refusing to sell and buying from shorts getting squeezed?  This market acts like it wants to go higher, but for it to move sustainably we need to identify the next incremental buyer is.  A short-squeeze lasts for two days, but without follow-on buying the market will stall and reverse lower.

This market is not acting like I expect and continued buying Wednesday on accelerating volume will force me to reconsider my pessimistic views.  That doesn’t mean I will buy the market, I will simply step aside until it starts behaving in a more predictable way.  We cannot always be in tune with the market and there is no reason we need to have a trade on.  Sometimes we just have to admit we don’t understand what is going on and wait for the next trade.

TRADING OPPORTUNITIES

Expected Outcome:
Is today’s pop real buying or a short squeeze?  One is sustainable, the other is not.  I am not a fan of the market at these levels and the trading pattern over the last two-days reeks of a short-squeeze.  Intraday trade surges is in bursts of maximum pain as it devours shorts willingness to fight this rally.  Bears are dumbfounded and bulls are gloating.

This rally is the Energizer bunny and just won’t quit.  But no matter how long it lasts, it cannot last forever and will eventually come down.  This rally is almost 5-months old and we are closer to the end than the start.  Obviously the market is not done rallying, but we are standing on a trapdoor and one of these dips is not going to bounce.

Alternate Outcome:
Holding above 1560 through Wednesday’s close shows this market still wants to move higher.  Short squeezes are short-lived and continued buying through Wednesday will show four days of solid buying after Firday’s opening low.  I don’t know where this new money is coming from, but it shows people are still excited about buying this rally.

AAPL daily at 1:51 EDT

INDIVIDUAL STOCKS
AAPL reversed from early weakness and is back in the upper $420s.  The stock might hover in this area until earnings in a couple weeks.  The views on this stock are polarized between bulls and bears.  Either people love this stock or they hate it.  These extreme opinions likely mean a decisive move following earnings as one side wins and the other loses.  Holding through earnings will be more betting on a spin of the roulette wheel than investing.

Stay safe

AM: Finding support

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:28 EDT

AM Update
Stocks are finding support at 1550 after Friday’s employment, but should we be selling the strength?

MARKET BEHAVIOR
Stocks opened modestly lower, but found support near 1550.  The market is calm as we head into the next major catalyst, earnings season.

MARKET SENTIMENT
Sometimes new information is easily quantifiable, like an employment report, Supreme Court ruling, or a Fed action.  Other times it is a little murky but still manageable, like a new piece of legislation or a single company’s earnings release.  These contain dozens, if not hundreds of pieces for investors to consider   Then there is earnings season with its tens of thousands of new data points.  Is one company’s bullish outlook more important than another’s bearish one?  There is so much variability it will make a fundamental or news based trader’s head explode.  And in fact no one can make sense of it, they simply pick and choose pieces to promote their bias or explain why the market made the move it did.

This is especially important to remember at times like this, news and fundamentals don’t move markets, only traders actually buying and selling stocks do that.  Sometimes traders change their portfolio allocations based on a new piece of information, other times they don’t.  That is why the market’s reaction to news can be so confusing and often contrary to common sense.

The market only moves on news if it changes people’s opinion they act on this new insight.  A bullish piece of news could change a bear’s mind and lead him to buy stocks.  But a bullish piece of news won’t change a bull’s mind and when he is fully invested he simply cannot buy more.  This is why a saturated bull market fails to respond to bullish news.

Over the last few months the market has become increasingly bullish. If most traders expect good things and are already long this market, no matter how great the news, there are few new people left to buy the market and keep the rally going.   On the flip side, if a large number of people are bullish and long stocks, it is disaster waiting to happen if all these bulls turn into sellers if news disappoints.

TRADING OPPORTUNITIES

Expected Outcome:
Once we recognize the setup, it becomes easy to build a trade from it.  Limited upside on great news and huge downside on bad news shows the risk/reward and probabilities are stacked against this market. Without a doubt the Energizer rally could keep going, but there is little advantage to holding here.

Long-term success is about the process, not the individual result.  Each move in the market is largely random and can easily go either way.  But over time the advantages of trading probabilities add up.  This isn’t about how we do on this particular trade, but how we fare over the next 100 trades.

And just to be clear, I am not a doom-and-gloom bear, just a realist that remembers the markets go up and down.  The first quarter was all up, so it makes sense that we are close to the next down.

Alternate Outcome:
The only thing bulls have going for them is momentum, and often that is more than enough.  These moves go far longer than anyone expects.  The deteriorating picture in other parts of the world is driving foreign investment into US dollar dominated investments.  This influx of foreign investment and thawing fear of equities could be the new sources of buyers.  The question is if this surge of buying is enough to overcome the natural ebb and flow of prices.  Markets go up and markets go down, it would take something fairly exceptional to let the rally continue another few months.

INDIVIDUAL STOCKS
AAPL is struggling to find buyers just above the 52-week low.  The biggest value story of a generation keeps getting cheaper.  Fundamentals simply don’t matter and the stock is a victim of too much bullishness.  When everyone loves a stock and already owns it, it is difficult to find new buyers.  After that point there is nowhere to go but lower.  Given the stock’s inability to recruit new buyers after breaking above the 50dma two-weeks ago, it sure feels like the selling isn’t done yet.

GOOG daily at 1:28 EDT

Recent big winners NFLX, LNKD, AMZN, and GOOG are struggling as money is shifting from speculative plays to more conservative names.  The greatest advantage we have as small investors is the ease we can move in and out of the market.  There is no reason we need to sit through market weakness.  After a strong move higher, we take our profits and wait for the inevitable pullback where we buy back in at cheaper prices.  No doubt a couple of high-flyers will keep going in spite of broad market weakness, but we are looking for high-probability trades, not trying to figure out what 10 or 20% of stocks will hold up.  We’re in this to make money and we can only do that by selling winners.

Stay safe

AM: Buy the dip?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:23 EST

AM Update

Stocks plunge and retest lows of the recent consolidation.  They are attempting a mid-day rebound, but will this finally be the dip that doesn’t bounce?  AAPL is a few dollars from setting a new low and expect selling pressure to intensify if the stock falls under $419.

