Category Archives for "Intraday Analysis"

AM: Buy the dip?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:57 EST

AM Update

Selling abated and buyers are waiting for better prices.  AAPL is within a whisker of setting a new low as its underperformance continues.

MARKET BEHAVIOR

Selling took a break this morning and the market is vacillating between gains and losses.  While it is good the market broke the fever of impulsive selling, a material dip under Monday’s lows could set off another wave of reactive selling, pushing the market to the 50dma/1475 level.

MARKET SENTIMENT

While the market is still on edge, holders are no longer rushing for the exit and everyone is waiting to see what happens next.  Selling dried up but prices remain flat because opportunistic buyers are waiting for even more attractive prices before jumping in.  Over the near-term the most likely buyers are late shorts forced to cover on any strength.  While this is not sustainable buying, it will be enough to seduce dip-buyers to jump on the bandwagon.

TRADING OPPORTUNITIES

Expected Outcome:
Recent selling does not prove this market will not top in a more traditional double-top, head-and-shoulders, or exhaustion surge.  This dip is potentially forming the left-shoulder of the H&S or the middle pullback of a double-top.  Further, this might simply be an intra-rally check back to the 50dma, something common in extended rallies. Either way, expect new highs in the near-term.  Look for the market to bounce somewhere above 1475.  A lot of selling has already occurred and we are closer to the end of this dip.  While we might have a little further to go, shorts should lock-in profits before a short-squeeze wipes them out.

The most aggressive traders can buy this pause and use 1475 as a stop, but the safer move is waiting for the market to reclaim 1500.  The size and volatility of this dip did a good job of refreshing the rally and if we continue higher, look for 1550 or even all-time highs at 1575.

Alternate Outcome:
This really could be the selloff everyone’s been waiting for and talking about.  While I am suspicious of anything widely believed, sometimes the crowd is right.  There are countless reasons for this market to implode and yesterday’s Italian election added to the list.  Every rally ends and this could be the early stages of a massive correction.  While I don’t buy this story, stop-losses are the best way to protect my portfolio from hubris.  I’m okay with calculated 10-point losses when a trade doesn’t work, but that is a far different risk profile than holding through a 200-point collapse because I refused to admit defeat.

No matter which side of this trade you are on, plan your trade and trade your plan.  Identify buy/short points, stop-losses, and levels to take profits; then stick to these.  If the market reaches your buy point, buy.  If it reaches a sell point, sell.

AAPL daily at 12:58 EST

INDIVIDUAL STOCKS

AAPL was within a dollar of making a new low.  In a day where the market is practically flat, AAPL fell nearly 1% in early trade.  Breaking $435 will trigger another wave of stop-loss selling and shorting by bears.  At this point even a broad market rebound cannot save this stock.  While it might initially bounce on market strength, look for the stair stepping lower to continue.  $400 is a major psychological level and expect the market to test it.  That is another 10% dip from here.  Current holders need to ask themselves how much further they are willing to ride this down.

Stay safe

AM: Bounce or breakdown?

By Jani Ziedins | Intraday Analysis

AM Update

Volatility is chewing up impulsive traders, but the rebound remains in tact as long as we hold 1500.  AAPL is holding $450, but what happens if the market takes a dive?

S&P500 daily at 1:15 EST

MARKET BEHAVIOR

Stocks gapped higher at the open, but slid through the morning, giving back all those gains and then some.  The intraday range already exceeded 1% and continues the recent trend of volatility and indecision.

MARKET SENTIMENT

The market is in a sucker’s phase where it throws in all kinds of fake signals to dupe impulsive traders.  In periods like this it is best to act proactively, not reactively.  Take profits into strength and buy dips.  Anyone buying strength and selling dips is having a bad time.  The safest trade is letting the gamblers sort this out while watching from the sidelines.

Early weakness is blamed on election polling out of Italy, but if the market is ignoring sequestration and negative GDP, why will it crash on European politics?  The ‘bad’ guys won in Greece a couple of years ago and we see what happened there.  Nothing.  Why will Italy be any different?

Of course this is the market we are dealing with and it doesn’t always act rationally.  We could implode in a cascade of irrational selling, but since that is what people expect, I have my doubts.  No one believes this rally and that is why it keeps working.

People trade their opinion and anyone suspicious of this market is already defensive and underweight.  There are far more available buyers than sellers here.  Recent support at 1500 shows most holders are comfortable holding through weakness.  This limits supply and puts a floor under the market.  On the other side, shorts and money managers feeling pressure to catch this market will be forced to buy any strength.  Limited supply and lots of demand is a recipe for higher prices.

This rally leg is getting a bit old and anyone calling for a pullback is right, just early and in the markets early is the same thing as wrong.  We will pullback, just not yet.

TRADING OPPORTUNITIES

Expected Outcome:
The market is still well above support at 1500 and until we violate this level, the rebound is alive and well.  No doubt I could be wrong and that is what stop-losses are for.  Markets like this are best suited for decisive traders who are willing to act early.  Anyone who bought the market in the low 1500s is still okay.  Those that waited for a confirmation of the bounce before buying are being flushed out for a loss.

To succeed in volatile markets like these, identify ahead of time levels that show support and resistance.  Plan trades around these levels and then stick to that plan.  Last Thursday breaking 1500 but quickly recovering showed strength and was a legitimate buy signal.  For those traders, stick with the trade until the market breaks under 1500 and don’t get sucked into the emotional selling today.  Chances are good we will not fall back to 1500 and it will be an easy hold.

Alternate Outcome:
Markets often reverses on seemingly benign news.  If reversals were obvious, everyone would be rich and we know that is not the case.  We make the high-probability trade, but use stop-losses to protect against flawed and incomplete analysis.  Without a doubt Italy could be the straw that breaks the camel’s back, but we need to stick with the high-probability trade and that remains higher.  But we cannot ignore the other side of the trade and that is a bigger market selloff.  The market can slice through 1500 but will likely find support at 1475.  Failing support at 1475 means this rally is done and we need to wait for the next high-probability opportunity.

AAPL daily at 1:16 EST

INDIVIDUAL STOCKS

AAPL is mirroring the indexes, gapping at the open, but pulling back in midday trade.  So far there is nothing new from today’s trade and the trend is more likely to continue than reverse.  The bigger challenge for AAPL will be holding up through a 10% dip in the broad market.  Since AAPL is a high beta name, it can fall more than 2x the indexes.  A 20% drop in AAPL means there is potentially another $90 of downside risk left in the name if the broad market hits a rough patch.  Are long-term AAPL investors willing to hold through that kind of volatility?

Stay safe

AM: Stocks finding a bid

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:19 EST

AM Update

The market is finding support and recovering recent losses.  Should this strength be bought or sold?  AAPL continues its lifeless trade and AMZN is setting up to break either direction.

MARKET BEHAVIOR

Stocks are finding support above 1500 as the wave of impulsive selling abated and traders are using the pause to more rationally evaluate the market.

MARKET SENTIMENT

The last couple of days were dominated by “sell first, ask questions later”, but some sanity has finally returned after bottoming around 1500.  This is an important development because herd psychology can trigger massive selloffs when people start selling simply because everyone else is selling.  The most encouraging sign of support came yesterday afternoon when the market didn’t collapse after dipping under 1500.  That was the perfect setup for technical stop-loss selling to trigger wider selling.  Demonstrating support in face of all those automatic stop-losses showed selling was slowing down, not picking up.

Everyone acknowledged the recent series of non-stop new highs was getting frothy and this two-day pullback addressed that.  The bigger question is if this was enough of a dip to resume the uptrend, or do we need to see more selling before this thing finally bottoms?  Markets top on complacency and how quickly the mood changed once the selling started shows me this market is not complacent and traders are still cynical and edgy.  Topping complacency is when stocks start selling off a little at a time and no one seems to notice or care.  Clearly that was not the case here.

The encouraging thing for the bull is the recent dip created a new pool of potential buyers.  Recent shorts and swing-traders that jumped out will turn into buyers if the rally resumes.  Markets move on supply and demand only, this renewed pool of buyers gives us more fuel to keep the rally going.

