Category Archives for "Intraday Analysis"

AM: Where are we going?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:24 EST

AM Update

Stock are down and retesting 1550 after yesterday’s rebound.  AAPL is oblivious to market weakness and higher on hopes of a rebound.

MARKET BEHAVIOR

Stocks opened lower and are retesting support at 1550.  The market is on track for four out of five down days, but even with all the selling, the market has not lost much ground.  Either this is supportive of a continuation, or the ground eroding under our feet.  Our job is figuring out which and how to trade it.

MARKET BEHAVIOR

The market is doing its best to abuse both bulls and bears with these head fakes and it is doing a good job.  We make new highs, then break down, only to rebound again.  A trader reacting to these moves is getting killed because this whipsaw volatility leads to buying and selling at the wrong times.

Tops and bottoms are some of the most erratic periods because this is where bulls and bears are on equal footing.  The dominant side is losing its grip and the underdog is coming on strong.   While the top will be identified as a single day, the process takes months to complete.  If this is a top, it started last month with the drop to the 50dma.  Most rallies do not end on their first dip and that was the case here as the market rebounded decisively to new highs.  But as this process continues, each rebound is less and less powerful, eventually ending on the dip that doesn’t bounce.

Currently we are building and testing support at 1550, just a few ponts shy of all-time highs.  Everyone expects us to take out these highs and that is why we struggle to get there.  Traders who normally wait the breakout bought early in anticipation.   Bears are not shorting because they are waiting for new highs first. Everyone is mostly just waiting around and that is why we are not moving and volume is so light.

To figure out where the market is going we need to understand what other people are thinking and how they are positioned.  If most bulls are in ahead of the expected breakout, the actual breakout will not trigger a wave of buying because everyone is already in.   If shorts are holding back until we make these new highs, a breakout will actually be greeted by a wave of shorting and profit taking.

I’ve been waiting for a high-volume surge to signal an exhaustion top, but the way the market is set up here, I don’t know if we will get there.  Rather than end with a bang, this rally leg could exit on a whimper.    The bang ending requires a pool of reluctant buyers chasing in the final moments, but it feels like many of them are already in the market and there is no one left to power the chase higher.

INVESTING OPPORTUNITIES

Expected Outcome:
There is little reason to own this market.  Most of the upside has already been realized and a lot downside is underneath us.  The trend remains higher, so it is a risky short the market, but that does look to be the next high-probability, high-profit trade.

Alternate Outcome:
This will be the third year in a row the markets top in the April.  I like the precedent, but I worry about the predictability.  The market hates being predictable and is this too much?  I would be more worried if talking heads were making a big deal out of it, but so far it is not getting much coverage.  People are talking about pullbacks, but each bounce back quiets the pessimistic commentary.   I have no idea what will happen next, but I do see the odds stacked against a continuation. But even if the chances for a pullback are 80%, that means one time out of five this rally will continue higher.  Low-probability or not, we need to watch for the continuation and buy it when it invalidates our previous analysis.

AAPL daily at 1:24 EST

INDIVIDUAL STOCKS

What do you know, AAPL is up when the market is down.  This stock is operating in a world of its own and AAPL traders have such intense tunnel vision they don’t see, nor care about what is going on around them.  The benefit for the bull is even if the broad market sells off, AAPL could surge higher on a break of the 50dma as traders chase the rebound.  But if people are buying the stock strictly for technical reasons, expect them to sell for technical reasons too, likely running into resistance near $485/$500.  Enter and exit a technical trade on technical levels.  Enter and exit a fundamental trade on fundamental data.  This story is still missing the fundamental catalyst necessary to reclaim much higher levels, so don’t let a technical bounce convince us to hold for larger gains when this will most likely be a temporary bounce.

Stay safe

AM: Cyprus who?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:21 EST

AM Update

Stocks recover from Cyprus fears, but is the coast clear?  AAPL is struggling with the 50dma and is building a trade one way or the other.

MARKET BEHAVIOR

Stocks bounced back from Cyprus weakness and are solidly above 1550 this morning.

MARKET SENTIMENT

Europe is a three-year old story and if it hasn’t crashed the global economy yet, it probably won’t.  Our historic 2008 financial implosion occurred over a period of months and if Europe has limped this far, they will likely pull out of it.  This Cyprus stuff is largely noise.  We survived Greece which is 10x the size, so Cyprus is simply a bump in the road.  The biggest concern isn’t the size of the bailout, but the precedent a savings account tax sets.  There is a bit of hubris at the ECB and the biggest problem is the way they presented this bailout.  Instead of calling it a tax, the should have approached Cyprus depositors and said “Your bank is about to go bankrupt and you will lose everything.  The ECB will step in and bailout out your bank if you are willing to pay 10% fee.  If you chose not to pay the fee, you will likely lose everything.”  Phrased that way it is hard to argue with them and most would be grateful the ECB ‘saved’ them instead of the outrage we are currently seeing.  Presentation and perception is everything.

The rebound from Cyprus selling shows the market is less worried about a domino effect and fear based selling has largely dried up.  We can now add Cyprus to the long list of bad news the market shrugged off.  This teflon rally is immune to headlines and it is unlikely one will take down this market.  Instead we need to watch for a diminishing supply of available buyers.

Markets top for one of two reasons, a wave of selling or an absence of buying.  Holders have repeatedly  proven how comfortable they are at holding through weakness and this prevented negative headlines from crashing the market.  Today’s rebound further reinforces this stubborn holding behavior.  The next question becomes how much buying is left because that is what will finally kill this rally.

Shorts are largely absent as demonstrated by the lack of meaningful short-squeezes on good news, new highs, and reversals.  If shorts are absent and bears less vocal, this is a major shift in sentiment and likely shows many cynics have joined the rally bandwagon.  As a contrarian there is nothing as unnerving watching the critics disappear.

TRADING OPPORTUNITIES

Expected Outcome:
The market is within 10-points of all-time closing highs and it seems likely the relief rally will push us through this level.  But rather than be a bullish breakout, this minor double-top could very well be the end of the rally.  Everyone knows rallies cannot last forever, meaning one of these upcoming dips is not going to bounce.  The impending rollover to the second quarter will give institutional investors a clean slate and often they approach the next quarter with a different strategy than the one that just closed.

The conservative trade remains sitting out this volatility.  At this point there is limited upside and a lot of downside, so the only real trade is waiting for a good short entry.

Alternate Outcome:
This might simply be another dip on the way higher.  Holding for more gains is getting a tad greedy, but further upside is something we still need to watch for.  Continued strength into the 2nd quarter invalidates a large portion of my bearish thesis and will be a signal to reevaluate the current market for more upside.  The current trading range is somewhere between 1550 and 1576.  If we hold this level for a while, time instead of pulling back will refresh the market and set the groundwork for a continuation.

AAPL daily at 1:22 EST

INDIVIDUAL STOCKS

AAPL is not sharing in the markets good day.  The 50dma is providing significant resistance and it is not surprising since the stock was $650 the last time it traded above the 50.  But this can cut either way.  Rebuffed at the 50 likely means we will see new lows in the near-future.  Break the 50 and it will trigger a large wave of short covering and momentum buying.  Remember, even if the stock breaks out, this is just a trade and lock-in profits in the upper $400s because $500 will provide a significant level of overhead resistance as underwater traders try to get their money back.

Stay safe

AM: Cannot hold 1550

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:12 EST

AM Update

Selling continues for a second day as the market fails to hold support.  AAPL hit its head on the 50dma and is down with the rest of the market.

MARKET BEHAVIOR

Stocks are struggling with support at 1550.  This is a key level that provided support the last couple weeks and failing to hold it has the sharks circling.

MARKET SENTIMENT

Today’s dip under 1550 triggered a swift wave of stop-loss selling and invited shorts to pile on.  The question is if this selling will achieve critical mass and continue lower, or bottom and rebound yet again.  Either scenario entirely plausible.   It wouldn’t be a surprise to see early bears get rebuffed for the umpteenth time as we finally take out the all-time high, but this would be the last gasp of a dying rally, not signs of unbreakable strength.   Alternately stalling 2-points shy of the record last week could easily be the top of this rally leg.  Either way we have far more down ahead of us than up.