MARKET BEHAVIOR

Stocks crashed on weaker than expected employment.  It dropped to 1540 before finding a floor and is attempting a late-morning rebound.  Every other dip was a buying opportunity, is this another one?

The recent low at 1538 set on March 19th is acting as support, but watch for a dip under this level to trigger of a wave of automatic stop-loss selling.  The next obvious level of support is 1530, which coincides with the 50dma and Feb 19th’s top.  (old resistance becomes support)  After that it is free fall to 1500 and February’s low of 1485.  A bounce could happen at any of these levels, but expect additional selling pressure if it violates these technical levels.

MARKET SENTIMENT

The recent rally was largely based on finding the sweet spot between growing fast enough to improve earnings, but not too fast to threaten easy money from the Fed.  This morning’s weak employment numbers exposes a vulnerability in the economic leg of the stool the market is standing on.

The justification for buying the dip is this economic weakness means the Fed will not withdraw stimulus anytime soon.  But that is what the Fed has said all along and most traders already priced in.  Everyone’s been buying the market for weeks under the rallying call “don’t fight the Fed”.  How much more money do these bullish Fed traders have left to pump into the rally?

Early trade show people are buying the dip because they are far more excited about the prospect of easy money than fear the risks of a weakening economy.  That was the right trade over the last several years, but is there a limit to the Fed’s effectiveness?  The early bounce is expected, but is smart money buying the dip, or will they sell the bounce?  Declines frequently stair-step lower as traders try to pick a bottom and today’s support could be fools rushing in if buying the dip has become too obvious of a trade.

Markets move exclusively on supply and demand.  Fundamentals, technicals, and headlines are only secondary in nature because they do not move prices directly.  They only affect markets if they change traders’ outlook of the future and cause them to readjust their portfolio.  If a news story simply reinforces existing views, the market won’t respond because everyone maintains their current positioning.  If the bulls expected QEfinity to stick around indefinitely, a weak employment report will not help boost their case because that view is already priced in.  The one thing not priced in was a weakening employment, a lethargic economy, and a threat to corporate earnings.  That is why a bounce on expectations of more easy money is unlikely to last.  Ignore what is already priced in and trade what is not expected.

TRADING OPPORTUNITIES

Expected Outcome:
The value of selling into strength is evident this morning.  Anyone who sold over the last few weeks is eagerly looking for the next trade while the guy who held for the top is stressing between selling or holding.  In theory holding for the top and using a trailing stop sounds better, but it is much harder to execute in practice because it is difficult to contain our emotions on days like today.

Markets often go too far on both the upside and downside.  Obviously November’s low was overdone.  The question is if  March’s highs went too high.  Markets operate on supply and demand.  Thawing fear and pessimism from early in the year provided the lift to record highs, but now the market is fairly optimistic, how many buyers are left to keep the good times rolling?  If every other dip was a buying opportunity, how many dip-buyers are still sitting on cash ready to save the rally?

Every rally comes to an end and this one is no different.  While I cannot say for sure if this rally is done, I know the odds are stacked against it and buying the dip here is riskier than at any other point in the rally.  No one has a crystal ball and success in the markets comes from trading probabilities.  Given the size and length of the recent run, there is more downside than upside here.  Like everything in the market, declines are hard to trade.  A ‘straight’ down move often involves multiple bounces and false bottoms along the way.  Patience is key, trade from strength, and don’t react impulsively to the market’s head fakes

Alternate Outcome:
When in doubt, stick with the trend.    These things go so much further and longer than anyone expects.  All-time highs and recent weakness awakened bears from hibernation.  Markets fall when everyone thinks the dips are buyable, but there could be enough cynicism left to fuel one more push higher.

AAPL daily at 1:23 EDT

INDIVIDUAL STOCKS

AAPL is just a few dollars from setting a new low.  Expect a wave of technical selling to hit the stock if it drops under $419.  No matter how great bulls think this company is, no one else is interested in buying to the stock and it keeps sliding.  Bulls might eventually be right, but the stock will likely see lower prices before this is done.  $400 is easily within reach and a pullback to $350 would be a 50% retracement from the highs, something often seen in leading stocks that fall from grace.

NFLX, AMZN, and LNKD are down with the rest of the market.  High beta stocks are a poor place to hide out in through a market correction.  If a trader expects further weakness, sell these stocks and look to buy them back cheaper once the broad market weakness passes.

Stay safe

AM: Where’s the bounce?

By Jani Ziedins | Intraday Analysis

S&P500 Daily at 1:27 EDT

AM Update

Stock struggle to come back after yesterday’s selloff.  Will they continue the pattern of bounces or give us our fist back-to-back down days in nearly three weeks?

MARKET BEHAVIOR

Stocks bounced back from yesterday’s selloff, but only recovered a fraction of those losses by late morning.  We are trading in the high 1550s, but struggling to break above 1560.  If stocks close in the red this afternoon, it will be the first back to back loss in nearly three weeks.

MARKET SENTIMENT

Wednesday’s high-volume selloff shook some complacency from the market and reminded people there is risk in this game.  Up to this point every dip has been buyable and we are seeing signs of an attempted bounce this morning.  While every previous selloff bounced, we need to remember that each rebound consumed a portion of the available pool of buyers.  After a certain point we run short of new buyers and the market falls under its own weight regardless of positive headlines or outlook.

While we know what is coming, the far more difficult part is timing the trade.  Every rally tops and this one will be no different.  All the bears calling for a pullback since January 2nd will eventually be proven right, but that is little consolation to their portfolio that was decimated by the premature call.  Markets go up and they go down, everyone know that.  All the money is made in figuring out when.

This rally is beyond obvious when mainstream media is promoting all-time highs in the Dow and S&P.  Many perma-bears are coming around because no one want to hear stories of doom-and-gloom anymore.  While I count myself as an optimist and a firm believer in the resilience of our economy, markets moves in waves.  The overshoot to the upside and downside every time, always have and always will.  The savvy trader exploits these swings in sentiment.  Last November saw a wave of pessimism hit the markets and lead to an oversold condition as traders bailed out for no other reason than everyone else was selling.  This herd mentality skews moves to the upside too.  When the crowd is calm and complacent, we let down our guard too.  The ironic thing is the market is safest when people are most scared and riskiest when everyone is most comfortable.