TRADING OPPORTUNITIES

Expected Outcome:
Arresting the slide shows the emotional selling has dried up for the time being.  That doesn’t mean the coast is clear, it just says the risks of an avalanche of herd selling has returned to more normal levels and makes it a little safer to buy-the-dip.

Even thought we are seeing some calm here, this could simply be the eye of the storm.  We need to use stop-losses to protect our account we jump in too early.  A stop-loss at 1495 provides a reasonable level of protection while still giving the market enough room to move around.  Everything I see still points to new highs before the end of the quarter and set your profit target accordingly.  The only question is if 1500 is the bottom or we need to dip down to 1475 first.

Alternate Outcome:
This pause could simply be a dead-cat bounce on the way lower.  The market is the most humbling contraption ever created and if too many traders are betting on the bounce, it will humiliate all of us by continuing the selloff.  Of course if I were in charge and my goals was to crush as many traders as I could, I would let the market rebound before sending it down for real.  Rather than just zing bull or bears, why not get them both at the same time?

INDIVIDUAL STOCKS

AAPL daily at 1:19 EST

AAPL is on pace to log its first green day in over a week.  While this is good, the lifeless sideways trade is showing little conviction supporting these gains.  As much as people hate to hear it, I still think there are new lows coming and any strength is a selling opportunity.

AMZN is doing its best to prove both bulls and bears wrong as it seems magnetically attracted to the 50dma.  Since everyone is expecting it to move one way or the other, the most frustrating trade is flat.  I don’t expect this will last and look for a break either way; buy $267 and sell $259.  Both the long and short trade have room to run; an upside breakout will make new highs and a dip will probably fall to the 200dma.  At this point it is a coin-flip and let the market show its hand first.

Stay safe

AM: Testing support at 1500

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:31 EST

AM Update

Stocks dipped and are testing support at 1500.  We could see a little more weakness, but this is a buy-the-dip moment, and those piling on the short bandwagon are going to have a bad time.

MARKET SENTIMENT

There are two kinds of holders, those that sell a 2% pullback and those that don’t.  Today we find out how large each contingent is.  New buying largely dried up because anyone already reluctant to buy the recent rally is not rushing in when the market is “melting down”.  The key to this pullback rests firmly in the hands of holders and how many are running for the exits versus those saying this is no big deal.

So far all the headlines say “buy protection while it is cheap”, “the pullback could be ugly and deep”, “correction”, etc.  It really is hard to find anyone shouting “buy the dip”.  When everyone thinks this is the real correction, I’ll take the other side.  I’m not saying this is the bottom and no doubt we could easily see further selling, but I do think we will make new highs before the end of the quarter.  That makes this a buy-the-dip opportunity, we just need to find the right timing to buy that dip.

Real tops happen when everyone is complacent and buying the dips.  When the guy running around saying the sky is falling is labeled Chicken Little and ignored.  Right now the guy promoting the rebound is the oddball and more likely to be ridiculed than the one saying the market is on the verge of collapse.

Why this matters is it gives us insight into how traders are positioning their portfolio.  Anyone who expects a major selloff is already out of, or short stocks.  These were the people who sold yesterday, but once they are out, they no longer have vote in what direction the market goes.  The only people with a say are those still holding and those contemplating buying the dip.  Those are the two groups we need to focus on when determining how to trade this market.

So far holders sat through too-far, too-fast, a negative GDP number, and everyone knows sequester is just around the corner.  I think it will be harder to shake these core holders out and this wave of selling could be short-lived.  The market is already finding support at 1500 as the selling is temporarily abating.  We have to be careful of the stop-losses sitting under 1500 because that could trigger one last wave of selling, but that will be the last of it.  Once those autopilot sell orders work through the system selling will climax and we will bounce higher.

Holders are just half the equation, we also need to consider who will buy this dip.  There are a lot of big money managers still underweight this market, wishing they bought the rally back at 1500.  Here is their chance and no doubt some are taking advantage of it.  Expect the buying to intensify if the market starts making new gains and big money fears being left behind for a second time.

This rally since November is running out of steam and we are closer to the end, but this is not that end.  Look for a more typical double-top or head and shoulders pattern before we see a bigger pullback.  That means new highs in the near-term and this dip is buyable.

TRADING OPPORTUNITIES

Expected Outcome:
I am looking for buying opportunities here, not shorting ones.   This selloff is too easy and once all the weak hands bailout, supply will dry up and we will continue higher.  I like going against the crowd, but that is different from catching a falling knife.  We need to look for a valid entry to buy back in.

The low of this pullback will be somewhere between 1500 and 1475.  If you are okay with another 25 points of weakness, buying now is not a bad thing.  Another strategy is putting a trailing buy-trigger just above the market.  Right now that could be 1506 or yesterday’s close of 1511.  This would let you ride the market down if it continues sliding, but will get you in when it is trying to rebound.  Another strategy is to wait a few days and let this market find and hold support. But either way I would not be short this market here, the high probability trade is a rebound, not a collapse.

Alternate Outcome:
The market can do whatever it wants and doesn’t stick to a standard playbook.  While most markets top with exhaustion, volatility, double-top, or head-and-shoulders, there is no rule that says it can’t just roll over one day and die.  While this is certainty a possibility  it is not the high-probability trade.  If you need a guarantee, get a savings account.  If you can handle a little risk when the odds are in your favor, look for the eventual top to be more consistent with history, making this a buy-the-dip opportunity.

INDIVIDUAL STOCKS

AAPL just cannot find a bid and is now under $445 now.  That is a 10% decline in 10-days.  Buyers are just not showing up because everyone who wants this stock already has some.  The high-probability trade is waiting for new lows and swing-traders to jump in and buy the dip after the stock hits $430.  This could lead to another bounce to $450, but that will be a selling opportunity.  There are still far too many hopeful holders in this stock for it to rebound and it will take time and volatility to grind that out.  Some people won’t ever give up, like the CSCO holders waiting for the bounce back to $50.  But that is a vice, not a virtue in the markets.

Stay safe

AM: Modest selling

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:19 EST

AM Update

Modest selling after making a new high.  AAPL is still searching for a support.

MARKET BEHAVIOR

Stocks gave back some of yesterday’s gains in early trade, but are finding support around 1525.

MARKET SENTIMENT

This weakness is actually supportive of a continuation because it shows the market is still skeptical and chasing is not getting out of hand yet.  The trend to this point has been breakouts followed by sideways trade.  If the market holds these levels for a few days, look for another new high next week.

Yesterday’s surge into the close was largely driven by short covering and by itself is a temporary source of buying.  Now that shorts have covered, we need to find new people to buy this market.  Today’s restraint shows many traders still on the sidelines are holding back.  We will be close to the end when this dam of restraint finally breaks and buyers fight each other to get in the market.

Looking at the calendar, there are five-weeks until the end of the quarter.  Big money managers underweight this market and overweight AAPL are getting nervous, but they are hoping the expected market pullback and AAPL rebound will save their quarter.  They still have time to move into high-beta stocks to catch the market if they need to and the pressure won’t really set in for a couple of weeks.  Desperate money piling into high-beta stocks will cause some fireworks.  Of course the above scenario only applies if we keep making new highs into early March.

TRADING OPPORTUNITIES

Expected Outcome:
While we need to exercise restraint here, the trend is still higher.  This is the time to be collecting winners, not initiating new positions or going short.    Each trade has a different risk profile and a good time to take profits is not automatically a good time to put on shorts.

The market is retesting support at 1525, which is normal and healthy.  If we hold this level for a few days, an aggressive and nimble trader could buy back in and squeeze a little more upside out of this market.  But for the average trader, its been a good run and there is not much left in this move.  We could continue up to 1550, but the risk of melting down increases by the day as the supply of available buyers is used up and lack of demand could trigger a larger wave of selling.  Is another 20-30 S&P500 points worth the risk?  For some yes,others no.

But that is the trade as it stands right now.  A modest dip and sideways trade for a week or two clears the way for a continued move higher and that is buyable for most traders.  I don’t know what the market will do and simply look for the best trade at any given time.  Today it is cautious optimism and restraint, but that could change next week if big money keeps buying every dip.