I’m not promoting a collapse and remain constructive on the economic recovery, but markets move in a zig-zag pattern and after every period of zigging, is normal and healthy to zag.  We came a long way and this is a reasonable place to take profits and wait for the next trade.    Even the most bullish years see dips of 5 and 10% and we should expect something similar here.

There is one more piece I can add to the contrarian puzzle.  Two-weeks ago I was still behind the rally and receiving a lot of positive feedback from readers.  But since I grew more cautious and bearish, its gotten quiet around here.  I’m not doing this to be popular and am comfortable going against the current, I only point this out as yet another sign of how popular this rally has become.

TRADING OPPORTUNITIES

Expected Outcome:
One of the upcoming dips is not going to bounce, is this it or will it be the next one?  This is not an exact science and no one knows for certain where and when a market will top.  The best we can do is get close enough and call it a day.  Everything I see says this is close enough.  New highs are still on the table because market tops are often volatile and one of these swings could easily take us to new highs, but that doesn’t constitute a high-probability trade.  I’m in this to make money, not pick tops, so I’m quite pleased with how far we came and am happy to cash in here.

The aggressive trader can start looking for a good short entry, but use prudent stops and don’t stubbornly argue with the market if it moves against us.

Alternate Outcome:
Markets are never easy and it takes more luck than skill to spot a top.  Without a doubt I could be 50 or 100-points premature in selling this rally.  But just because I sold doesn’t mean I have to sit out remaining upside.  I am still looking for signs of continued strength and am more than willing to admit I pulled out too early.  The great thing about sustainable rallies is they give plenty of opportunities to get back in.  Long-term success in the markets is less about offense and comes down entirely to great defense.  The only way to make money in this game is selling winners.

INDIVIDUAL STOCKS

AAPL daily at 1:13 EST

AAPL bumped its head on the 50dma and is selling off with the rest of the market.  Talking about AAPL is like discussing politics and religion with family, it just cannot be done without upsetting someone.  This shows just how emotionally charged this trade remains.  Neither bulls nor bears care about anything other than the data that supports their emotionally held position.  Fundamentals just don’t matter in this stock like this and it continues trading on sentiment.  It will surge on any new product rumor or cash distribution scheme and fall when follow-on buying fails to materialize.  AAPL is setting up for a great sentiment driven swing-trade, but it will be a while before this stock is investment grade again.

For a swing-trade, jump on a break of the 50dma and get out around $485.  AAPL has quickly gone from a Return ON Investment to a Return OF investment stock.   Most people no longer dreaming of huge profits and simply want to get out at break-even   This selling will put a lot of pressure on any rally.

Stay safe

AM: Fear Cyprus?

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR

Stocks gapped lower at the open on renewed Euro fears, but recovered a chunk of those losses by mid-morning.  We bounced off 1545 and are back above 1555.

MARKET SENTIMENT

The financial world is holding its breath over a savings account tax in a country smaller than many mid-western cities.  The rebound from opening lows shows many investors think the fear is overblown and the anxiety induced selling is reversing.  Europe has been a concern for three years and so far they managed to muddle through it without collapsing the global financial system, chances are this is just another bump on that road.  The biggest fear is Cyprus sets a wider precedent and opens the door to similar moves in Greece, Spain, and Italy.  It will be interesting to see how this story plays out over coming days and if European officials relent on their pressure for such a tax seeing how it could shatter confidence in Eurozone bank deposits.

As we discussed here many times, markets move on supply and demand, not news.  News can affect traders expectations of the future and make them change their positions, but it is this buying and selling that changes prices, not the news itself.  Why this matters is if news simply reinforces existing sentiment, it won’t move markets because no one adjusts their portfolio.  This is why markets often shrug off good or bad news to the frustration of fundamental and news based traders.

Up to this point the market ignored headlines of negative GDP, ‘socialists’ taking over in Italy, and the Sequester.  Will Cyprus really be the thing that finally upsets this teflon market?  Market participants are already doubting the significance of Cyprus and using this dip as a buying opportunity.   Buying weakness worked every other time this year, so that makes it a perfectly safe buy here, right?

TRADING OPPORTUNITIES

Expected Outcome:
While I’m not worried about Cyprus, the market is more vulnerable than it has been in months because the extended rally and assumption by many traders every dip is buyable.  By mid-day it looks like the market is finding support and this dip has not triggered a wider avalanche of selling.  This support in the face of seemingly dire headlines shows we are still in position to take out the all-time highs, but I’m not sure how much is left in the tank beyond that.  It will be interesting to watch how the day closes.  If the rebound continues and we close near flat, that will signal all clear and will make traders even more complacent about the next dip.  On the other hand, afternoon weakness will put more pressure on the markets and could signal the start of something bigger.  It’s not that Cyprus is a big deal, but it could be the final straw that breaks the camels back.

Alternate Outcome:
The market ignored far more meaningful economic news on its way to these highs, so why are we afraid some tiny island taking down the rest of the world?  If we are weighing the significance of recent developments, negative GDP headlines, arbitrary Sequester cuts, and anti-austerity leadership in Italy are far more meaningful than some Mediterranean island.  No matter what the market does from here, it won’t be because of Cyprus.  Today could easily be the start of something bigger, but we’ve laid the groundwork for a pullback it would happen with or without this nudge from Europe.   This mornings bounce shows the market is still resilient and new highs are easily within reach, depending on how we respond to those, this rally could continue to 1600 and beyond.

Stay safe

AM: Where are the buyers

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:56 EDT

AM Update

Stocks are trading flat, just under record highs and AAPL is taking flight.

MARKET BEHAVIOR

Stocks sold off modestly in early trade, but found a bottom and recovered to break-even by late-morning.

MARKET SENTIMENT

At the open the market exhibited restraint from buyers and profit-taking by holders, but this was a brief episode as it quickly found a floor and dip-buyers prevented early weakness from cascading into something more.

Everyone is still waiting for higher prices and a climax surge to finish this rally off.  Until then they are buying dips, anticipating new-highs are a foregone conclusion.  Bears are becoming an endangered species and even they are afraid to short this market.  When everyone thinks the market will go one direction, it often heads the other.

If traders are expecting higher prices, they are already in the market waiting for those gains.  But if everyone is already in, who is left to buy?  The amazingly low volume earlier week shows a lack of both buying and selling;  holders are holding for higher prices and buyers are running low.  At least that is one possible, and bearish, interpretation of recent events.  For the bulls, they need to explain where new money is going to come from.  Some will claim the great rotation out of bonds, and while I agree, this is a multi-year process and not enough to prop up this market over coming weeks.     Money cleaving bonds will sustain a 10-year secular bull market, but it will not prevent intermediate corrections along the way.

TRADING OPPORTUNITIES

Expected Outcome:
The rally remains intact until proven otherwise.  That doesn’t mean we have to buy or own it at these levels, but it does mean we shouldn’t short this market simply because its gone too high and needs to pullback.  Wait for real signs of exhaustion or breaking down before betting on the reversal

Alternate Outcome:
There could easily be another 50-points left in this rally, but just because something can happen doesn’t mean it is likely to happen. If this rally is to continue, it needs to do it sustainably.  Today’s flat trade is a good start, but we still need to answer the question of where are the incremental buyers going to come from.

INDIVIDUAL STOCKS

AAPL daily at 1:57 EDT

AAPL is on fire today, likely because Samsung’s Galaxy S4 is largely similar to the S3 and didn’t leave the iPhone5 in the dust.  This is more relief than a fundamental reason to buy AAPL, but sometimes no bad news is good news.  But here’s the thing, if the S4 is mostly like the S3 and the iPhone5 is mostly like the iPhone4S, what does that say about the industry?

A lot of AAPL’s sales came from customers upgrading every two-years, but what happens when the difference between model years is not even large enough to justify paying the subsidized price?  I enjoy my iPhone5, but when neighbors ask if they should get the iPhone5 for $200 or the iPhone4S for free, the free one is clearly the better choice.  There is nothing special enough about the 5 to justify paying the premium.

The risk to both Apple and Samsung is their current products are so good that the upgrade cycle is going to stretch from 2-years to 4-years. Going forward customers’ existing phones will provide more competition to sales than the rivalry between Apple and Samsung.

Stay safe

AM: All-time highs within reach

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:52 EDT

AM Update

Markets keep inching toward all-time highs and AAPL remains range bound.