TRADING OPPORTUNITIES

Expected Outcome:
I wish I had a crystal ball and knew for sure if this dip was buyable or the start of something larger, but the best I can do is trade probabilities   Its been a good run, the mass media is promoting all-time highs, we just started a new quarter, and fear of an economic collapse has been replaced with fear of missing the rally.  All these conditions point to a market closer to the end than one that still has room to run.

There is a lot of positive news already built into the market and simply meeting expectations is not going to move us higher.  On the other hand anything that falls short will catch investors off guard and rekindle those pessimistic and irrational fears.  There is no reason this market cannot bounce back today, but a second consecutive down-day and close under 1548 will rain on this parade.

Alternate Outcome:
The last few weeks of sideways trade facilitated profit taking and gave nervous holders the opportunity to bail out.  Wednesday’s high volume selloff also cleared dead wood and tempted bears to short this market.  These sellers are creating fuel for the next rally leg.  Holding above 1550 and reclaiming 1560 by Friday shows buyers are still supporting this market and the next move is higher.  No matter what the daily price-action shows, the rally remains intact until we start making lower-lows and lower-highs.

AAPL daily at 1:28 EST

INDIVIDUAL STOCKS

AAPL fell back into the $420s and any hope of resuming the previous rebound is fading fast.  We are within $10 of setting a new low and expect a wave of selling to hit the stock if it falls to this level as stop-losses and shorts are triggered by this widely followed technical level.  Eventually AAPL will boost its dividend and buyback, upgrade existing products, and launch new products, the question is if these will be enough to bring a lethargic stock back to life.  Once a stock loses its aura of invincibility, it is really hard to get it back.  The tech industry is littered former pioneers and innovator who continue operating great companies, but their stocks have been dead money for years. Is AAPL on the verge of joining that club?

NFLX is struggling since it broke the 50dma yesterday.  This stock is vulnerable to broad market weakness and is a poor place to hide out if anyone expects a near-term selloff.

Stay safe

AM: More volatility

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:33 EDT

AM Update

Stocks are keeping the up and down routine going as we are selling off following yesterday’s new highs.  Is this just another buyable dip or the start of something more?  AAPL attempts another rebound, completely oblivious to the market weakness around it.

MARKET BEHAVIOR

Stocks dipped on weaker than expected private employment.  This pushed the marked through recent support at 1560 by late morning. If today’s declines hold through the close, this will be the eleventh consecutive alternating red and green day.  At some point this market will string together two up or down days and that could signal the next near-term move, either a breakout or breakdown.

MARKET SENTIMENT

The jobs data was decent, but fell short of expectations and given how much positive news has already been priced in, the market sold off.  It’s easy for a repressed market to top expectation and trigger a wave of buying, but inflated markets are far more vulnerable to disappointment because everyone bought the market ahead of time.

One concern about this market is the wedging higher.  This sucks in buyers and does not refresh the market by forcing out weak hands.  Dips refresh the market because it sends uncommitted holders running for cover, creating the a new pool of buyers to fuel the next leg higher.  But wedging lets these weak holders hold and actually increases the vulnerability of the market because it encourages even more weak holders to join the party.  Once the level of weak holders reaches critical mass, the market collapses in a rush of panicked selling.  Currently the market is down nearly 15-points and it feels like some of this froth is letting out.

TRADING OPPORTUNITIES

Expected Outcome:
Is today’s weakness just another buyable dip, or the start of something larger?  While I cannot say for sure what will happen next, I am concerned about the sustainability of the Q1 rally and think this is a normal and healthy time for the markets to rest a bit.  A day-trader can play these intraday swings, but there is too little upside left in this move to make it worthwhile for me.

Failing to hold support at 1560 is a concern, as would be a second day of selling on Thursday.  Any weakness is setting up for a buyable dip, we just don’t know if it will bounce off of 1560, 1550, 1500, or 1400.  Given how many shallow, buyable dips we’ve seen recently, I’m wondering how much money the dip-buying crowd has left.  Without dip-buyers and triggering stop-losses at technical support levels will  lead to a larger wave of selling than we’ve seen recently.

Alternate Outcome:
Record highs has all the worrywarts and naysayers out in force.  Many traders are anticipating this top and selling into the strength.  These seller will be the new buyers when the market heads higher.  Today’s weakness is an important turning point for the market.  It makes an interesting shorting opportunity, but if the market rebounds, it shows bears still cannot get the job done and the next move is higher.

AAPL daily at 1:34 EDT

INDIVIDUAL STOCKS

AAPL is attempting another rebound and while the stock is in the green, it’s off early highs.  This stock is in a world of its own and is up on a day where the rest of the market is off.  The iPhone has its own ecosystem and so does AAPL’s stock.  AAPL traders are oblivious to the world around them, showing they don’t care about macro fundamentals.  And given the disconnect from AAPL’s earnings data, micro data doesn’t matter either.  What are we left with?  Gamblers.  At this stage traders are just gambling in the stock.  When a stock is completely detached from macro and micro data, fundamentals don’t matter and anyone who is using these to justify their purchase is going to have a bad time.  This is an emotion driven trade and it can only be traded successfully when evaluated from a sentiment analysis.

And for all those “long-term investors” out there who are buying last decades big winner because they know it will come back, I only have one question for you, how many technology market leaders had strong runs 10-years after their initial breakout?  Most tech companies don’t even stay relevant for twenty years, let alone have a runaway stock.  MSFT, CSCO and DELL had great, decade-long runs but have been dead money ever since, even thought the companies are doing great.  Of course AAPL is different from those just like all those were different from the ones that came before them.  The names change, but investor attitudes stay the same.

Stay safe

AM: New highs

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:31 EDT

AM Update

MARKET BEHAVIOR

Stock’s indecision continues as we rebound from yesterday’s weakness and are making new highs, just a few points shy of the all-time record at 1576.