The hardest part of trading is selling winners on the way up and very few people trade this way.  But if most people don’t make money in the market, maybe we should consider using a different strategy than everyone else.

Alternate Outcome:
If the expected outcome is a little more upside, the alternate is an imminent collapse.  The sequestration fight is heating up and could take the air out of this market any minute now, but I don’t expect it.  Anyone who sold/shorted the Fiscal Cliff lost a lot of money and they are not about to repeat the same mistake here.  In fact, I’m wondering if we are seeing some buy-the-rumor, sell-the-news here as the market is rallying into an expected budget deal.  What is the least expected outcome?  A market selloff on a budget deal, and that is why we might actually see it.  This is pure speculation at this point, but the closer we get, the more clues we will have about the market’s intentions.

INDIVIDUAL STOCKS

AAPL daily at 1:19 EST

AAPL’s sell-the-news keeps on selling as the stock dipped under $450 this morning.  This is no longer a fundamental story, it is a supply and demand trade.  It doesn’t really matter what Apple the company does here, the stock is stuck in a rut because it cannot find new buyers.  This is the most widely owned stock by both retail and professional investors.  This means everyone who wants some already has more than they need, and beyond just a lack of demand, this also creates a huge pool of potential sellers.  Gigantic supply of potential sellers and small pool of available buyers is why this great company’s stock is down 35% in just a few months.

NFLX is seeing a little selling pressure here.  After running up nearly 100% since earnings, a pullback to $160 should be expected.  I’d still be afraid of shorting this stock because it is so heavily shorted it could pop 10% at any moment, but holding a long here is getting greedy.

AMZN put the hurt on more bears as it traded up to $275, but that squeeze didn’t last and it since pulled back to $270.  So far the stock looks like it wants to set a new high above $285.  What cannot go any higher usually keeps going higher.

Stay safe

AM: New highs again

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:23 EST

AM Update

New highs in the market as all is well with the world.  AAPL struggles with $460, AMZN is holding the 50dma, and NFLX is close to breaking $200.

MARKET BEHAVIOR

The market made new highs in early trade and is holding those gains through midday.  What cannot go any higher keeps going higher.

MARKET SENTIMENT

No one wants to sell this market and anyone watching from the outside is developing second thoughts about sitting this one out.  There are few motivators more powerful than seeing everyone else make money and that is why so many former cynics are quickly forgetting their fear of heights.  The calm and complacency of the group is infectious and there are fewer and fewer people warning of imminent doom with each passing day.

The gradual shift in market sentiment is what heightened my senses.   There could easily be days and weeks left in this rally, but we are far closer to the end than the start.  From a risk versus reward analysis, the remaining reward is shrinking by the day and the risk becomes more and more real.  We could easily see another 25-points to the upside, but on a 180-point move from November’s lows, holding out for those last few percent could lead to “tripping over pennies”.  Buy when everyone is fearful and sell when everyone is greedy.

TRADING OPPORTUNITIES

Expected Outcome:
The market is rallying here, but don’t become complacent.  This is not a time to short the market, but it is a good time to start locking in profits, especially if the rate of gains increases.  This would be the last of the holdouts chasing the market and once they buy-in, demand will dry up and we will finally have that pullback everyone’s been calling for.

It’s easy to predict the market because it always does the same things.  A pullback is a no-brainer because markets always pullback……eventually.  The money is made in correctly timing these moves and that is the hard part.  I don’t know exactly when this market will top, but I suspect it is coming.  No doubt I’ll get out of this market early, but I’m okay with that because top-picking is a fool’s game.

Alternate Outcome:
Markets often go further and longer than anyone expects.  We could see this rally continue higher for weeks, even months, but that doesn’t make it a high-probability trade.   This market has already gone further and longer than anyone expected, already up 60-points from the Fiscal Cliff pop.  We are approaching the point where cynicism gives way to greed and that is when markets top.

If someone wants to play both sides of the fence, a trailing stop is not a bad idea.  It leaves the door open to further gains, but locks in profits if the market does start dipping.

INDIVIDUAL STOCKS

AAPL daily at 1:23 EST

AAPL couldn’t hold $460 and stop-loss selling pushed it down to $453.  The real test will be if the stock can reclaim and hold $460 or if this level becomes resistance again.  The sell-the-news dip continues following last weeks push up to resistance at $485.  Last Tuesday Cook quashed hopes of an imminent increase to the dividend/buyback program and without that catalyst  the stock has drifted lower.  I still don’t know where the next buyer will come from or when the next revolutionary product will be released.  Until those questions can be answered, the stock will probably retest recent lows as it continues purging hopeful holders.

AMZN is finding buyers above the 50dma and the stock looks like it wants to keep defying bears and shorts.  Owning AMZN here is a pure speculation trade and based entirely on the next greater fool theory, but it seems likely that greater fool will be shorts rushing to cover as the stock trades back above $270.  This stock will unravel at some point, but it is a bad short right here.

NFLX continues its assault on $200 and is less than $10 away.  Anyone who thought the 30% post-earnings pop was waaaaay over done missed a great trade.  Remember, the contrarian trade isn’t going against the chart, it is going against the crowd.  If the crowd thinks something went “too-far, too-fast”, the contrarian trade is betting on a continuation.

Stay safe

AM: Another day of quiet trade

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:15 EST

AM Update

Stocks are holding recent levels in quiet trade.  AAPL is holding support at $460, but technicals still indicate a downtrend.  AMZN is building a trade around its 50dma, we just have to wait and see what that trade is.

MARKET BEHAVIOR

Stocks were up in early trade, but hit their head on 1525 and are down midday.  1525 seems to be resistance and 1515 support.  We will watch to see which of these levels gets taken out first but I wouldn’t buy/sell a break through either level because the probabilities of a head fake are high and these are minor technical levels.

MARKET SENTIMENT

The low volatility drift higher continues.  While the market is bouncing up and down, it is doing so within fractions of a percent and more likely the result of random noise than meaningful trade.  What we know for sure is the market continues creeping higher through these gyrations and the trend remains intact.

TRADING OPPORTUNITIES

Expected Outcome:
While this market is closer to topping, don’t try to short it here because the rally is still alive and has some upside left.  On the other side, longs need to start building a plan to lock in profits.  I find it easier to sell into strength, but trailing stops work too.  If you are sitting out of this market, it is a bit late for anything other than quick day trades.  The market could rally sharply from here, but that will be the end of the run, not the start of the next leg.  If the market consolidates and/or pulls back slightly, that will refresh the market and make a good entry point, but if it races ahead, resist the temptation to chase.

Alternate Outcome:
If the expected outcome is caution, the alternative trade is reckless abandon.  While a several percent move higher seems likely and could be profitable if timed exactly right, it will be part of a topping pattern and not the start of a new leg higher.  If someone needs to trade this market, stay nimble.  The more comfortable people become with this market, the more nervous we should be.

INDIVIDUAL STOCKS

AMZN daily at 1:15 EST

AAPL is down, but still holding above $460.  Volume tapered off the last couple days as both buyers and sellers are taking a break.  Technicals show the downtrend remains intact as the stock continues making lower-lows, and lower-highs and is solidly underneath the 50dma.  Without a doubt this stock will rebound at some point, but when in doubt stick with the trend.  As for a trade, sell a break under $460 and buy a pop above $485.

AMZN is dipping but still has a several dollar cushion above the 50dma.  If someone bought the break above the 50dma, they still have some breathing room, but get out if the stock cannot hold the 50dma.  Holding the 50dma is obviously bullish, but a break under the 50dma could be shorted, but only for a couple of days because it is likely to bounce.  Failing to hold the 50dma for a third time setup a longer short trade.

Stay safe

AM: Cautious optimism

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:22 EST

AM Update

S&P500 bounces off of support at 1515 and AAPL is finding buyers in the $460 range.  AMZN, NFLX, and LNKD continue proving the cynics wrong as they keep gaining.

MARKET BEHAVIOR

The market opened lower, but rallied off of 1514, again finding support near the 1515 level.  What was resistance a couple of weeks ago is providing support here.