MARKET BEHAVIOR

Stocks added to yesterday’s gains and are making new highs again after a brief consolidation.  The market is within a few points of an all-time closing high and just a bit further from all-time highs.

MARKET SENTIMENT

This is a challenging time to trade the markets.  The obvious up-trend and media constantly promoting new highs is sucking in formerly hesitant investors and convincing existing holders to keep holding.  How far this goes is anyone’s guess, but we all know it will end at some point because it always does.  Even the best traders in history cannot pick-tops with any consistency, so why do so many average traders try?  I suppose it comes down to the type of people attracted to the markets.  We are all here because we feel we have an edge.  We think we can buy things that are undervalued and sell things that are overvalued.  Some people look at this market and finally see a safe place to buy stocks; others see it as grossly over-bought and keep shorting the market.  Who’s right?

What if the best trade is no trade?  The market is in no-man’s land.  It’s gone too far to be a safe buy, but the upward momentum makes it poor short.  We’re traders and that’s what we do.  Call it a gamblers fix or whatever, but the hardest thing for many people is to just sit there without any positions.

TRADING OPPORTUNITIES

Expected Outcome:
Momentum continues. We are within 5-points of an all-time closing high.  Can the market really resist the temptation of making history?  This rally might be in the final innings, but support at 1550 shows there is still gas in the tank.  We could easily tag 1565 and that marks the top of the rally, or it sets off a short-squeeze and pushes us through 1575, at this point it is anyone’s guess.  No doubt there are stop-losses above 1565, but each short-squeeze is getting weaker and weaker.

Alternate Outcome:
I remain suspicious of the current rally, but the market is good at faking us out.  It wouldn’t be unusual to see the market pause after making all-time highs.  A pullback that finds support at 1550 shows both buyers and sellers are still behind this rally we should expect a continuation.  At this point moving a trailing stop up to 1545 gives the market room to move and lets a trader stay in the rally.

INDIVIDUAL STOCKS

AMZN daily at 12:53 EDT

AAPL is up modestly ahead of Samsung’s Galaxy announcement.  One of the more interesting things to note is how much press Samsung is attracting with this launch.  It isn’t quite Steve Jobs like, but it sure is the most anticipated and hyped Android phone release.  No matter what the Apple management claims, the market sees the Galaxy as a viable alternative to the iPhone.  Whither this is true or not doesn’t matter because stocks trade on perception, not reality.

AMZN slipped on an analyst downgrade.  Analysts ratings are not part of the fundamental story and moves because of upgrades/downgrades rarely stick.  If analysts were good at trading, they would be traders, not analysts.

Stay safe

AM: Buy, sell, or hold

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:30 EDT

AM Update

Markets finding support, but are we close to the top?

MARKET BEHAVIOR

Stocks continue finding support around 1550.  We dipped modestly but bounced above break-even by late morning.

MARKET SENTIMENT

Retail sales came in higher than expected, showing the payroll tax and gas prices are not taking too much of a bite out of the economy, but the market responded with a yawn. That means either it was already priced in, there are few people left to buy the news, or the market simply doesn’t care about fundamentals right now.  Lets look at how these various explanations affect where we are headed.

Given the market’s recent rise, it isn’t surprising a fair amount of good news is already priced in.  The long rally also has a calming effect on the traders, helping them forget about their worries.  If traders feel pretty good about the state of the world, they are likely fully invested.  But if most are fully invested, who is left to buy good news?

Everything I see says this rally is running out of gas, but that doesn’t mean this is the top.  Momentum can easily carry us higher.  In addition, tops are often volatile and indecisive as buy-the-dip traders fight it out with top-pickers.  This back-and-forth can chew up a traders in no time if they react to each dip and bounce.

1565 is clearly in the market’s sights and it is a coin flip if we get there.  Buying after such a strong run is clearly late in the game and doesn’t provide a favorable risk/reward.  Shorting here is also a bit premature because the up-trend is still intact and it would be nothing more than a gambler’s game of picking-a-top.  While that can be fun, it usually isn’t profitable.  All of us are in this because we love the challenge of the markets, but we often forget we don’t always need to have a trade on.  In fact forcing a less than ideal trade is how smart investors often give up most of their hard-earned profit.

TRADING OPPORTUNITIES

Expected Outcome:
The market is entering an indecisive and volatile period as it bases and gets ready for its next move.  Markets often top fairly quickly, so holding 1550 for another day bodes well for the continuation.  Failing to close above 1550 on Thursday shows demand is struggling to keep up and the market will likely encounter a bout of selling.

The market could easily go either way, so it is hard to justify a trade here.  Wait for it to show its hand and then grab on.

Alternate Outcome:
These signs of topping can also count as resting.  We’ve come a long way and it makes sense for the market to slow down.  Sideways is often a way the market catches its breath before continuing higher.  But for the market to continue higher, it would be helpful to see more traders calling the top and following that talk up with selling and shorting the market. Seeing it hold up in the face of that wave of cynicism demonstrates it still has room to go.

The biggest challenge with subjective sentiment analysis is the risk of confirmation bias that skews a trader’s view of what ‘everyone’ is thinking.  As this market rallied, I kept hearing bears say how bullish everyone was.  But the interesting thing is I heard more bears talk about bullishness than I heard firsthand from bulls.  Obviously these bears had a preconceived bias and they sought out data that supported their existing views.  This is not all that different from buying a Honda and suddenly it seems like everyone is driving a Honda.  The number of Hondas didn’t change, just that you now notice them.  Bears focus on bullish opinions and bulls on bearish ones.  The hard part is seeing what is really there, not just what we want to see.

INDIVIDUAL STOCKS

The chop in AAPL continues.  Up one day, down the next.  The stock is mostly holding between $425 and $435 with occasional excursions a few dollars above or below.  Look for a breakout either way to have some legs because this is becoming a closely followed range.  A break above will trigger a wave of buying and a dip below will setoff selling.

NFLX daily at 1:30 EDT

The sideways trade shows the stock is not over-sold and primed for a sharp bounce, so anyone trading that thesis needs to reevaluate.  Chances are the breakout/breakdown will be short-lived and anyone trading that move should take profits early.

NFLX is launching off of support and putting the hurt on bears again.  Stocks that are too-high most often continue higher.  Trade the momentum, don’t fight it.  Arguing with the market is one of the surest ways to give money away.

Stay safe

AM: A rest day

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:23 EDT

AM Update

Early weakness threatens the seven-day winning streak.  AAPL struggles to add to yesterday’s gains.

MARKET BEHAVIOR

Stocks are modestly in the red this morning, but a down-day shouldn’t surprise anyone given the streak of seven-consecutive up-days.

MARKET SENTIMENT

Is this weakness another buy-the-dip opportunity or the start of something bigger?  Dips are buyable until they aren’t.  Every diversified portfolio is showing profits as the market keeps notching 5-year highs, but we all know this cannot last forever.  Weakness here is a no-brainer after running 70-points, but do we buy, hold, sell, or short this dip?

The most conservative option is to sit this one out.  Tops are often volatile and flush out the uncommitted at the exact wrong moment.  Changes in trend are one of the hardest times to trade because of the whipsaws and head-fakes.  The easy trade is cashing in profits and waiting for the next high-probability opportunity.

1565 is a very seductive level and traders are fixated on all-time highs, but that could cause the market come up short.  To figure out where the market is headed, we first need to understand what everyone is thinking and how they are positioned.  If everyone expects us to reach theses all-time highs, they are still holding on.  If bears also expect this, they will resist shorting.  But if everyone is holding and no one is buying, the market will stall and gravity will take over.

While earlier pullbacks bounced, selling was fueled by nervous holders and aggressive shorts. Markets quickly reversed because both of these groups lack the firepower to sustain a move.  But if the market starts selling-off here, it isn’t driven by either of these groups that are waiting for all-time highs.  Instead, this could be the start of real and sustainable selling.

TRADING OPPORTUNITIES

Expected Outcome:
The rally trade is getting a bit obvious and we should expect a pullback to at least 1550.  How the market responds to this level will give us more information about where it is headed.  Support at 1550 is constructive for a near-term continuation through all-time highs.  Failing support at 1550 would form the right-half of the head in a bearish head-and-shoulder pattern.

Either way traders with profits should consider locking them in.  We are in this to make money and the only way to do that is by selling winners.  Obviously the market will continue higher once we sell, but the goal isn’t to make all the money, just the easy stuff.