MARKET SENTIMENT

This back-and-forth has both bears and bulls more vocal as they cheer for their side, but this equality is new and a big reason the market’s behavior has changed in recent weeks.  Bulls are still winning the tug-of-war with each new high, but the rate of gains has tapered from the nearly straight-up market in the first two-months of the year.  This is typical behavior as the best gains occur early in a move and become harder to come by the older a rally gets.  At 4.5 months old, it shouldn’t surprise anyone we are seeing more sideways trade.

The Q1 rally proves traders were overly bearish at the start of the year, and converting former bears into buyers is what propelled us higher.  If this rally fueled itself on pessimism, how much gas is left in the tank?

It is easy to predict the future, the harder part is getting the timing right.  Both bulls and bears could be right if we continue another 30-points higher before falling into a 10% correction, but they could both lose money if the bear shorts too early and the bull holds too long.  That is what makes this game so maddeningly difficult.  I have no doubt this market will top because every rally eventually ends, the harder part is figuring out when.

TRADING OPPORTUNITIES

Expected Outcome:
There are three ways this market will top.  It might simply run out of buyers and rollover.  It can surge higher and exhaust itself before reversing.  Or an unexpected negative headline can send holders rushing for the exits.  Holding 1560 through Wednesday makes the rollover top unlikely because we don’t get that long to sell the top.  We still haven’t seen a powerful exhaustion surge, so the market needs to go higher before it can turn lower under that scenario   And the news driven top requires an external and unpredictable catalyst to move the market.

In the absence of bad news, the market is setting up for higher prices if we hold 1560 through Wednesday.  Just because the market is headed higher over the next few days doesn’t automatically make buying and owning the market a good idea.  We always need to consider the risk/reward of every position and given the age of this rally and the slowing gains, it seems like there is more downside risk than upside potential here.  And of course a material selloff under 1560 today or tomorrow means this market is struggling to find buyers and we need to watch for further weakness.

Alternate Outcome:
A lot of profit taking occurred over the last 4-weeks of sideways trade.  We need buyers to continue higher and these recent sellers could buy back in and keep pushing this market higher.  The longer we hold these levels, the more likely this outcome becomes, especially if we consolidation stretches out and gives the 50 and 200dma time to catch up.

AAPL daily at 1:31 EDT

INDIVIDUAL STOCKS

AAPL recovered a large chunk of yesterday’s selloff.  This could simply be a dead-cat bounce as shorts cover for a tidy profits after the recent selloff.  Buying at $430 is less convincing when the stock couldn’t attract support above the 50dma.  Anyone who wanted to buy the dip already bought it, meaning there are few buyers waiting in the wings to prop this name up.  Look for more weakness as hopeful bulls sour on this name.  I don’t see a rebound in this name until everyone has given up on it and stops defending it.

Stay safe

AM: Taking a break

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:29 EDT

AM Update

Stocks opened weak in what looks like another buying opportunity, or is it?  AAPL’s struggles continue .  What will it take to turn the stock around?

MARKET BEHAVIOR

Stocks are down half-a-percent on the first day of the second quarter.  They found early support at 1560 and are trading sideways through late morning trade.

MARKET SENTIMENT

Is this just another routine dip on the way higher?  In a rally, far more dips are buyable because they all bounce until the one that doesn’t.  We could see twenty buyable dips before coming to the one that doesn’t bounce.  I’m just making up numbers here, but without additional information, it is far smarter to buy a dip because 95% of the time it will bounce.  This shows why picking tops is often a fools game because tops happen so infrequently.  But that is in the absence of other information.  The last few months has seen countless buying opportunities, but each one brings us one step closer to the end.    If we had eighteen consecutive rebounds, then the odds of a top become far more likely, going from 5% to 50% in the hypothetical example.  When combined with the limited upside and material downside after a large move, buying the dip becomes a poor trade, even if it does bounce.  Success in the markets isn’t about predicting the future, but understanding probabilities and weighing that against risk versus reward.

Taking a deeper look at both sides of the argument here.

Bull Case:  The momentum is clearly higher and the trend of higher-highs and higher-lows remains intact.  The economy continues improving; the pace is slower than anyone wants, but the direction remains positive. Corporate earnings and balance sheets are as strong as they’ve ever been and valuations are far more reasonable than the two previous times we traded these levels.

Bear Case:  Every rally comes to an end and this one is 4.5 months old.  Further the market’s personality often changes with each new quarter.  A lot of optimism is already priced in the market as sentiment shifted from paranoid pessimism in January and February to near complacency because everyone expects Uncle Ben will take care of us.

These arguments are equally compelling and is why both sides have passionate supporters.  But this is always the case.  If the answer was obvious, market participants would make the easy trade and buy/sell stocks until the price changed enough to bring opposing views back in balance.  The legitimacy of both points of view is what makes it so difficult to trade the market.

TRADING OPPORTUNITIES

Expected Outcome:
While the trend is higher, we don’t need to hold out for those last few dollars of upside.  Its been a good run and everyone know this cannot go on forever.  It is often better to get out while everyone else is oblivious to the risks because it gets ugly when everyone rushes for the exits at the same time.  I don’t know which dip will not bounce, but I know it gets closer by the day.

Alternate Outcome:
A dip to support at 1560 is hardly a breakdown and simply resting after setting a new closing high last week.  At this point the market needs to fall past 1538 to start a new trend of lower-lows and that is still twenty-points away.  Momentum is clearly higher and continued support at 1560 shows buyers are still willing and able to step in at these levels.  The pullback case rests on running out of buyers and as long as we have buyers, we will continue higher.

AAPL daily at 1:30 EST

INDIVIDUAL STOCKS

AAPL is having another ugly day and this is the fourth consecutive down-day.  The stock fell $35 from the recent break above the 50dam.  Obviously the stock was unable to attract wider follow-on buying after clearing this technical milestone and the stock collapsed after the “choir” ran out of money buying the dip.   The question any AAPL bull needs to ask is who is the next buyer?  All the faithful already own as much as they can hold and the wider market doesn’t seem interested in the outstanding valuation, margins, cash hoard, or history of innovation.  If AAPL cannot find buyers at a forward P/E of 8 ex-cash, is falling to 7 really going to make everyone wake up and rush to buy the stock?  AAPL might make great products, but the stock is clearly broken and the trend of lower-lows remains intact until it can attract new buyers.