MARKET SENTIMENT

Josh commented a couple posts ago that while exchange volume returned on Tuesday, trading volume on the SPY remains suspiciously light.  This is a really interesting observation and it might give us further insight into this market.  The SPY is a trading vehicle for speculation and hedging, not investing.  This can be seen by the SPY’s ridiculously high turnover rate of just 5 days.  Following volume on the SPY provides great insight into what traders are doing, separate from longer-viewed investors.

One possible explanation for the low volume on SPY is traders are afraid to buy this market and just as fearful of shorting it.  Since short squeezes have been a big part of what pushed this market higher, we might not have that same bid above the market going forward.  If that is the case, this market will need to draw in new buyers to keep moving higher.

TRADING OPPORTUNITIES

Expected Outcome:
Without a doubt the market is approaching the end of its run and an intermediate top is weeks and a handful of points away.  The safer this market feels with its steady climb higher, the more nervous it makes me.  I’m not ready to give up yet, but I am less confident and more paranoid than I was a couple of weeks ago.  One of the hardest part of trading is knowing when to take a winner.  We should be giving that more thought here than what positions to add.

Alternate Outcome:
If the expected trade is promoting caution, then the alternate is going all in.  Markets often move further and longer than most expect and undoubtedly this one has already don that, jumping over 120 points in less than two months. But are we seeing skepticism grow or fade the higher this thing goes?  I’m still waiting for that large weekly price gain, but am actively looking for an exit.  It is always better to be out of the market wishing you were in, than in the market wishing you were out.

INDIVIDUAL STOCKS

AAPL is finding support at $460 and trying to regain upward momentum after two days of selling.  $460 is a good line in the sand to use as a stop-loss for a long trade, but if this is an obvious stop-loss, other traders will use it and the stock could trigger another wave of selling if it dips to under it.

LNKD daily at 1:22 EST

After some early weakness, AMZN is fining buyers willing to support the break above the 50dma and recent gains.  This stock is not done humiliating bears and get in its way at your own peril.

LNKD and NFLX continue dining on fresh bear meat as they push to new breakout highs.  Remember, the contrarian trade isn’t going against the price, it is going against the crowd.  If the crowd thinks these are ridiculously overpriced stocks and bound to crash, then the contrarian trade is betting on the continuation.

Stay safe

AM: More constructive trade

By Jani Ziedins | Intraday Analysis

AM Update

The S&P500 continues finding support near recent highs.  AAPL is struggling for direction.  AMZN popped above the 50dma plus a few other individual stock stories below.

S&P500 daily at 1:18 EST

MARKET BEHAVIOR

Stocks gaped up at the open, sold off to break-even by midday, and are attempting a rebound as I write this.  Nothing new or insightful from this price-action and the previous analysis and expectations of a continuation remain intact.

MARKET SENTIMENT

Any selling widely viewed as the start of an expected pullback will not turn into said pullback.  This rally will top, but it will happen when everyone is convinced it is another buy-the-dip opportunity, and we are not there yet.

So far this Q1 is a carbon copy of last year’s Q1.  Last year’s rally kept going and going until everyone gave up fighting it and that is when it finally nosed over.  People will point to some fundamental story that broke last year’s market, but the truth is fundamentals can only break the market when it is already setup to fall.  We have all witnessed when markets reacted counterintuitively to a major story and that is because the underlying supply and demand was setup for a different direction.  When fundamentals and supply and demand disagree, always go with supply and demand.

TRADING OPPORTUNITIES

Expected Outcome:
Some weakness is normal and healthy.  Anyone rushing for the exits or piling on the shorts because the market dipped a few points is going to have a bad time.  Markets top on complacency, not fear, and as long as traders keep predicting the top, it won’t happen.

Alternate Outcome:
The end of this rally is coming and the market doesn’t always follow a set playbook.  There are countless examples of markets topping without a surge of buying that exhausts demand, but we are playing a game of probabilities.  If most rallies top on high volume, that becomes the basis for a high-probability trade.  We could be wrong, but if we trade this way over a long period of time, we will win more often than we lose and that is the key to succeeding in the markets.

INDIVIDUAL STOCKS

Quite a bit of indecision in AAPL as it struggles for direction.  The stock opened low, surged higher, and is now drifting lower.  While the technical rally attempt is still intact, we can probably say the fundamental justification for the rally, an imminent dividend and buyback increase, is dead.  Can this rebound continue without its rally cry   As it stands, I see no fundamental or supply and demand reason for this stock to rebound here and I continue expecting lower prices.

AMZN daily at 1:18 EST

AMZN broke above the 50dma on elevated volume.  Anyone who jumped on the short bandwagon is having a bad day.  Same goes for those that bought unconfirmed 50dma support and were chased out by the recent pullback.  Going forward, anyone looking for a good entry into AMZN, here is your shot.  Put your stop near $260, but this bounce should not fall back under the 50dma.  If it does, consider selling before it reaches $260.

NFLX is recovering from a few days of selling.  Any bears who used this weakness as a shorting opportunity are second guessing that decision and many are buying back their shorts, adding fuel to the rally.  These stories go further and longer than most expect and bears would be better off burning a pile of cash in their driveway than shorting a strong stock.  Maybe NFLX is overvalued here, but that doesn’t mean the market will recognize that any time soon.

LNKD is finding buyers at these higher levels and this is supportive of a continuation.  The market obviously doesn’t care what its P/E is and neither should you.  Anyone shorting this stock because of the P/E should just send their money to me and I promise to put it to better use.  No doubt this stock could crater here, but that doesn’t make shorting LNKD a good trade, just a lucky one.  The difference between luck and a good plan is luck always runs out.

FOSL is having a bad day.  We will see if it respects support at $102.  If a stock falls more than a few percent under the pivot, then the chances of success diminish dramatically.  Success in the market is not about being right all the time, but how a trader responds when wrong.

Stay safe

AM: Adding to recent gains

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:02 EST

AM Update

The market is holding recent gains in quiet trade while AAPL is dipping in active trade.  FOSL is breaking out and setting up an interesting trade.  AMZN bounced back and is just under the 50dma and NFLX is holding recent gains.

MARKET BEHAVIOR

Stocks are up modestly this morning and continue supporting the recent break above 1515.

MARKET SENTIMENT

Things that are “expensive” usually get more expensive.  This is because people shy away from them and that means there is a larger pool of available buyers.  Contrast this with something that is “cheap” and a “good buy”.  That means everyone is already in the stock/market and there is a large pool of available sellers.  We are seeing both cases play out in this market.  The S&P500 continues higher no matter how “overbought” people claim it is and AAPL keeps going down no matter how “cheap” people think it is.  Trading isn’t about what people think, but how they are positioned.   When everyone loves something there is little demand left, when everyone is suspicious there are few sellers left.

TRADING OPPORTUNITIES

Expected Outcome:
Stick with the trend because what is overbought is about to get even more overbought.  The tight trade over the last couple days is a nice change from last week’s volatility.  Calm and stead trade bodes well for a sustainable continuation.

Alternate Outcome:
This rally will end at some point and with each passing day we are one day closer to that end.  We’ve come almost 180 points since the November lows and without a doubt most of this leg’s gains are behind us.  At most we have another 50 points left in the tank before we see some kind of larger consolidation/pullback.  Look for a material break of support at 1500 or an unsustainable surge higher to signal this rally is dying, but until then stick with the steady climb higher.

INDIVIDUAL STOCKS

AAPL is suffering a bout of sell-the-news as Tim Cook failed to deliver what speculators were hoping for.  If the justification for the recent bounce is invalid, then the trade is also invalid and traders need to get out.  Look for the stock to trade back down to recent lows if it cannot find a floor and bounce back this afternoon.

FOSL daily at 1:02 EST

FOSL popped nicely and looks buyable for the aggressive trader.  The stock could dip and close the gap, but the trend is clearly higher.  Use a stop-loss near $103.

AMZN is bouncing back from yesterday’s selloff, but is still under the 50dma.  If it cannot regain this moving average on decisive volume, there could be a quick short trade here.  Either way look for a decisive break from this area and ride it for some quick profits.  Don’t get greedy and take profits early.