Alternate Outcome:
The market is on hot streak and there is no reason it has to end at seven-days.  We could easily see nine, ten, even twelve days in a row, especially when everyone is fixated on new all-time highs.  The race is between drying up demand and scarce supply.  Will confident and ambitious holders pull in supply faster than we use up available buyers?  Or will buying dry up and be unable to swallow the normal supply that hits the market every day?  I wish I had an answer for everyone, but this is the market and we have to make educated guesses.  At this point a couple of rest days seem more likely than extending the streak.

AAPL daily at 1:24 EST

INDIVIDUAL STOCKS

AAPL gave back most of yesterday’s surge and is holding just above $430.  The key level remains $455 and buying before then is trying to catch a falling knife.  In every instance until now these strong surges were selling opportunities.  This stock is full of hopeful holders that are excited by every rumor that makes the rounds.  This shows way too much bullish and optimistic sentiment remains in the stock to sustain a meaningful rebound.  AAPL topped as the most loved stock in the market and it will likely bottom after it becomes the most hated stock and people are ashamed to admit they own it.  We are clearly not there yet.

Stay safe

AM: Is the market safe?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:26 EDT

AM Update

Markets are aiming for another up-day and AAPL continues lagging.

MARKET BEHAVIOR

Stocks opened modestly weaker, but slowly clawed their way back to break-even and beyond by mid morning.  What is more important than gain or loss is trading tight and supportive of last week’s breakout to 1550.  This shows holders continue holding and are not locking-in profits.

MARKET SENTIMENT

Is this market safe or dangerous?  The sustained rally over the last several months has been a great time to own stocks and an easy ride for most of the way.  But easy is a relative term that only works in hindsight.  Buying the market January 3rd after a two-day, 60-point move was anything but easy, yet here we are up another 90-points.  Conventional tools of fundamental and technical analysis kept many traders on the sidelines, but a speculator that understands market sentiment and contrarian investing was able to harvest some nice gains.

Bears and pessimists have called for a pullback the last few months and while they were slaughtered in this straight up market, eventually they will be right.  Every rally ends and this one will be no different, the only challenge is knowing when to hold ’em and when to fold ’em.  Obviously every new day brings us one day closer to the end and just when we feel most comfortable is when we are at the greatest risk.

Failing to set off short-squeezes is a great sign sentiment is shifting.  This market has largely rallied on the backs of cynics and shorts.  Breakouts were decisive as shorts scrambled over each other to get out.  We’ve seen less of that recently, meaning shorts are starting to give up.  This is HUGE.  It shows doubt is giving way to acceptance.  Traders that were fighting this market are giving up and joining the bandwagon and this means the pool of available buyers is dwindling.

TRADING OPPORTUNITIES

Expected Outcome:
The market will likely coast a bit higher.  All-time highs at 1565 and 1576 are attractive targets and the market will likely be drawn to these levels.  The question is how do we get there.  Will it be a straight run, or turbulent volatility?  Typically we see choppiness at transition points and the shift from rally to pullback is rarely clean.    This is where many traders end up loosing  all the gains they made in the rally.  This is a difficult place to make money and often the most conservative trade is moving to cash and waiting for the next high-probability opportunity.  If someone is reluctant to sell, at least use a trailing-stop to lock in gains.

Alternate Outcome:
The market doesn’t have to do anything and even if its gone too-far, too-fast it can keep going.  If this were easy everyone would be rich.  While the market could continue rallying here, a rally that lasts several more months would need to be at a moderate and sustainable pace.  If a trader gets off too early, there is still time to recognize the mistake and jump back on.  We can only win this game if we sell our winners and most of the time that means selling too early.

AAPL daily at 1:26 EDT

INDIVIDUAL STOCKS

What is there to say about AAPL?  It is down when the market is up.  The dip-buying from last week is evaporating and no meaningful follow-on buying is propping-up the recent bounce.  What cannot go any lower is acting like it wants to go lower.  A short trade with a stop above $435 and taking profits around $400 looks like an attractive trade.  Given the explosive nature of this stock, using options would help define risk in the case of bullish news.  The Mar28 $420/$400 put-spread I mentioned last week still looks attractive.

Stay safe

AM: Indifference to better than expected employment

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:23 EST

AM Update

Stocks are modestly green on a lower unemployment rate, but is the lack of a move good or bad for the rally?

MARKET BEHAVIOR

Stocks gaped at the open on stronger than expected employment, but sold off to break-even in the first hour of trade.  After briefly dipping into the red, stocks bounced back and are stuck somewhere between the open and early lows.

MARKET SENTIMENT

It is interesting to see the market’s tepid reaction to one of the strongest jobs gains we’ve seen since the recovery began.    We need to figure out why it didn’t surge higher and what this says about where we are headed.  This was the perfect recipe for a short squeeze and momentum chasing.  What happened?

Part of it is the diminished role employment played in recent months.  A year ago the market held its breath for each employment report, but now it is just another data point. Going from losing jobs to gaining jobs was a major turning point, but going from 150k to 200k gains is less meaningful.

The more concerning explanation is if we are running out of buyers and no matter how good the news, the market is stuck without new money to keep pushing prices higher.  Are we finally out of buyers or are reluctant holdouts are just being stubbornly difficult?

TRADING OPPORTUNITIES

Expected Outcome:
I’ll be honest, I expected more out of the market this morning.  When it doesn’t behave the way I expect, it makes me nervous because it means I am missing something.  We are obviously getting close to a top, but I thought we still had a bit further to go given the persistent and widespread cynicism.  The lack of a surge today means could be closer to the top than I expected.  While we are still trading in the green and I don’t want to pull the plug prematurely, I am less confident and moved my stop up to 1530.  Holding 1540 this week is supportive of the market regardless of the headlines and reluctant money managers only have a few weeks left to buy this bull before quarter’s end.

Of course there is no reason to keep holding for the last few dollars of upside.  The market rallied nearly 50 points since breaking back above 1500 last week and taking worthwhile profits is never a bad idea.  We are in this to make money and the only way to do that is selling winners.

Alternate Outcome:
The risk of an imminent top jumped this morning when the market failed to find a large pool of buyers after a decent employment number.  If the lack of buying is because no buyers are left, we will head lower no matter how good the news.  The market is still holding gains and is not breaking down, but it is enough to make me raise my stop-loss to 1530.  A closer stop-loss increases the chances of getting shaken out in a normal market fluctuations, but until I see stronger performance out of the market, I’ll keep it on a short leash.

INDIVIDUAL STOCKS

AAPL is stuck between $420 and $435.  Bottom-pickers come in below $420, but follow-on buying fails to materialize above $435.  As tempting as it is to call a bottom, there is no material supply and demand reason or change in sentiment to justify a reversal here.  In fact this pause is encouraging the hopeful and sucking in dip-buyers, making a continued selloff even more likely.  This stock needs big money to back it up and right now institutions are selling, not buying.

Stay safe

PM: Too-far, too-fast keeps going

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Markets are holding recent gains ahead of the employment report.

MARKET BEHAVIOR

Another day of tight trade supporting the breakout.  This was the third-close above 1540 and shows holders are willing to hold and buyers are willing to buy.  Volume was average and slightly lower than recent days.    A fourth close above 1540 shows sellers are absent and this market wants to continue higher.

MARKET SENTIMENT

Every time the market starts making all-time highs, the academics descend from their ivory towers and warn of irrational exuberance, impending crashes, bubbles, euphoria, and all that jazz.  But the thing to remember is these guys are historians, not traders.  They call the top, the market rallies another year, and they still proclaim to the world how right they were when the market finally corrects twelve-months from now.

We are the one putting money on the line and theory just doesn’t cut it.  Telling us that markets go down after they go up is completely and totally useless.  Tell me when they will go up and down and now we have something to act on.  Without a doubt the market will pullback 7% or more at some point this year.  How do I know that?  Because the market always does.  That’s the easy part, all the money is made in figuring out exactly when that pullback is going to happen.

While I don’t pay much attention to what these academics and historians are preaching from their soapbox, the fact that they are getting airtime is meaningful.  Journalists are not analysts,  they simply report what other people tell them.  When the market is pessimistic, they interview pessimists and report pessimistic stories.  When everyone is in a good mood, they cover positive stories and interview bulls.