Stay safe

PM: We did it!

By Jani Ziedins | Intraday Analysis

PM Update

It took a while, but the market final set the all-time closing high.  Is this the end of the run, or are we just getting started?  AAPL missed the party and plunged 2% as is struggles to find buyers.

MARKET BEHAVIOR

Stocks finally did it, they set the all-time closing high Thursday.  Volume was extremely light given the breakout, end of quarter, and option expiration trading activity.  The all-time intraday high is the only record left and is just 7-points away.  It’s amazing how far we’ve come since the 2009 lows.

MARKET SENTIMENT

Friday’s 0.4% breakout is nothing to write home about.  Shorts and momentum buyers are nowhere to be found and Thursday’s move was fairly uninspiring.  Without a doubt the holiday played a role in the light volume and lack of enthusiastic follow-on buying.   We are left to determine if these new levels are here to stay and if buying will keep pace when volume returns to normal.

Sentiment came a long way from the post-election and Fiscal Cliff lows last November.  Even two-months ago the tone was very cynical.  There are still bears abound, but the pessimism doesn’t seem nearly as pervasive and universal.  Without a doubt momentum can carry us a dozen points higher, but are there enough buyers left to continue past 1600 without a material pullback?

The biggest risk the market faces is if bulls bought the breakout ahead of time and swing-traders will use the new high to lock in profits.  Few buyers and lots of sellers is a recipe for declining prices.

TRADING OPPORTUNITIES

Expected Outcome:
This rally deserves a lot of credit.  Its did what no one thought was possible and matched the go-go record highs set long before most knew what a mortgage-backed security or credit default swap was.  The lesson is never doubt our determination to overcome anything thrown in our way.  This rally has long legs and the secular bull will easily pass 2,000 in coming years.  I don’t believe in the tripple-top theories being thrown around.  This market has gone nowhere in thirteen years, how can people possibly claim that is unsustainable and too-far, too-fast?  But that is the long-range view, we are traders and want to know what is around the next corner.

The market continues holding 1550 and every bout of selling is conquered, resulting in yet another higher-high.  Any bear knows how dangerous it is challenging this bull, but every move must come to an end.  As much as I believe in the longer-term trend, I don’t feel comfortable owning stocks on the heels of a four-month rally.  Markets go up and they go down, it is normal, healthy, and expected to run into a little resistance after coming this far.

Alternate Outcome:
The one thing this market does best is prove doubters wrong and it continued doing that on Thursday.  Markets always pullback, but they never do it when people expect it.  When markets top, they tend to roll over fairly quickly.  The last few weeks of support at 1550 is what enabled this breakout to all-time highs.  If this market holds up through Tuesday, look for more gains out of this bull.

INDIVIDUAL STOCKS

AAPL is living in bizarro world.  When the broad market sets all time highs, AAPL plunges 2%.  AAPL clearly has a demand problem and cannot find follow on buyers to keep it above the 50dma.  Even more scary is all the recent momentum buyers are fleeing in droves.  The stock fell short of setting a new high above $485 and the trend of lower-highs continues.  Without buyers, expect the stock to test $400.

Stay safe

AM: Holding for the record

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:02 EDT

AM Update

The market set a new high and is in a position to break the all-time closing highs.  AAPL’s struggles continue as buyers are staying away.

MARKET BEHAVIOR

Stocks finally broke the 1565 barrier, but they need to hold it to set the all-time closing high.

MARKET SENTIMENT

How the market trades above 1565 will be insightful.  Will the market continue higher on breakout buying and short-covering?  Or was the new high already priced in and there are few left to buy the breakout?  How the market goes into the close will tell us a lot about people’s positioning and views.

This is the last day of a rough quarter for many money managers.  Anyone who was underweight the market had a bad time, but fortunately for them, most clients simply look at the bottom line to see if they made or lost money, neglecting to compare their expensive money managers against dumb and cheap index funds.  Everyone starts fresh next quarter and has the flexibility to trade their view of the market instead of scrambling to keep up with a strong rally.  Will this change the way big money approaches the markets?  Will they stop buying?  Will they start taking profits?  Or will they double-down on this teflon rally?

TRADING OPPORTUNITIES

Expected Outcome:
A lot of questions will be answered the next couple of weeks.  Can we hold these highs?  Will big money keep chasing?  Are there enough buyers left to continue the rally?  Right now we simply wait for those signs.

I remain reluctant to own the market because we always see step-backs and its been a while.  The February dip was three-percent and while noticeable, we will see much larger pullbacks this year.  No matter what we expect, we need to keep an open mind to what they market is telling us.  If the market doesn’t do what we expect, then our analysis is flawed and we need to adjust it.

Alternate Outcome:
This sideways trade emboldened bears and it is easier to find bearish commentary as compared to a couple of weeks ago.  These whipsaws refreshed the market by flushing out weak holders and reminding traders that the market is a risky place.  If we continue higher, this consolidation is where the new buyers will come from.   Of course we need to remember minor corrections and consolidations lead to minor moves, so even if we continue higher, don’t expect another 100-point, non-stop move without

Recent support is impressive and more suggestive of a continuation than an imminent pullback and that is why we are seeing new highs today.   Moving into next week will put quarter-end shenanigans behind us, giving us a clearer view on what the market is thinking.   Market tops tend to roll over quickly after the cracks develop, continued strength shows we are not there yet.

AAPL daily at 2:02 EDT

INDIVIDUAL STOCKS

AAPL’s bad luck continues as few are willing to buy the dip under the 50dma. All the buying happened in the run-up to the breakout and no one was left to continue the move.  This is a trading stock now and should be treated as such. Any strength is a selling opportunity because until it proves otherwise the trend remains lower.  Buying dips is okay as long as a trader is disciplined and uses hard stops for protection and to lock in gains.  AAPL’s next earnings release is nearly a month away and it seems unlikely Cook will surprise shareholders with good news in the meantime.