NFLX opened higher, but sold off by midday and is in the red for the 4th day.  But more bullish is holding support above $175.  Selling is a normal and a health part of moving ahead so don’t pay too much attention to the recent volatility as long as the stock keeps holding recent gains.

Stay safe

AM: Looking good

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:28 EST

AM Update

Stocks are consolidating near recent highs and signaling a continuation   AAPL is testing $485, AMZN can’t hold the 50dma, and NFLX is pulling back.

MARKET BEHAVIOR

Stocks are trading flat and supporting Friday’s breakout to new highs even if we are slightly in the red.  Consolidation is an important part of moving ahead in a sustainable way and this is more bullish than had the market jumped 15-points this morning.

MARKET SENTIMENT

The “obvious” pullback following the Fiscal Cliff pop has not materialized and we find ourselves another 65-points higher.  This is yet another example where the contrarian trade is sticking with the trend, not going against it.  There is no fundamental or technical reason for the market to rally, but that is exactly why it did.  Traders who focus on these aspects of the market are often confused by the market’s irrational behavior.  Prices are not determined by fundamentals or technicals, but by people buying and selling stocks with each other.  Understand what people are thinking and how they are positioned and all of a sudden the market starts behaving a lot more rationally.

We are rallying because most traders are afraid of the fundamentals and technicals.  Everyone who fears the future already sold and is in cash.  Once all the pessimists were out, supply dried up and there was nowhere to go but higher.  Further adding fuel to the fire, all of the pessimists in cash can only do one thing, buy the market.  Tight supply and a huge pool of potential buyers is the exact recipe for a 200 point move and that is what we are seeing.  Don’t follow the data or charts, instead look at the markets as a collection of people and understand what they are thinking, how they are positioned, and how they can trade the market going forward.

TRADING OPPORTUNITIES

Expected Outcome:
Keep doing what is working.  This pause after Friday’s breakout is healthy.  It shows traders are not selling the new highs, but the breakout is also not surging unsustainably.  Keep holding as long as the market stays above 1505 and doesn’t race ahead 20 or 30 over a couple of days.

Alternate Outcome:
This market will pullback because all rallies eventually end, but in the market early is the same thing as wrong. It is okay to expect a pullback, but it is wrong to jump in front of this market.  We need to wait for clear signs this market is topping before trying to short it.  Last week’s three-dips to 1500 flushed out a lot of weak hands and largely exhausted selling at these levels.  If we fall back down there, that means buying is also running low and we should anticipate further weakness.  A few pullbacks to support is healthy and signals a sustainable continuation, but more than that and it becomes topping.

We also need to be wary of the market racing ahead because this signals the last of the emotional and formerly reluctant buyers are chasing this market.  Once they are in, there is no one left to buy and we head lower on lack of demand.  Successive strong up-days shows the dam burst and anyone sitting on their hands has plunged in.  That will be our signal to get out.  I don’t know how far this rally will go or when it will end, but I do have a good idea of what the end looks like, so we just keep watching for those signals.

INDIVIDUAL STOCKS

AAPL daily at 1:28 EST

AAPL continues its rebound and touched $485, a technically significant level because that was the low prior to earnings.  The market expects the dividend and buyback will be boosted by ~30% in coming days and that is the justification for this rally.  Is that enough to get the stock back on track or is this a buy-the-rumor, sell-the-news event?  Only time will tell.

NFLX is selling off and testing support at $175.  It will be interesting to see how the stock responds.  The trend is still higher, but this is a volatile stock and there will be some wild swings no matter which way it eventually goes.  I’m not in this stock, but if I had to choose sides, I’d buy it here.  When in doubt, stick with the trend.

AMZN failed to hold the 50dma and is selling off.  This shows why we wait for a confirmation before jumping in.  We were looking for a high volume-bounce off the 50dma and it never happened, keeping the disciplined trader out of this stock.  We could see a rebound in coming days so don’t stop following this stock, but watch from the outside and wait for the right entry.  If the 50dma starts acting as overhead resistance, this could make for a quick and nimble short, but don’t get greedy because a stock like this will bounce after any weakness.

Stay safe

AM: New highs

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:19 EST

AM Update

The S&P500 breakouts out to new multi-year high, defying all the naysayers.  AAPL is coming back to life but is this a sell the news trade?  AMZN and NFLX are flat, but that is supportive given how many people are gunning for these stocks.

MARKET BEHAVIOR

Stocks popped above 1515 in early trade and are holding these levels midday.  New highs are forcing shorts to cover, but we have not decisively broken this level and no doubt some shorts are still holding on and hoping for a fade into the close.  These reluctant buyers could trigger a second leg higher this afternoon if strength continues.

MARKET SENTIMENT

The financial press is attributing this breakout to recent data, but the truth is people are under-invested and this pop clearly shows that.  I can’t get away from all the “experts” claiming this market is too bullish, but they are letting their own views bias their analysis.  The failed breakdowns and successful breakouts shows this market is anything but overly bullish.  Each dip fails because all the cynics are already out of the market and the selling pressure dries up quickly.  Each breakout succeeds because all the cynics are scrambling to cover their shorts and the strength is turning bears into buyers.  Simple supply and demand.

It isn’t all that difficult to figure out what the market is going to do next, the biggest challenge is looking at the market objectively.  People see what they want to see, not what is really there.  I don’t pay much attention to what I think the market should do, but instead focus on what other people think it should do.  The market is not driven by fundamentals or technicals, but by other traders.  Figure out what they are thinking and how they are positioned and everything starts making sense.

TRADING OPPORTUNITIES

Expected Outcome:
The market wants to go higher and is still buyable for a quick swing-trade.  We should hit 1525 next week, but maybe we selloff a little first or we jump right there, it really depends on how stubborn the bears are.  Will they stick with their shorts or will they admit defeat and cover?  Either way the trend is still higher.

How much higher depends on the pace of gains.  If this market takes off with some of the largest weekly gains we’ve seen, that is a signal to get out.  If the market continues trading modestly, look for the rally to continue.  The interesting thing to watch is if volatility continues or calms down next week. Volatility is a warning sign of indecision and a changing personality, often preceding a change in direction.

Alternate Outcome:
The market has put some distance between itself and 1500.  The next time we test this level, the market probably won’t hold.  Any dip below 1505 should be met with a high level of skepticism.  Current price action indicates a continuation, but the market can surprise us at any moment so be ready for it.

INDIVIDUAL STOCKS

AAPL daily at 11:19 EST

AAPL is adding to yesterday’s gains on optimism  it will do something with its mountain of cash.  That is a potential catalyst for the stock, but is it big enough to reverse its downtrend?  I expect the best trade is buy the rumor and sell the news.  Anyone buying the stock needs to ask themselves, is AAPL more likely to blow investor expectations away with some amazing plan to return cash to shareholders, or will it be pathetic and disappointing?  Given AAPL’s track-record,  I wouldn’t expect a lot out of AAPL, if it does anything at all.  Plus this is not a reinvention of the product line that will drive huge sales growth, profit margins, and earnings.  Most income investors buy a stock for dividends, not capital appreciation, so while an increased payout would be nice, don’t expect the stock to return to old highs on distributing cash to shareholders.

AMZN tried to breakaway from the 50dma but is retesting it by midday.  With so many doubters, holding support is a win and as long as AMZN remains above the 50dma, look for a continuation.

NFLX is trading sideways and resting at $180, also strength given how far its come.  I still wouldn’t short this stock and there is probably more upside remaining.

Everyone loves AAPL and is suspicious of AMZN and NFLX.  Fear what is safe and embrace what is feared.  Often the contrarian trade is going with the trend and that is the case with these three stocks.

Stay safe

PM: 1500 is rock solid

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Bears cannot break this rally and look for higher prices in coming days.  AAPL surged on hopes of money being distributed to shareholders, but use this strength to get out.  AMZN looks interesting here and NFLX is chewing up bulls and bears alike.