When the media tells us these gains are unsustainable, I know that is what traders are telling journalists.  The financial press is a great reflection of what the market is thinking.  Without a doubt this market will top and that top is coming, I just know the market won’t top when everyone is talking about it.  Whether it takes weeks or months of new highs to wring the pessimism from the markets I don’t know, but I do know the crowd and financial press usually get it wrong.  When they talk about corrections, we bet on the continuation.  I’m not saying it is impossible for the market to correct here, but it is less likely when everyone expects it.

I also want to point out financial history is a critical tool I use when analyzing the market and I don’t mean to demean the views shared by academics,  I’m simply pointing out they typically have poor timing.  We can actually broadening that statement even further by saying most people have poor timing.  If this were easy, everyone would be rich.

TRADING OPPORTUNITIES

Expected Outcome:
Last year the market was buzzing in anticipation of each employment report as the recovery was just taking hold, but recently the market is less obsessed with it.  It might be getting to the point where modest gains are taken for granted and only a big deviation will move markets.  And to be honest it really doesn’t matter one way or the other because the market reads into these numbers what it wants to see.  We don’t trade fundamentals, we trade expectations.  If bulls want to buy, they will invent reasons to buy.  If bears want to sell they will find excuses to sell.

If we take the view that the actual number is less important than what the market wants to do, we will be fairly constructive on this market because every sign is it wants to continue higher.  If we have a disappointing number, we might dip, but expect traders to find a sliver lining in the report and buy the dip.  That is what they did with negative GDP and is what they will likely do with a disappointing employment report.

Alternate Outcome:
If the expected outcome is the employment report is not a big deal, then the alternate is the market hinges on this report.  The only time this is true is when it materially changes people’s views of the future and they adjust their portfolio to reflect this new reality.  A negative employment report will not be meaningful for pessimists because they already expect it and adjusted their portfolio ahead of time.  To crash the market, the employment report would need to convince bulls to give up and sell.  While less likely, it is still a real possibility and why we start any trade with defense first.  We always know where our stops are and when the market doesn’t act as expected, we sellout and look for the next opportunity.

Stay safe

AM: Waiting for employment

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:05 EST

AM Update

Stocks are consolidating gains ahead of Friday’s employment numbers.

MARKET BEHAVIOR

Stocks are modestly higher, but hitting their head on 1545.  After last week’s volatility, the calm trade is welcome.

MARKET SENTIMENT

Holders continue holding and cynics keep resisting.  The calm trade shows stock owners are comfortable at these levels and awaiting further gains.  This market is rising on tight supply, putting a wrench in the pull-back crowd’s plans.

This is just another example of the least expected trade being the right trade.  Between December 31st and January 2nd, the market surged 65-points in just two trading days.  To any casual observer this was too-far, too-fast and everyone waited for the inevitable pullback.  That was over two-months ago and the market is up another 80-points.  The pullback crowd is technically right because every market eventually corrects, but in trading early is the same thing as wrong.  This week we have renewed cynicism claiming the all-time highs in the Dow are unjustified and signal an imminent top.  But here we are, holding those gains.

Unsustainable gains typically reverse within a couple of days because the market runs out of buyers and without demand, prices slide.  Holding these levels for a 3rd day shows there is adequate buying to support new highs.  Every jump in price invites the paranoid to lock in profits, but this is a temporary weight on the market and after a couple of days most of the that selling is done.  The end of profit-taking further tightens supply and sets the foundation for the next move higher.

Traders are waiting for Friday’s employment report.  Bulls are expecting good things and bears are waiting for reality to kick in.  Both sides have already positioned themselves and there is little adjustment by either side today, leaving trade quiet as we wait for the next economic catalyst.

Speaking of economic catalyst, are we still under sequester?  What ever happened to that anyway?  Turns out the sequester was widely expected, priced in, and nothing but media driven hype.  If the baristas at Starbucks are talking about it, you know you can safely ignore it.  The only way to get ahead in this game is by trading things people don’t know about yet.  No matter how good or bad, if everyone is already talking about it, they already factored it into their portfolio.  News only moves markets if it makes people adjust their portfolio.  If everyone expected it, they traded ahead of time and the actual news is uneventful.

TRADING OPPORTUNITIES

Expected Outcome:
It will be interesting to see how the market responds to employment tomorrow.  It will either go up, down, or sideways.  There is an above average chance for another short-squeeze to push this market above 1550, forcing under-invested money managers to chase into quarter’s end.  A poor employment report is the only thing left in the bear bag of tricks and if it fails to deliver, look for a wave of buying to hit the market.  We could see weakness if the number is bad, but it likely won’t get carried away since we flushed out most of the weak hands in last week’s pullback to the 50dma.  This market wants to go higher and likely will simply wave away a weak employment report as another excuse the continue easy money.  The last outcome is an expected report and sideways trade.  This simply supports status quo, which is a gentile climb higher.

This market is getting closer to the top with each passing day and new high.  We are not there yet, but we should be more focused on taking profits than putting on new positions.  If someone is not already in the market, don’t chase and wait for the next trade.

Alternate Outcome:
This market is ignoring a lot of negative headlines, but sometimes reality catches up at the most inopportune times.  While holders are confident and keeping supply tight, there is nothing that shakes confidence like falling prices.  Even the most resolute bull will quickly fill with doubt when the market is plunging.  The market should find support around 1525 in the event of near-term weakness, if it doesn’t t we need to prepare for lower prices.  A dip under 1500 means the pullback is underway, but we will likely see a bounce, forming the right shoulder of a head-and-shoulder.  Use that bounce to put on a short.

INDIVIDUAL STOCKS

AAPL traded lower before jumping above break-even midmorning.  Volatility remains high as bulls and bears are fighting it out over where the stock will go next.  Bottom-pickers were excited about Tuesday’s powerful rally, but so far it hasn’t triggered much follow-on buying from a larger pool of investors.

NFLX is challenging support at $175 and a dip under this key support level will trigger a wave of stop-loss and bear shorting that pushes it back to $160.  But this is just a step back in the climb higher.

Stay safe

AM: Consolidation is good

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:23 EST

AM Update

Stocks consolidate after yesterday’s breakout and AAPL struggles to find new buyers.

MARKET BEHAVIOR

Quiet morning in the markets.  We opened higher, but are trading closer to break-even by midday.

MARKET SENTIMENT

This tight trade shows neither sellers nor buyers are showing up in force and we continue consolidating recent gains.  Holders continue holding for more gains and resist the temptation to take profits.  Buyers remain hesitant to chase this market.  This is how traders behaved over the last two-months, so we should expect the current trend to continue until there is a material change in the attitude of either side of the market.

TRADING OPPORTUNITIES

Expected Outcome:
We are looking for one of two possible scenarios; consolidation supporting a continuation, or a surge higher into exhaustion.  Today’s price action supports consolidation and continuation.  Resisting the urge to break 1550 exhibits restraint as slow and steady wins the race.  Staying between 1530 and 1550 for the remainder of the week is bullish.  On the other hand if the market takes off in a frenzy of buying, lock in profits because that surge is not sustainable.  We will never be able to sell the top and the market will inevitably head higher after we sell.  The most successful traders insist the key to their success is selling too early and if it works for them, it works for us.

Alternate Outcome:
The market can breakdown at anytime and bullishness and complacency is increasing with each new high.  The high-probability trade remains higher, but even if the chances for a continuation are 75%, that means 1 out of 4 times the market will fail under these exact conditions.  75% is a great trade to take, but we need to manage downside risk because 25% still a likely outcome.  1515 is a good trailing-stop and we can move that up to 1525 once the market holds 1550.

This market is quickly running out of both upside and time.  At most there are a couple dozen ponts of upside and a few weeks left in this rally.  Its been good run since the November lows and the market needs a break.  Use this time to plan your exit.

INDIVIDUAL STOCKS

AAPL daily at 1:24 EST

AAPL is giving back some of yesterday’s gains.  After the short-squeeze and bottom-fishing, the stock is struggling to find follow-on buyers.   Today’s pause shows just how shallow the pool of potential buyers is and why the high probability trade remains lower.

A short can use $435 as a stop-loss and target a pullback to $400.  Because this stock is so volatile and could explode higher on a news story, the safest way to play this is through options.  Right now a March 28 $420 to $400 put-spread costs ~$6 and has a max profit of $14.  The time aspect of options adds a whole new dimension to trading and can lead to some unexpected behavior before expiration.  Only do this if you are experienced with options, or alternately experiment with a small position to build experience with options.