There is still a lot of bullishness left in this stock and it is not done humiliating bulls yet.

AM: Comeback kid

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:45 EDT

AM Update

Stocks dipped at the open, but are making a comeback.  AAPL gapped under the 50dma and is struggling to find buyers as it remains at the lows of the day.

MARKET BEHAVIOR

Stocks gapped lower at the open on Euro concerns, but rallied through the morning, reclaiming a large chunk of early losses.  The market remains stuck in the 1545/1565 range and without a strong close, it seems unlikely we will reach record levels today.

MARKET SENTIMENT

Early rebound strength looked like dip-buying and short-squeezing was keeping a steady bid under the market and fueling the one way move.  Are there enough buyers remaining to keep this phenomenon going through the close and beyond?

This is potentially the seventh-consecutive alternating up/down day we’ve seen as volatility is picking up.  Over the last four-months it was easy for the market to rally when we were making new highs every few days.  Even the nasty dips bounced back after just a couple of days of weakness.  Our current three-week consolidation is the longest yet and is a shift away from easy buy-and-hold.  This is just another example of the right trade being the hard trade.  The easy money was made in the middle of the Fiscal Cliff hype, now that everything finally looks good, the rally stalled.

TRADING OPPORTUNITIES

Expected Outcome:
I still find it hard to be constructive on this market, but the longer it holds these levels, the more likely a continuation is.  If we hold 1550 through next Monday look for an upside breakout and all-time highs.  But a breakdown the next couple days and all bets are off.  I’m still waiting for a dip under 1545 that doesn’t bounce, but so far the market is holding up and I have to respect that.

Even if the market pops next week and sets all time highs, that will be a selling opportunity, not a buying one.  Every rally needs a break and this one came a long way in four-months.  Given the limited upside and large downside, this is a poor place to own stocks.

But don’t get me wrong, I’m not a bear, just an opportunist.  We have plenty of room for a five-percent pullback before resuming the longer-term uptrend.  Two-steps forward, one-back.  I’m still constructive on the economic rebound and believe in the longer-term secular reallocation away from bonds and into equities.

Alternate Outcome:
No only could the rally poke its head above all-time highs, it could continue higher for a few more months.  The market hates being predictable and a summer rally would be unexpected.  Big money trading strategies often change from quarter to quarter, but often is not the same thing as always.  Strong economic improvement could delay the expected step-back, but the higher we go, the harder we fall.

AAPL daily at 1:45 EDT

INDIVIDUAL STOCKS

AAPL ran out of buyers and gapped under the 50dma, a big warning flag for bulls.  This could simply be a step-back on the way higher, but no one is buying the dip this morning as the stock trades at the lows of the day.  Anyone with a profit might look to lock in at least a portion until the stock reclaims the 50dma.

Stay safe

AM: Bouncing back

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:29 EST

AM Update

Stocks bounced back on positive data, but are still shy of all-time closing highs.  AAPL is resting, but this is supportive of the recent bounce.

MARKET BEHAVIOR

Stocks gapped higher at the open following encouraging data, but traded sideways around 1560 all morning.  The extents of the current trading range fall between 1538 and 1565.  Today’s strength brings us closer to the upper end of the range, but the market still struggles to find buyers willing to push it above all-time highs.

MARKET SENTIMENT

Given the rise in homebuilder stocks, strength in home prices shouldn’t surprise anyone and the market saw this coming for a while.  Same goes for gradually improving manufacturing data.  These do discredit bears’ claims the economy is slowing, but given the market’s strength the last few months, this negative opinion is increasingly in the minority.

Sideways trade here is constructive, but it will likely be a quiet week due to the holiday and quarter end.  Big money is largely positioned how they want to end the quarter (window dressing) and are just coasting this last week.  Next week is when they get back to business and look at the market with a clean slate.  Without pressure to chase, will they keep buying?  We’re days away from learning the answer.

If the market is running out of buyers, it should happen pretty quick.  Continued sideways trade shows buyers are stepping up and supporting prices.    1545 is the level to watch.  A dip under here is more worrisome for bulls than a pop above 1565 is for bears.  This far into the rally gains are harder and harder to come by and dips are increasingly more likely.  No one has a crystal ball, but we can trade probabilities.  History tells us we should expect multiple 5% pullbacks each year, each quarter often has a different personality, and every rally must end.  On the other side, it also tells us rallies often go far longer than anyone expects.

TRADING OPPORTUNITIES

Expected Outcome:
The challenge for a savvy trader is not selling too early, and at the same time not holding on too long.  We aim for the sweet spot between these two common made mistakes.  Hold when everyone is talking profits and sell when everyone is holding for larger gains.  This sweet spot is a region, not a point and we need to decide what is good enough.  We cannot sell the top, so either we are late or we are early.  Many retail investors try to sell late because the logic goes holding past the top lets a trader continue riding prolonged rallies higher.  And it makes a lot of sense, but I’ve never seen an interview with a successful trader who uses this strategy and almost all say they sell on the way up.  Do we want to model ourselves after the average retail investor, or the elite trader?

Either way, the market is looking for direction here.  We cannot trade between 1550 and 1560 indefinitely and a resolution is imminent.  The trend is higher and it is often smart to stick with what is working.  Of course every rally ends and this one has been around the block a few times, putting it closer to the eventual pullback.  If a trader doesn’t have conviction here, the best trade is no trade.  Simply sit this one out and wait for a better setup.

Alternate Outcome:
Everyone continues holding on for new highs.  This limits supply and is propping up the market.  As long as supply remains tight, the market can continue higher.  The bigger question is how much higher.  20-points on a 200-point rally is fairly trivial.  100-points is a major continuation.  Between the changing quarter and lack of short-squeezes, sentiment is changing.  Bearish expectations over the last three-months enabled this rally, but if people come into the second quarter with a different outlook and portfolio, should we still expect the market to keep acting the same way?  The alternate outcome is a continued rally, but it has to prove itself.  Making and holding all-time highs through next week will do a lot to prove the sustainability of this rally.