MARKET BEHAVIOR

Stocks stumbled in early trade but recovered most of those losses by the close.  The market is finding support near 1500 and continues bouncing back from any dips to this key level.

MARKET SENTIMENT

No matter what the “experts” say, this market does not want to selloff.  For the umpteenth time it had the perfect opportunity to selloff, yet found support and rebounded.  If this market was as over-bought and overly-bullish as many are claiming, it would have fallen apart at the first signs of weakness.  Clearly that is not happening.  This market will top because every market tops, but it isn’t ready yet.  Look for the cynics to turn into chasers the higher this market goes.  Since many of these cynics are big money managers, there is still a lot of fuel left in the tank.

TRADING OPPORTUNITIES

Expected Outcome:
The reluctance to selloff after so many tempting opportunities shows this market is far more resilient than most give it credit for.  I can’t say how much higher this will go, but high-probability trade remains to the upside.  Today’s rebound made for a nice entry point and if you missed that, look to buy any dips.  We have probably seen the last 1500 dip and look for the market to surge past 1515 as shorts scramble to cover on Friday.  The next target is 1525 and depending on how the market trades there, 1550 is a real possibility in coming weeks.

Alternate Outcome:
With so many failed breakdowns it is hard to see the market implode, but we still need to prepare for the unexpected.  A material break of 1500 that doesn’t find support and bounce is a change in character and we will need to reevaluate our bullish thesis.

INDIVIDUAL STOCKS

AAPL daily at end of day

AAPL spiked in anticipation of a policy shift regarding its cash hoard.  Clearly investors favor getting their hands on some of that money, but this is not a fundamental shift in the business model and the enthusiasm will be short-lived.  The primary reason for AAPL’s selloff has been concern over competitiveness and margins.  Increasing dividends, buybacks, or preferred stock plans does nothing to help the company make more money.  Everyone has long assumed AAPL would do something with that mountain of cash, so most of this is already baked into the price.  This is still a trading stock and a move up to $485 should be used as a selling opportunity.  The best trade for the next few months is selling strength and buying weakness.  Give this story a few days to play out, but don’t get sucked up into the hype.

NFLX pulled back modestly after making a new high. This stock is chewing up momentum chasers and shorts at the same time, so be careful with this one.  The trend is higher and $200 is within easy reach, but it might experience a few dramatic dips along the way.

AMZN slipped under the 50dma, but quickly recovered this level.  Finding buyers and not triggering a larger avalanche of selling is suggestive of a move higher.  If the broad market breaks out to new highs, look for it to take AMZN with it.

Stay safe

AM: Volatility continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:21 EST

AM Update

The S&P500 fell under 1500 this morning, but has since found support.  While nerve-wracking  this volatility is building support for the continuation.  AAPL is finding strength, but I remain suspicious and would be a seller if the stock breaks into the gap.  NFLX is holding its own and FB is at an interesting place.

MARKET BEHAVIOR

Volatility continues as stocks dipped under 1500, but the market found a floor in late morning trade and is back above this key level.

MARKET SENTIMENT

This sideways churn is changing the ownership base as nervous holders are selling to confident ones.  Is this smart money selling to dumb money, or the other way around?  Only time can tell for sure.

Maybe this is just selective hearing, but it sure seems like the only opinion I regularly hear  is “everyone is too bullish”.  I’m sure there are a lot of bulls are out there, but the cynics seem even more numerous, or at the very least more vocal.  But I could be mistaken too.  We tend to notice things more once we are a member of a certain group.  For example when a person buys a car, suddenly they notice that same model all over the place.  When we take a bearish or bullish position, we have to be careful we don’t selectively filter our view of the world to confirm this bias.  A bull often sees nothing but bearishness and a bear sees nothing but bullishness.

It seems the widely held belief is dumb money is long this market and smart money is waiting for the pullback.  Through the lens of supply and demand, smart and dumb lose their meaning and the only thing that matters is size of each constituent.  Professional money managers are typically labeled smart money, but they are also the largest players.  I’m far more nervous when all the smart money is doing the same thing because they hold all the chips.  If this rally continues and “smart” money is forced to chase, it will lead to a fairly spectacular, and profitable, rally.

TRADING OPPORTUNITIES

Expected Outcome:
The market is retesting support at 1500.  Another bounce here will make the market even stronger because each dip flushes out weak hands.  While it has been a wild ride, the last few weeks have been constructive and suggest a sustainable continuation.  If the market holds 1500, today’s dip is buyable.

Alternate Outcome:
The market could be on the verge of running out of dumb money and this entire thing is about to collapse.  Obviously I don’t buy into this widespread view, but I also recognize I can be wrong and that is why we always trade with defense in mind.  1500 is clearly the line in the sand and any dip under it will cause me to reevaluate my bullish thesis.  Without a doubt this market will pullback, it is simply a matter of when.  This constructive price-action combined with the widespread cynicism  is telling me this is not that time.

INDIVIDUAL STOCKS

AAPL continues the whipsaw between $465 and $455.  In my mind this is the exact opposite trade we are seeing in the S&P500.  The indexes are consolidating for a continuation higher and  AAPL is consolidating for a continuation lower.  This sideways trade is calming nervous holders and giving them hope they will get some of their money back.  It wouldn’t surprise me to see AAPL jump back into the $465-$485 gap, but any strength should be sold.

FB daily at 1:21 EST

NFLX made a fresh high this morning, but gave it up and is trading back under yesterday’s close.  The stock found support at $178 by mid-morning and buyers are willing to step in here.  It will be a wild ride, but the stock still wants to go higher.

FB is finding support at the 50dma, a high-volume bounce off this level would be an interesting entry.  Most of the bullishness from the IPO has worn off and the stock is up over 50% from recent lows.  I’m not sold on the long-term prospects for FB, but it makes an interesting trade if it finds support here.  Wait for the bounce confirming support and don’t jump in early because this could just as easily fall through a trapdoor.

Stay safe

AM: Modest selling

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:21 EST

AM Update

The S&P500 is trying to recover from early weakness, but selling is modest given the size of yesterday’s rebound.  AAPL popped, but is struggling to hold those gains.  NFLX is humiliating bears again AMZN is finding support.

MARKET BEHAVIOR

Stocks started weak, but bounced back by late morning.  Earlier in the up-trend the market opened weak and finished strong.  We will watch afternoon trade to see if this pattern is making a comeback.

MARKET SENTIMENT

Bull markets often experience early weakness followed by strength.  Many participants are still suspicious of the rally and sell new highs in anticipation of the “inevitable” pullback.  This view is widespread enough that it gains some initial momentum, but selling tapers off because most cynics are already out of the market. Once supply dries up, prices rebound and make new highs.  This pattern repeats until most cynics have given up and jumped on the bull bandwagon.

This pattern is not exclusive to intraday periods and is seen across days and weeks too.  All through January early weakness was overcome and the market strung together countless up-days, but more recently the market closed on the day’s lows only to see it snap-back the next day.

This market will eventually top because every market does, the challenge is figuring out when.  Markets rally on the back of pessimism and as long as cynics are holding out, look for the rally to continue.

TRADING OPPORTUNITIES

Expected Outcome:
Most traders should take their money and run from this volatile market because it is too easy to buy high and sell low when the market is whipping around.  There is upside left, but it is really hard to tell the difference between a bear-trap and a real breakdown.  This market will be buyable if we see more sideways trade around 1500 or a retest of recent support at 1475.  This is the refresh the market needs to continue sustainably.  Without this, be suspicious of any strong advance.

If someone has to trade this market, go against the crowd by selling strength and buying weakness.

Alternate Outcome:
It is hard to escape the opinions of people who don’t believe in this rally.  They quote all kinds of fundamental information and while their logic is sound, the market is not worried about it.  There are two possible explanations, one is the market already discounted those risks and it is included in the price.  The other is the market is choosing to ignore it and that can last for only so long.  I’m firmly in the bull camp, but I don’t intend on going down with the ship if this market starts sinking.  Finding support at 1470 is healthy, breaking this level means I need to reevaluate my bullish thesis.