The above option trade isn’t just for bears either.  It can be used by nervous bulls looking to buy a little insurance against further losses.  The raging bull could further offset the cost of the insurance if he sold two puts at $400 if he is convinced he wants to buy even more AAPL if it falls to $400.  I’m not recommending this trade, just offering it up as a creative way for bulls to manage their position.

Stay safe

AM: New all time highs on the Dow

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:18 EST

AM Update

All-time highs on the Dow, 52-week highs on the S&P500 and AAPL bounced back from recent selling.  All is well in the world for the time being.

MARKET BEHAVIOR

The market gaped above 1530 at the open and marched on through 1540 by mid-morning.

MARKET SENTIMENT

A lot of fanfare over the Dow setting a new all-time high and no doubt that headline will be repeated through non-financial news outlets.  This is another big step in overcoming the average Joe’s aversion to equities.  This is not a switch, but over time the market will seem less risky the higher it goes and the gentle thaw will bring a steady stream of new investment over coming years.  The best time to buy-and-hold is when everyone says buy-and-hold is dead.  We will still see brutal selloffs and even bear markets, but in the 100-year history of the markets, each period of 10+ years of stagnant trade was followed by powerful secular bull markets.

Back to the present, we saw a modest short-squeeze this morning, but the breakout is still relatively contained.  We are concerned about excessive and unsustainable buying leading to an exhaustion top.  As explained in previous posts, this market will top on good news, not bad, and we need to watch big up-days with suspicion.  Today’s 1% gain is nothing to worry about by itself, but if we string three of them together, that is noteworthy.  We are still looking for the biggest up-week since the rally began to signal chasing is getting out of hand.

If big gains are unsustainable, a slow grind higher is.  If we keep inching higher with intermediate pullbacks, that shows cynicism is alive and well.  The holdouts are the ones that keep pushing this market higher and the longer they resist, the longer this rally will last.

TRADING OPPORTUNITIES

Expected Outcome:
Keep holding what is working.  If a person wanted to, they could raise their stop to 1515 after today’s gains.  We might see the market dip and consolidate these new levels, but a healthy market should hold above 1525.  The extra 10-points margin gives a little cushion so a trader doesn’t get shaken out prematurely.

1550 is the next stop.  If we pick that up tomorrow, the rate of gains are getting aggressive and should raise a warning flag.  If we trade sideways between 1530 and 1550 for the remainder of the week, that will clear the way for more gains.  We already came 40-points in the last four-trading sessions, so a pause here is normal, health  and expected.

Alternate Outcome:
The last four-day pop is aggressive and pushing us closer to exhaustion.  The low-volume over the las few days shows buying isn’t getting out of hand yet, but everyone knows the market goes two-steps forward, one back, so locking in today’s gains is not a bad idea.  We’re in this to make money and they only way to do that is by selling winners.

INDIVIDUAL STOCKS

AAPL daily at 1:18 EST

AAPL holders are breathing a sigh of relief as the stock regained most of the last two-days of selling, but it is still under the previous lows of $437.  No doubt a lot of late shorts are running for cover in this short-squeeze.  There is no news so the pop is largely driven by supply and demand.  The bigger question is if more buyers will follow the short-squeeze and dip-buying frenzy?  If not, this will be just one of many bounces on the way lower.

The key level to watch is $437 and closing above it shows this bounce can go a bit further, but bumping its head on resistance at $437 makes an interesting short entry with a stop just above $437.  $5 of risk for $30 reward is not a bad trade.  Of course AAPL is a highly emotional stock and it could easily gap $15 higher overnight, blowing well past a stop-loss, so this position should only be made by savvy traders using an appropriately sized position.  The other way to manage and define risk is buying a put-spread.

Previously I said we need a ‘V’ bottom to send a wave of panic through the investor base and finally create a bottom to this selloff.  Two-days and a few percent decline doesn’t count as a ‘V’ bottom because it didn’t trigger that huge wave of emotional and irrational selling that flushes out all hope remaining in the stock.  The last couple days of selling were barely average and we need to see huge volumes of selling to form a capitulation bottom.

Stay safe

AM: Constructive consolidation

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:18 EST

AM Update

Stocks are consolidating after the recent bounce, but holders keep holding and the rally remains intact.  AAPL is making new lows because it cannot find new buyers.

MARKET BEHAVIOR

Stocks opened modestly lower, and are trading around this level by midday.  Tight trade after the last 10-days of volatility is constructive and supportive of these levels.  The 50dma is catching up and the sideways trade let the market rest for its next move higher.

MARKET SENTIMENT

Holders are happy with their positions and not selling, supporting last week’s rebound.  As we’ve seen over last few months, the biggest hurdle isn’t selling, but lack of buying.  Those out of the market remain skeptical and are waiting for this market to breakdown in the widely expected pullback.  But since holders are so comfortable holding, that breakdown hasn’t happened and the market inches higher on tight supply, not widespread demand.

Bears have stop-losses above 1530 and breaking this level will trigger a wave of short-covering.  This pop will further add to the pain underweight investors are feeling.  There are few emotions more persuasive than watching everyone else make money.  This is why smart people throw caution and reason out the window when chasing bubbles to unsustainable heights.  I’m not suggesting this is a bubble, just using that example to show the power the crowd has in winning over reluctant investors.  The higher this rally goes, the harder it is for cynics to resist and that eroding base of pessimists keeps pushing the market higher.

Between confident holders holding and former cynics joining the rally bandwagon, the rally has the perfect recipe for a continuation.  As we’ve seen multiple times, headlines don’t mean anything to this market and we shouldn’t expect negative headlines to break this market.  We all know markets top, but if this one won’t top on bad news, what is left?  Good news.  As crazy as this sounds, I expect this market will top on good news.  Remember, fundamentals and technicals don’t determine market prices, only supply and demand.  What happens is the final piece of good news wins over the last holdouts and we push higher on their buying.  The problem arises when the last holdouts buy the good news there is no one left to keep pushing prices higher and the market finally rolls over.

Of course the other hurdle this market faces is the end of the quarter.  Money managers underweight and trailing the market will be forced to buy in to quarter’s end.  Even if they cannot catch up, they want to at least show their investors they have all the rights stocks in their quarterly position report.  Because of this window-dressing, look for strong stocks to continue going up and weak stocks to keep selling off.

TRADING OPPORTUNITIES

Expected Outcome:
Today’s support shows very little profit-taking and stock owners holding out for more gains will keep supply tight.  New highs are just a few points away and breaking this level will trigger another short-squeeze.  Look for the market to continue into 1540 when chasing will put 1550 in play.

Fear a strong surge fo buying more than a bad headline.  This market will fail on optimism, not the pessimism that has so far failed to dent the rally.

Alternate Outcome:
This choppy sideways trade could be a ploy to suck in the last buyers.  Tops are often volatile as power shifts from Bulls to Bears and we certainly have that volatility.  While there is often one last push higher to create a double-top or head-and-shoulders, it isn’t required.  The best way to protect ourselves is stick to our stop-losses.  While the market has bounced several times off of support, each further test is more likely to fail.  Double-bottoms are common, tripple-bottoms not so much.  1500 is the level we need to watch and failing to hold it will be a big red flag.  In the meantime swings of 5 and 10 points can be ignored because this is the market consolidating and building a base for a move higher.

INDIVIDUAL STOCKS

AAPL daily at 1:18 EST

AAPL is selling off, creating new 52-week lows.  There are rumors of an iWatch, iTV, dividends, buybacks, and stock splits, but that doesn’t save the stock from its core problem, too many hopeful holders.  Everyone loves AAPL and already owns as much as they can.  If it’s a buy at $550, it’s a steal at $450.   But this is why it is having such a hard time finding new buyers.  When you have a huge pool of holder and small pool of potential buyers, there is little place to go but down.

The problem with a large group of holders is they are just a few dollars away from becoming sellers.  Breaking support and creating new lows is challenging holders resolve and many are giving in.  There are many reasons to own this stock, but any holder needs to be willing to see the stock continue lower in the near-term.  For the swing-trader, continue pressing the short and look for $400 over the next few weeks.  I would be reluctant to keep a short past quarter end since the trade will likely take on a new personality after the mass exodus of fund managers tapers off.