AAPL daily at 2:29 EST

INDIVIDUAL STOCKS

AAPL is taking a break after a strong performance early Monday morning where the stock traded up to $470.  There was a lot of momentum and short-covering in that move, but that demand quickly evaporated and the stock retreated back to the low $460s.  Finding support at $460 suggests this near-term up-trend will likely continue for a little while longer.  $485 remains the level to watch, but the $500 is even more significant since that provided rock solid support for three-months.  The stronger a support level, the more challenging resistance it poses.  This is because many traders had the opportunity to “buy the dip” around $500 and most of these traders are simply looking to get out at break-even when the stock returns to their purchase price.  Traders selling to get their money back will keep a lid on prices once the stock challenges previous levels of congestion

Stay safe

AM: New highs, but……..

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:53 EDT

AM Update

Stocks still struggle with all-time highs even on good news out of Europe.  AAPL is holing up as momentum traders buy the break above the 50dma.  How much further can this go?

MARKET BEHAVIOR

Stocks set a new high, but turned back just shy of 1565 and fell nearly 20-points from the high to the low.

MARKET SENTIMENT

So much for the pop and all-time highs on Cyprus.  It’s lunchtime and the market already moved on.  More interesting is the struggle with 1550.  The last few dips to this level have been buying opportunities, but are there enough buyers left to do it one more time?

Markets only move when people buy or sell.  Anyone already positioned for a move can do nothing but watch.  If everyone bought in  anticipation of a Cyprus resolution, when that resolution becomes reality, the market stalls because no one is left to buy the news.  The same goes for all-time highs.  If everyone bought early, anticipating an all-time high breakout, the market stalls because no one is buying the breakout.

The only thing that matters is what people think and how they are positioned.  Technicals, fundamentals, and news only play a supporting role in moving markets.  They only matter when they cause people to change their outlook and adjust their portfolio. If the greatest and most loved company in the world comes out with a cure for cancer, its price will surge when people buy more shares.  The problem arises when everyone loves it so much they already own all they can hold.  Then the life saving news goes unnoticed in the stock because it doesn’t trigger new buying.  This is why understanding how people are positioned is far more important than knowing what is in tomorrow’s newspaper.  We cannot predict the news, but we can predict people’s reaction to it.

TRADING OPPORTUNITIES

Expected Outcome:
This dip is a buying opportunity only if there are more buyers left to keep pushing prices higher.  This is what happened a couple of months ago.  The widespread cynicism provided plenty of fuel for a sustained move higher.  But here we are, another 100-points higher and it took a lot of buying to get here.  Do we still have gas in the tank, or are we running on fumes?

Today’s reversal from all-time highs is concerning.  There was zero short-squeeze from breakout buyers as we set new highs and cynical bears did not cover on a constructive news out of Europe.  The most likely explanation is people are no longer short this invincible market.  Bears and shorts are often the last on board the rally bandwagon, so we need to be extra careful here.  There will be more zigzagging as the fight between bulls and bears is evening up.  That in of itself is a warning sign as the formerly dominant bull is losing strength and the beaten down bear is fighting back.

I see nothing in today’s price action that is bullish and we could be on the verge of more selling if dip-buyers fail to show up in meaningful numbers.  While the market could continue higher, this is finally time to start thinking about shorting the market.

Alternate Outcome:
The bull isn’t dead yet and we are only a fraction off of 52-week and all-time highs.  .  If this market holds 1550 for a couple more days, it shows buyers are still willing to get in at these levels.  That bodes well for a continuation.  With today’s failure to break above 1565, that is quickly turning into a psychological barrier.  We need to close above it to put this whole all-time high thing behind us and start focusing on something else.

AAPL daily at 2:53 EDT

INDIVIDUAL STOCKS

AAPL is holding up nicely on a day when the market is in the red.  With the 50dma behind us, the biggest technical milestone is $485.  This will be a far larger hurdle to clear than the 50dma.  The moving average is simply a line on a chart that people follow.  Support and resistance are areas where people bought and sold stock and are far more meaningful for influencing individual investors.  These are levels that represent profits and losses.  This is where people can get their money back.  This is where people promised they would sell if the market would only give them a second chance.  That has real meaning and it will be a challenge to overcome.  Swing and momentum trading can get us to$485, but only follow on buying from a wider pool of investors can move us beyond it.  The nimble trader should consider locking in along side all the other short-term traders.

Stay safe

LA: New highs, or not

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Look Ahead

MARKET BEHAVIOR

Stocks dipped modestly last week as they struggle to capture those last few points needed to push through all-time highs.  Either this pause is building support for a sustained move higher, or it signals exhaustion just before the market rolls over.

MARKET SENTIMENT

A big part of why it is so difficult to predict the market is any setup ALWAYS gives contradictory signals.  If the answer was obvious, everyone would make the easy trade and this one-way buying/selling brings the market back into perfect contradiction.  Balance is the law of free markets and always makes sure both bull and bear views are equally represented.

To figure out where we are going, we need to search beyond widely followed technicals and fundamentals and uncover what the market is thinking and how it is positioned.  This gives us the best insight into what comes next.  Markets only move when people buy or sell, so obviously we need to figure out what will induce them to buy or sell.

In late-January/early-February we saw a similar consolidation and volatility around 1500, but the mood was completely different.  Traders were still afraid and the popular expectation was an imminent pullback from over-bought conditions.  That was six-weeks and 50-points ago.  Now we see the same technical setup, but sentiment changed.  Everyone feels good about the market’s strength and is looking forward to new all-time highs. This means most chasers are already in the market and few are left on the sidelines.  Value investors sold to these momentum traders as prices climbed, but after the chaser, it is hard to figure out who is the next in line to buy.

Obviously markets can coast higher on momentum alone, but just because there is more upside doesn’t make it a good trade.  This far into the rally there is limited profit potential and lots of downside risk, making a poor risk/reward.  Day-traders can grab those last few dollars, but overnight traders need to be more cautious.