AAPL daily at 1:22 EST

INDIVIDUAL STOCKS

AAPL surged $14 over a few minutes this morning, but the rally ran into a wall at $465 and is drifting lower.  This is a trading stock now and most moves should be met with suspicion.  An interesting trade for an AAPL owner at $465 would have been selling the Feb 15 $470 call for $5.  As I’ve shared, I’m not in AAPL, but for those who cannot bring themselves to sell, covered calls and selling puts could be one way to squeeze some money out of a stock stuck in a trading range.  Obligatory warning: selling options is dangerous and make sure you understand the risks before trying this.

NFLX is up another 5% as more bears are getting skinned.  The stock broke above recent resistance near $175 and the ironic thing is bears are the ones pushing this stock higher with their short covering.  Bears might eventually be proven right in this stock, but we must remember early is the same thing as wrong.

AMZN has some volatility following earnings, but it is finding support at the 50dma.  A high-volume bounce off of this moving average can be bought for a shot trade, but watch out if the market lets this stock dip under this key level and technical support at $260.

Stay safe

AM: Market finds support

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:06 EST

AM Update:

AAPL and the S&P500 are giving traders whiplash.  In both cases look for the trend to continue, but take profits early and often.

MARKET BEHAVIOR

Stocks bounced back from yesterday’s sharp selloff and the whipsaws are chewing up impulsive traders.  The market usually gets more volatile near turning points as power transfers from one side to the other, but look for one a final push higher before trading against the rally.

MARKET SENTIMENT

The market is filled with regret after the last few days of volatile trade.  Anyone reacting to the market’s moves is having a bad time because breakouts and breakdowns are failing left and right.  Clearly the best trade is selling strength and buying weakness, but often that is the hardest trade to make.

Last week started with three out of four days in the red.  Many thought that was the obvious top they were waiting for and felt save safe going short.  Then Friday’s market blew out all the bears and seduced plenty of breakout buyers to jump on the bandwagon.  Yesterday’s pullback made those breakout buyers look foolish and this time the breakdown was for real because it broke recent support.  And here we are today with yet another whipsaw day back to the upside.  The lesson is don’t get in the way of this meat-grinder.  Trade proactively not reactively.  Take profits early and often because they are going to disappear in a matter of days or even hours.

TRADING OPPORTUNITIES

Expected Outcome:
There is no reason to ride this roller coaster and if it is playing games with your emotions, step to the sidelines and wait for more stable trade.  The mistake many traders make is felling compelled to trade every market.  Most can make money, but they shoot themselves in the foot by sticking around too long and giving back all their profits.  For those ambitious enough to trade this market, when in doubt, stick with the trend.  We haven’t seen a blow-off top so continue going with the rally, but in this more volatile period sell strength and buy weakness.

Alternate Outcome:
While the market often exhibits patterns, there are no absolute rules in trading.  This volatile trade could be the top and we won’t see a final push higher.  Markets exhaust themselves when buying dries up.  Typically this happens on a final surge higher as the last of the shorts are runoff and momentum chasers buy in  but this is not the only reason buying dries up, especially with intermediate pullbacks.  The high probability trade remains to the upside, but cover your backside with stop-losses if the market fails to hold support and downside selling accelerates.

AAPL daily at 1:07 EST

INDIVIDUAL STOCKS

AAPL is also jerking traders around as it regains $450 this morning.  The sharp directional trade has arrested itself and we should no longer fear a huge rebound or selloff in the near term.  The stock is consolidating around $450, but look for a drift lower to demoralize the remaining hopeful holders.  While it will start slowly, the selling will pick up as regret builds in the stock.  Only after it becomes the most hated stock on Wall Street will it finally be a safe buy.  But at the same time, the big gains in AAPL are behind it without a new revolutionary product or strategy shift.  AAPL is transitioning into the typical stagnant mega-cap trading range and we could see AAPL trade sideways between $450 and $550 over the next 10 years.

If buy-and-hold is dead in AAPL, look for other strategies, such as swing-trading and selling options to make money going forward.    If you want to buy more if the stock on dips, consider selling puts under recent lows when the stock dips.  If you have stock you don’t want to sell, try selling covered calls above recent highs when the stock goes up.  These are expert strategies so make sure you understand all the risks before trying them.

Stay safe

AM: Bear trap?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:21 EST

AM Update

Bears have the perfect opportunity to break the market here and if they fail, look for higher prices.  AAPL is going the wrong way as buyers fail to show up and prop the stock up.

MARKET BEHAVIOR

Stocks opened weak after Friday’s big bounce, giving back all of those gains.  Early weakness is not a surprise since many people still doubt the sustainability of these record highs.  What is important is how the market responds to this dip.  Finding support and bouncing back in afternoon or Tuesday’s trade will signal a continuation.  This selloff is the perfect slow-ball pitch for bears and if they can’t this this one out of the park, look for the rally to continue, but if selling accelerates, this is the start of a pullback and look for a retest of 1470

More often than not, these rallies surge into their top and we have not see that type of nonstop buying yet.  (see Saturday’s weekly review post for more on this)  Often the final stages of a rally are volatile and the market frequently bounces back from what most assume is the expected breakdown.  In situations like this, the best trade is buying weakness and selling strength, not jumping on the breakout/breakdown.

S&P500 weekly at end of week

MARKET SENTIMENT

No one believes in this rally.  Even the most bullish expect a near-term pullback to digest recent gains, but markets are a function of supply and demand so we need to understand how these expectations affect the way people are positioned.

Chasing pushed this market to new highs, but these same holders are also very skittish and everyone is rushing for the exits on any weakness.  These mad dashes of selling are what refreshes a rally, clearing the way for new buying.

Today’s dip under 1500 is the selloff everyone’s been waiting for and they are selling into it, but the easy trade is rarely the right trade.  Once all the nervous are out and the aggressive short, selling will abate and that lack of further supply will send the market higher.  We need to fear markets where longs stubbornly hold on, not rush for the exit.

TRADING OPPORTUNITIES

Expected Outcome:
If tops were easy to spot, every trader would be fabulously rich.  Following this logic, if most people get tops wrong, then we should be extremely suspicious when everyone, including bulls, are expecting a top.

To get ahead of this market we need to be proactive instead of reactive.  Sell strength and buy weakness.  Sell when you don’t want to sell and buy when you don’t want to buy.  As we are seeing today, Friday’s breakout was a great time to sell and it seems today’s weakness is an interesting time to consider buying.  We don’t need to rush in and buy on the way down, but look for convincing support over the next couple days that shows the selling has exhausted itself.  We are entering a more volatile period of the market cycle, but the trend is still intact.  And most importantly, don’t lets these intraday swings make you buy high and sell low.

Alternate Outcome:
Sometimes the crowd gets it right, especially when it comes to lack of demand.  If buyers fail to show up, prices will decline and that weakness could trigger a follow-on wave of stop-loss selling.  As I write these words, the market is breaking through 1500 and no doubt triggering some stop-loss selling with even more stops lined up under the recent lows of 1496.  The market can peak and rollover at any time, but more often than not it surges before rolling over and weekly charts show this market is not at that point yet.

There is no reason to trade the last stages of a move since it is often more volatile and harder to get right.  For many traders the smart move is taking their profits and waiting for the next high probability trade.  But for the aggressive, this recent weakness is interesting buying opportunity and I sure as heck wouldn’t be piling on the short bandwagon here.

INDIVIDUAL STOCKS

AAPL failed to hold $450 and is testing $440.  Dipping under $435 and making a new low is clearly in the cards.  If anyone watching AAPL from the outside isn’t convinced of the value at $460, then it is highly unlikely they will come to the rescue at $425.   The question AAPL bulls need to answer is who is going to buy the stock and push prices higher?  The stock’s inability to bounce back from the post-earnings gap shows everyone who believes in this story already own all the AAPL they can hold.  Without new buyers, this thing will continue floundering.

Stay safe

AM: Market frustrates bears

By Jani Ziedins | Intraday Analysis

AM Update

The S&P500 defies bears and rallies to new highs while AAPL continues to frustrate the buy-the-dip crowd.

MARKED BEHAVIOR

The S&P500 bounced off of 1500 and is making new highs again. The three-days of recent selling refreshed the market and it is ready to go again.