Stay safe

WR: Rally wins another one

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Weekly Review

Stocks bounced back from a volatile week and I pissed off a lot of people when I suggested MSFT is out innovating AAPL.

MARKET BEHAVIOR

The market closed the week higher by three-points, but only after some dramatic downside volatility.  The 10wma is within 27-points and we bounced of this key moving average in intra-week trade.  The weekly range was the largest since the Fiscal Cliff pop as the debate between bears and bulls intensifies.

MARKET SENTIMENT

If there was a week for the selloff to finally take hold, this was the week.  We sliced through support at 1500 and bears were after blood.  But much to everyone’s surprise, the market snapped back and regained all the weekly losses in another example of the obvious trade being the wrong trade.  No doubt the market could break wide-open at any moment, but to see it run out of sellers and bounce back so quickly speaks volumes about where this market wants to go.

Recent volatility eliminated any complacency and flushed out most weak holders.  Sellers sold because everyone else was selling, which is common in a herd-style selloff, but we are more interested in the people buying the dip.  These investors are willing to step in front of a freight train and absorb near-term losses because they believe this market is headed higher longer-term.  The most noteworthy trait of these holders is they are not spooked by minor dips and are more than willing to hold through some volatility.  What this means for us is these holders don’t panic and run for the exits at the first signs of weakness and their willingness to hold through volatility actually eliminates volatility because they keep supply off the market.

TRADING OPPORTUNITIES

Expected Outcome:
When in doubt, stick with the trend.  Any weakness over the last two-months has been a buying opportunity and that trend continues.  News cannot bring this market down and any headline-induced dip has been a buying opportunity.  Without a doubt this market will top, but it isn’t ready yet.

Alternate Outcome:
This Teflon market wants to go higher, but is the rally getting too obvious?  Once everyone buys into it we will run out of new money to keep pushing prices higher.  I don’t think we are there yet, but I don’t have a crystal ball and stop-losses protect us from ourselves.  1500 is the line in the sand and another break in the near-term shows this market is running out of traders willing to buy the dip.  I still expect new highs over the next few weeks, but a dip under 1500 invalidates the bull thesis.

INDIVIDUAL STOCKS

Wow did I strike a nerve when I suggested MSFT was out innovating AAPL.  Quite a few people took offense and let me know about it.  At my core I’m a contrarian and when everyone is defending AAPL and ridiculing MSFT, that warrants a closer look.   I am the first to admit I could be wrong, but I am fairly certain MSFT will trade $60 long before AAPL sees $900.  Feel free to disagree because that is what makes markets.

Just to give people perspective on where I am coming from, I was the guy using dialup modems in the 80s call to bulletin boards, I was emailing friends in Europe in the early 90s, I used Netscape Navigator before most people even heard of the internet, I was using Yahoo when it was still hosted on Standford.edu, I had a “HoTMaiL” account long before most people knew what email was, I watched Steve Jobs unveil the original iPhone live on the internet, and I run Linux on my laptop because it is a great operating system that makes old computers new again.  While I’m not a hardcore technology pioneer, I’m certainly an early adopter.  Now I’m stereotyping here, but who has a better idea where technology is headed, someone like myself or some gray-haired investor who bought his first AAPL product a couple of years ago?

As I said, I could easily be wrong because nothing is certain in the markets, but I see real potential in MSFT and am impressed with the direction the company is headed.  Win8 and the SurfacePro have bugs, but everyone forgets what an overpriced piece of junk the original iPhone was.  I am also old enough to remember how ruthless MSFT is in showing up late and crushing the competition.  They don’t need to be the best; just good enough and I think they are more than good enough here.  Plus as a long-time Apple customer, I am becoming more and more dissatisfied with how controlling they are and am irritated with their constant dumbing down of OS X and iOS.  I want to write a lot about this subject, but will continue this discussion another time.

As for sharing these controversial ideas, I have a choice, I can say what people want to hear, which is what the popular gurus do, or I can step on toes and tell people what is really happening.  I’m not in this to make friends; I’m here to share the best investing ideas and insights and will keep doing that no matter how unpopular it is.  As always please feel free to disagree because I will be the first to admit I don’t know everything.

Stay safe

PM: Sequester = buy?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Markets rallied on bad news, what could be more normal than that?  AAPL is making new lows and looks like an interesting short.

MARKET BEHAVIOR

Stocks opened lower as the sequester deadline came and went without a compromise.  Early weakness found a bottom at 1500 and we rallied back through the day, eventually finishing up a quarter percent.

MARKET SENTIMENT

The financial press claims the market rebounded because some positive data (manufacturing activity) was more important than other negative data (slowing in Europe and Asia), but we know better.  The market bounced because it ran out of sellers.  Markets move on supply and demand; nothing more, nothing less.  Today’s developments were largely negative and firmly supported the bear’s case, but the market rallied because all the pessimists sold earlier in the week during the volatile pullbacks.  Without bears selling and putting fresh supply on the market today, we rallied.

Don’t get me wrong, fundamentals are important, but they don’t move markets, only people trading stocks does that.  If new fundamental data changes people’s view of the future, then it will move the market when traders adjust their positions.  But if the news simply reinforces what people already believe, they will keep their current positions and the market will be unaffected because no new trading took place.

This is not an easy concept to grasp, but it is the way the markets work. The worst happened today, sequestration kicked in, but the market rallied.  If someone else can come up with a good reason why markets rallied on bad news I’m all ears.  Contrary to popular opinion, the markets are rational and make perfect sense once you understand why it moves.

TRADING OPPORTUNITIES

Expected Outcome:
How can anyone be anything but long this Teflon market?  Nothing can take it down and it is proving all the doubters wrong.  This market will top because every market does, but it will not rollover for any of the reasons the cynics are pointing at.  This market will top on good news, not bad.  That biggest piece of bullish news will convince the remaining holdouts to jump in headfirst and running out of buyers is how this will end.

Keep buying weakness, but use a stop under 1500 just in case.  Look to take profits after we set a new high and the rate of gains accelerates unsustainably.

Alternate Outcome:
There are no guarantees in the market and it can do whatever it wants next week.  I don’t know what it will do, but we don’t need to in order to make money.  Success in the markets is about understanding probabilities.  If we know what is more likely to happen than not, we trade on this insight, manage our risk, and over time will come out ahead.  We will be wrong, there is no way around that, but as long as we are wrong less than we are right, we win this game.

These recent pops higher might be sucking in the last of the bulls and we are running out of new buyers.  This will exhaust the market sooner than I expect, but sticking with a stop-loss at 1500 will keep our risk manageable.

AAPL daily at end of day

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What is there to say about AAPL?  It made a new low and will probably keep making new lows for a while longer.  Hope is a poor strategy and it will take something more to bring this stock back to life.  Right now it is a far more attractive short than buy.  Anyone who is still holding on figuring it cannot get any worse is about to have that theory tested.

But that is just a sentiment analysis of the stock.  I also think the stock is in hot water fundamentally too.  I’m a bit of a tech geek and have been using Apple products before they were cool and have close to $5k of AAPL hardware on my desk.  But let me tell you, I stopped by the Microsoft store at the mall and they are leading the innovation charge.  My iPhone, iPad, iMac, and Macbook feel dated next to Win8 and the slick touch interface.  Without a doubt AAPL is no longer leading this race and mostly living off its reputation.  AAPL has a lot of catching up to do if it wants to keep its crown.

Stay safe

AM: What sequester?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:10 EST

AM Update

The market is up in a contrarian trade after sequester cuts go into effect, but the market’s strength is not enough to keep AAPL from making new lows.

MARKET BEHAVIOR

Stocks tested 1500 in early trade as the sequester kicked in, but the market bounced within minutes, rising nearly 20-points over the next couple hours.

MARKET SENTIMENT

The obvious collapse due to sequester is no longer a sure thing.  The market dipped in the first 10-minutes, but that hasty selling quickly exhausted itself and the market bounced decisively.  Sequester is more a media event than an economic one.  It made great fodder on financial and political talk shows, but most market participants realize a 2.4% cut in federal spending will not turn this economy upside down.

Sentiment wise, a lot of the fearful are scratching their head and wondering what is wrong with this market.  As we discussed yesterday, most of the weak hands are already out and no longer have a vote in where this market goes.  When all the pessimists are already on the sidelines, this limits new supply and the resulting scarcity props up prices.