TRADING OPPORTUNITIES

Expected Outcome:
There is little concern left in the market.  Cyprus dominated the headlines, but we are trading within 3-points of the pre-Cyprus close, demonstrating apathy from the market over these headlines.  But it shouldn’t surprise anyone when a market that didn’t flinch on a negative GDP report last month, effortlessly ignores the struggles of a tiny Mediterranean island.

This upcoming week will be a key one for the markets.  Holding level for a week is supportive, holding level for a few weeks becomes stalling and shows the market cannot get the job done.  This is also the last week of the quarter and most quarter-end buying is behind us.  For the time being, the chase is taking a break as money managers have a clean slate starting in April.  Chasing could continue, but managers feel far less pressure to buy reactively when the finish line is three-months away.

The market needs to continue higher after this pause to prove it still has an ample supply of buyers.  It doesn’t need to be a lot, but a healthy rally would finally reach 1565 and hold it this week.  If a modest gain is constructive, then anything else is destructive.  A dip under 1550 will likely continue because most of the dip-buyers came in last week and used up all their capital.  A strong surge higher signals a potential climax and exhaustion of remaining buyers.

As of this writing, there is some kind of resolution regarding Cyprus that avoids a disorganized bankruptcy.  This doesn’t do anything to save wealthy account holders, but it does protect the integrity of the banking system by upholding the guaranteed 100k safeguard.  The market could rally on this, but Cyprus never posed much of a risk to the wider banking sector and the market never sold off on the news, so any relief rally will be short-lived and this story forgotten before lunchtime.

Alternate Outcome:

This is the rally that just won’t quit.  When everything else is equal, stick with the rally because a rally can continue countless times, but it only reverses once.  Every call for a market top the last three months has been premature and I have no doubt I am early here too, the biggest question is if that is 10 or 100-points early.  Time will tell and we will continue watching the market for signs of strength and sustainability

Stay safe

AM: Tug-of-war

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:18 EDT

AM Update

Markets are higher as the back and forth continues.  AAPL is challenging the 50dma and is presenting a trading opportunity.

MARKET BEHAVIOR

Stocks are higher as the tug-of-war continues.

MARKET SENTIMENT

The battle between bears and bulls is heating up.  We saw a similar back-and-forth in early February.  That time the bulls prevailed, can the pull off another victory here too?

Complacency is the norm as every dip is just another buying opportunity.  All the fear from early in the year is long forgotten.  If the market will continue higher, who will be next buyer?  That is a tough question.  Shorts are avoiding this market, making it unlikely a short-squeeze will propel us higher.  If shorts are away, it probably also signals many former cynics have changed sides and joined the bandwagon.  There is money flowing out of bonds and into equities, but this is just a trickle and not enough to affect short-term volatility.  With the quarter end just days away, most money managers have already adjusted their portfolios and are ready to start fresh in April.

The news is obsessing over Cyprus, but it is an isolated event unless you live on the island or are a crooked Russian hiding your money there.  Other than those two groups, there is little exposure for the rest of the world and the risk of contagion is nil.  The worst is it could highlight weakness in the European banking system, but someone had to be living under a rock the last three-years if this is news to them.  The market is trading near pre-Cyprus levels, meaning little risk premium has been priced in, thus there will be little bounce when the crisis is resolved.

Right now we still don’t know who will buy the market going into the second quarter and that is why I remain wary of the market.  Without a doubt momentum could carry us another 10 or 20-points higher, but the next 50-point move is lower, not higher.

TRADING OPPORTUNITIES

Expected Outcome:
When everyone is buying the dip, we should sell the strength.  Contrarian investing works because when everyone is bullish and owns stock, there is no one left to buy and keep pushing prices higher.  It has nothing to do with fundamentals and everything to do with supply and demand.  Without demand, prices cannot continue higher no matter how good the news.

I am really tempted to short today’s strength.  Three is often the magic number in the markets.  The first peak usually bounces back because everyone is still excited by the rally.  The second peak also bounces, but less enthusiastically.  By the time we get around to the third dip, most of the buyers bought the first two dips and there is little left to prop up this dip.  Over a very short time-frame, we have that with last Thursday’s peak, this Wednesday’s rebound, and now today’s strength.  If we cannot hold these levels, there are few buyers left to buy the dip and the slide will start shaking free previously confident holders.

Alternate Outcome:
We continued past February’s volatility and there is no reason we can’t do it again.  But just because something is possible doesn’t make it a good trade.  Success in this game comes from understanding probabilities.   Of course we could continue higher, but given how far we’ve come and all the other warning signs, we should be more fearful of this market than enthusiastic.  Most of my bearish thesis rests on weakness after the first quarter chase ends.  If the market holds up and builds constructive support in April, that signals the rally is still on.  These things always come to an end at some point, but they often surprise us by lasting longer than we ever imagined.  I expect near-term weakness, but am open-minded to a continuation.

AAPL daily at 1:18 EDT

INDIVIDUAL STOCKS

AAPL is up to the 50dma.  Reclaiming this moving average is significant because it hasn’t been above it since early October.  The biggest question is if people are buying in anticipation of this event and that leave few buyers to buy the actual breakout.  We often see this with expected news events and is where the axiom “Buy the rumor, sell the news” comes from.

AAPL remains one of the most followed and loved stocks in the market.  This technical milestone will be shouted from the hilltops everyone will know about it.   It will be interesting to see how traders respond.  Anyone out of the stock could use this signal to buy the dip.  But how far will this dip-buying carry the stock without a fundamental catalyst to bring in a wider pool of buyers?

The easy trade here is buying the break above the 50dma and using a stop $5 under the MA.  If the stock doesn’t explode to the upside, then most of the buying happened ahead of time and there will be little new demand, making this a sell-the-news trade.  If the stock cannot hold the 50dma and crashes back through, it will likely continue sliding to new lows.  If a trader’s thesis is to profit on the strength from a 50dma breakout, if that surge doesn’t happen, they need to sell ASAP because their original analysis is flawed and invalid.  Long-term success in the markets is all about defense, not offense.

Stay safe