MARKET SENTIMENT

Anyone who jumped on the over-bought bandwagon and shorted recent weakness is having a bad day. Just another example of the market abusing counter-trend traders. When in doubt, stick with the trend because it goes longer and further than anyone expects.

This recent strength is winning over reluctant traders who are having a harder time resisting the temptation to buy this market. All the fears from a couple of months ago are long forgotten and while not surprising, it is amazing what a rallying market does to a trader’s view of the world. But the further this goes, the more careful we need to be. These things always end and with each passing day we are one day closer to that end.

TRADING OPPORTUNITIES

Expected Outcome:
The market is defying all expectations and continuing higher. Fundamental and technical analysts are full of reasons this market needs to pullback, but that is the very reason it continues. Keep watching for the cynics to give up and that will be the we find the top, until then stick with trend. If anyone is foolish enough to short this market, take profits within a day or two because they won’t last much longer as yesterday’s shorts are finding out.

Alternate Outcome:
This market will top and it will top in the near future. Maybe that is next week, or maybe next month, but it is out there. We found out this week headlines cannot dent this market so we need to watch for a depleted supply of buyers. As long as traders keep shorting this market, they are creating new demand when they are forced to cover. When the shorts finally give up, that demand will taper off and most likely the market pullback will follow.

We have come a long way and holding out for that last couple percent is getting greedy. No one sells at the top, so either we sell early or we sell late. I’ve never heard of a highly successful investor who sells late and in fact most claim the secret of their success is selling too early. Maybe they know something we can learn from. Maybe this market will top at 1525 or 1550, but for anyone in since 1400 would be foolish to risk those gains for an extra 20 points that might or might not happen.

But it all depends on your trading strategy. Swing-traders should take profits, and long-term traders keep holding and wait for higher prices this summer or next year. Aggressive short-term traders can continue squeezing out the last few drops of this rally, but stay on the long-side until we get a more clear signals this market is topping.

INDIVIDUAL STOCKS

AAPL is having another bad day and retesting $450. The sharp rebound so many were hoping for is dead and once those swing-traders throw in the towel, their selling will put more pressure on the stock. Now that the oversold bounce isn’t happening, who is going to buy AAPL if all the people who believe in the company and stock already own it?

The stock very well might be trading near the bottom of the selloff, but that doesn’t make it a good to stock to own if it will take a while to recover. I’d rather take that money and put it to work. Only when AAPL livens up buy back in. No reason to hold on to dead money. But that is just my approach to trading and each person needs to follow their plan.

Stay safe

AM: Testing support

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:22 EST

AM Update

The S&P500 tests support at 1500 and AAPL struggles with resistance at $460.  One is headed higher and the other lower and it is the opposite of what most think.

MARKET BEHAVIOR

The S&P500 dipped under 1500 in early trade following yesterday’s 0.4% decline.

MARKET SENTIMENT

Red days are normal and expected, especially after the long string of up-days we saw over the last few weeks.  The bigger question is if this is the near-term pullback everyone’s been waiting for, or just a modest dip before resuming higher?

TRADING OPPORTUNITIES

Expected Outcome:
Modest dip or pullback to support, either way this will be limited selling and present a buy-the-dip opportunity.  I don’t know if we’ll find support at 1500, 1490, or 1475.  Heck, we could even head all the way back down to 1450 and I wouldn’t be concerned.  Rallies pullback, that’s what they do and there is no reason to over analyze a situation.

For the swing-trader with some profits, we are getting pretty far along and any point over the last few weeks would have been a good time to lock in profits and wait for the next high probability trade.  Swing-trading the indexes with a little bit of leverage to spice things up can be quite profitable.  2x leverage means a 2.5% move in the indexes yields a 5% return.  Do that 12x over the course of a year and it compounds to 80% ROI.  Not bad.  The key is getting those 5% gains, locking them in, and then waiting for the next high-probability trade.  You don’t need big moves to make money in the markets, taking a little here and there add up over the year.

For the longer-term trader, the economy is still looking up in spite of any near-term weakness.  Recoveries take time and the most patient often win in the end.  Just expect some near-term volatility and don’t let it shake your resolve.

Alternate Outcome:
Bear markets start when people least expect them.  This rally is turning 4 in two months and that is pretty old for a bull.  But that is under normal conditions and the 2008 bear market was anything but normal, so we should also expect the subsequent rally to be abnormal too.  The lack of widespread complacency is what keeps me positive on this market.  When looking for a major top, we need to look at a bigger audience to judge complacency.  Too many normal people are still afraid of equities for this to be a major top.  When you need to be worried are when you mother-in-law is giving you hot stock tips and we are a long way from that level.

AAPL daily at 12:23 EST

INDIVIDUAL STOCKS

AAPL was turned back by $460 again and that level is providing a lot of near-term resistance.  Failing to close above $465 this afternoon tells me the chances for a quick recovery are dead.  Further, if the stock cannot break $460, soon, I think lower prices are in store and this would be a good time for people to cut their losses and wait for the breakout above $460 before buying back in.  Everyone bought AAPL for a reason and if that reason is no longer valid, they should get out.

Stay safe

PM: Negative GDP

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Trivial decline in the face of negative GDP, how can that be?  AAPL struggles with $460, while AMZN is near record highs, what gives?

MARKET BEHAVIOR

Stocks started strong, but finished at the day’s lows and just a hair above 1,500.  What began as surprising strength in the face of a negative GDP headline faded into the close.  Volume was above average, but lower than yesterday.  This shows sellers were not rushing for the exits and it was more a lack of buying that let the market drift lower.  The other noteworthy thing is today’s 0.4% loss was the largest decline of the year.

MARKET SENTIMENT

Just a few months ago, a negative GDP would have crashed the market, yet today we set a new intra-day high shortly after the headlines hit the market.  What gives?  Journalists and fundamentalists are coming up with various excuses, but the truth is holders didn’t care about the headline and chose to keep holding, expecting higher prices ahead.  It doesn’t matter if these traders are right or wrong, the fact remains they want to keep holding and they are not going to let some silly headlines flush them out of the market.

We find ourselves in a market with limited supply because no one wants to sell, and not only  that, the steadily rising prices are converting former pessimists into buyers.  The real takeaway from today’s trade is this market is not afraid of headlines.   Risk of unexpected bad news is something traders normally live with, but the market is demonstrating a carefree attitude toward fundamentals and that is giving investors a free pass to be long.  Markets decline for various reasons, but it looks like this one won’t top until we run out of buyers because headlines cannot dent this rally.

TRADING OPPORTUNITIES

Expected Outcome:
While the day finished in the red, the market’s resilience in the face of unexpected negative headlines is quite bullish.  0.4% is trivial if we talking about unexpected negative GDP.  This doesn’t mean the coast is clear and this move is near the end, but it doesn’t look like it is done yet.  Look for a bounce off of 1500 tomorrow to confirm a continuation.

Alternate Outcome:
The end is near and we could be in the early stages of the top.  Failing to hold 1500 would be a change in character and we could see further weakness.  At this time I don’t expect a selloff to be anything more than testing recent support.   Holders have shown a lot of resilience in the face of some highly negative headlines and if they haven’t cracked yet, I don’t expect a modest pullback will send them running for cover.

AAPL daily at end of day

INDIVIDUAL STOCKS

APPL failed to hold $460 for a second day.  I’ll give the stock one more shot to surge higher Thursday, but if we don’t see strong rebound from these oversold conditions, this is going to become AAPL’s new home for a while.

A lot of people are dumbfounded by how AAPL can have record profits and be down by 35% while a company like AMZN misses and is holding near record highs.  It all comes down to supply and demand.  Everyone loves AAPL and anyone who wants some already has as much as they can fit in their portfolio.  AMZN is the scariest stock on the street and investors are afraid to own it.  Contrarian investing works because while AAPL is extremely popular, there is no one left to buy it.  On the other hand investors avoid AMZN, meaning there are tons of new buyers available to keep pushing the price higher.  Supply and demand; understand how it works and the market starts making a lot more sense.

Stay safe