Clearly this market does not want to not top on news, but it will eventually run out of new buyers.  As long as people continue doubting this market there will be fuel to keep the rally going.  What we need to watch for is when everyone embraces this market.  That is when supply of new buyers is drying up and we need to look for an exit.

TRADING OPPORTUNITIES

Expected Outcome:
This was the fourth time people could buy 1500 in the last couple weeks.  When the market surges higher, those that missed the move hope for a pullback, but too often they are afraid of the pullback when it finally happens.  The rule of thumb is if a pullback is hard to buy, it is probably a good place to get in. If the pullback is easy to buy, then it will probably keep going lower.  There is a lot of psychology and supply and demand behind this, but we have two high-profile examples of this between the S&P500 and AAPL.  The hard buy was the right buy and the easy buy was the wrong buy.

Today’s bounce off of 1500 shows this rally still has legs.  Supply is tight because most of the sellers already sold and current holders are comfortable holding.  While volatility will persist, any weakness should find support quickly.

Alternate Outcome:
Obviously there are no guarantees in the market and we need to be wary of a drop under support.  No matter how convinced we are in our analysis, we need to stick to our sell rules.  We will be wrong and that’s okay, but it is criminal to stay wrong.  Right now 1500 is solid support and a material breach of this level will force us to reevaluate our thesis.

AAPL daily at 1:10 EST

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AAPL is making new lows and is a far more attractive short than buy at these levels.  The stock continues its underperformance and is down 1.5% when the market is up.  In the near-term this is a sentiment trade, not an investment.  Look for weakness to persist as long as people still talking about value.  Expect selling to accelerate and challenge $400 as many “investors” bailout after pain and regret get too intense.  This stock will eventually become oversold after this last wave of selling and will finally become buyable, it just isn’t there yet.

Stay safe

AM: Digesting gains

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:12 EST

AM Update

MARKET BEHAVIOR

A quiet and uneventful morning after seven consecutive sessions of heart-pounding volatility.

MARKET SENTIMENT

Neither buyers nor sellers showed up in force and the market is digesting recent gains.  The last week-and-a-half humiliated bulls and bears alike as it duped many into making impulsive and ill-timed trades.  At present everyone is too shell-shocked and hesitant to make a decisive move, but this calm is an important step in regaining composure.

When in doubt, stick with the trend.  The high-volume selling purged all complacency and much of the fat that accumulated since the start of the year.  Technically speaking, the dip under 1500 cleared the minefield of automatic stop-losses, making that area far less dangerous to the market.  But chances are we won’t test this area again since all the sellers under 1500 now need to figure out how to get back in and their buying will prop up any potential dips.

When the market marches ahead, those left behind hope for a pullback.  We had that pullback this week, but how many jumped on the opportunity to get in?  My guess is not many.  In fact many of the holders who were lucky enough to be in the market were spooked out by the dip under 1500.  Now both of these groups need to figure out how to get back in and their chasing is the fuel that will keep this market moving higher.

Buying is only half the equation and we also need to consider sellers.  Anyone who held through recent volatility is feeling pretty good about themselves right now.  Maybe they held because of discipline, or they failed to sell because they froze under pressure, but either way they are congratulating themselves for sticking it out.  This affirmation and positive reinforcement makes them holders less likely to sell the next dip.  Add to this to all the buyers looking to get in and we have a recipe for higher prices.  At least until we run out of buyers…….

TRADING OPPORTUNITIES

Expected Outcome:
We might see some weakness if sequester negotiations bog down, but most holders expect this and are growing immune to the gridlock in DC.  The more interesting thing will be watching the post-sequester trade.  Will the market spike on a deal?  Is the market already expecting the deal and will selloff on the news?  Can it do both?

An interesting trade would be a surge higher on compromise out of DC, but if the buying comes in too fast, it could build the head of the head-and-shoulders.  A one-way run up to  1550 or 1575 should be looked at with a healthy dose of skepticism.  On the other hand, modest, measured, and earned gains are sustainable and indicate there is more left in this rally.  The recent dip to the 50dma refreshed and renewed the rally meaning we might only be halfway through this move.

Alternate Outcome:
After the Fiscal Cliff and Debt Ceiling scares and last second compromises, the market might be looking past the sequester expecting a deal is all certain.  The risk is if politicians say enough is enough and refuse to compromise any further, using a govt shutdown to prove a point.  Its happened before and the uncertainty will roil the markets.  While certainly a possibility, our politicians care more about their reputation than doing the right thing.  Look for them to be politically expedient and leave the hard work for someone else down the road.

AAPL daily at 1:13 EST

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AAPL is finding support around $445 and is resisting a selloff after an uninspiring investor day yesterday.    $450 has been near-term resistance.  Breaking above and holding this level would be supportive of a swing-trade higher.  The stock already missed the opportunity for a quick rebound and any long-term investors should expect a 12 to 18 month.  In the meantime there is still a lot of money to be made swing-trading or selling options.  Just because this isn’t a set-it-and-forget it trade anymore doesn’t mean we should stop paying attention to it.

Stay safe

AM: Humble pie

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:11 EST

AM Update

Bears are humiliated today as the break above 1510 sent shorts running for cover.  AAPL’s investor day is uninspiring and the stock is sagging as another catalyst came and went.

MARKET BEHAVIOR

Stocks broke above 1500 and continued past 1510 in morning trade.  Runaway selling on Monday gave way to binge buying.

MARKET SENTIMENT

Two-days ago the world was ending and now it is saved.  Try as they will, fundamentalists, technicians, and the financial press cannot explain away these recent swings using headlines, data, or charts.  There is only one thing that moves markets, supply and demand.  Herd psychology is taking over as people make trading decisions exclusively based on what other people are doing.  Normal rules do not apply in times like these and is why it is so important to understand what people think, how they are positioned, and why they are doing what they are doing.

Shorts and breakout buyers are chasing this market higher and while their buying is not sustainable, the rally is sending a wave of relief through the market.  Traders who held the dip are feeling better and anyone who sold the dip is suffering a bout of regret.  The obvious short was anything but and bears have humble pie all over their face.

Reclaiming 1500 and 1510 is significant.  While volatility will persist, this rebound shows bears have less sway over the market than most thought.  The recent rebound further diminish their credibility and traders are becoming more comfortable holding this market.  But in one of the most ironic paradoxes of the market, the smaller a group, the more powerful it becomes.  As the bear contingent shrinks we need to become more fearful them.  The more bullish people become, the greater the risk of running out of new buyers becomes.  This is the psychology and structural trade that leads to double-tops and head-and-shoulders patterns.  The first breakdown typically fails and bounces higher because too much cynicism and doubt remains.  With each successful bounce, the rally bandwagon becomes more and more crowded, eventually succumbing to its own success when everyone is bullish.

TRADING OPPORTUNITIES

Expected Outcome:
This market is showing how important it is to trade proactively, not reactively.  There was a lot of money to be made using defined buy-points, stop-losses, and taking worthwhile profits.  Unfortunately for many, this has been a horrible couple days as they bought the rally and sold the dip.

The market reclaimed 1500 and has a comfortable cushion above this key support level.  The obvious stop-loss is 1495 and anyone who overcame their fear and bought the  break above 1500 is doing pretty well right now.  There is no reason to become complacent here, but so it looks like higher-highs are in our future.

Alternate Outcome:
Until the market makes a higher-high, the risk of a suckers rally is real.  Markets often bounce on their way lower, sucking in bottom-pickers and flushing out late shorts.  Any bull needs to acknowledge they can be wrong and this is where stop-losses are worth their weight in gold.  Success in the market isn’t about how much we make when we are right, but how little we lose when wrong.

AAPL daily at 1:11 EST

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AAPL is down 1.5% halfway through its investor day as the market has been underwhelmed by what it heard.  There is still time to surprise the market in the Q&A, but if there was real meat to this story, Cook would have presented that early.  With another catalyst come and gone, look for the stock to resume its slide lower.  There are still too many hopeful holders in this stock for it to make a meaningful rebound without an insanely cool new product that will reinvent the company.  The iPhone6 or another me-too streaming TV device just isn’t going to do it.

LNKD is squeezing bears again as something that’s gone too-far, too-fast keeps going.

Stay safe