Category Archives for "Intraday Analysis"

What is the harder trade?

By Jani Ziedins | Intraday Analysis

Markets were lower, then higher, and finally lower again.  Is that u-turn an ominous sign or simply the indecisiveness of the market trying to fool everyone?  I keep hearing bears talk about the widespread optimism and hope filled market, but I sure can’t find any of those market optimists.  Maybe they are hiding from me.

S&P500 daily at end of day

MARKET BEHAVIOR

The market opened lower on Tuesday, but first couple hours showed a strong rebound rally and no doubt sent some late shorts running for cover.  Unfortunately the market rolled over not long after because additional buyers failed to step in and support those price gains rally.   The market covered a lot of ground, but volume was just average as neither bulls nor bear were driven off in large numbers.

The trend remains lower and Tuesday’s early price action marked a new low for this pullback.  A lot of times these selloffs climax in a ‘V’ bottom, but the longer we trade at this level, the less likely we’ll carve out a ‘V’ bottom.

MARKET SENTIMENT

I keep reading articles and investor opinions that say the market is too optimistic and filled with hope.  But the thing is I can’t find any of those reported articles full of optimists and hope.  Maybe I am looking in the wrong places, but I am finding very little hope and even non-investor types are debating the Fiscal Cliff with everyone they meet.  Heck, today I even read a well-reasoned article on why the Fiscal Cliff, Debt Ceiling, and Europe is going to send us back to the 2009 lows.  The guy was trying to make himself out to be a contrarian, but 10 to 1 the comments to his article were supporting his bearish theme.  It sounded more like an echo-chamber than legitimate contrarian views.

No doubt the bears could be right and we have only seen the tip of the iceberg, but traditionally the markets don’t work that way.  We don’t see 50% declines when the biastras at Starbucks go on about how screwed this country is.  50% declines happen when that biastra is bragging about the dot-com stock he just bought or how many investment houses he owns.  We are miles away from that type of widespread irrational exuberance that leads to bubbles and massive corrections.

As for the notion that our economy is on ‘life-support’, that is what every recovery looks like.  Selloffs are only buying opportunities because the crowd is too shortsighted to see the potential in the future.  Taking the other side is a great way to make money; buy shares cheap when everyone says what a bad idea it is to own stocks and sell them when everyone thinks they are headed to the moon.

TRADING OPPORTUNITIES

The market is still in a down-trend and it is risky to pick a bottom.  As I said yesterday, these levels look interesting and are far safer places to buy in at than at any point in the last several months, but I could easily be a bit early in expecting a rebound.  Maybe the market will bounce decisively this week, or maybe it will selloff a bit more before bouncing.  But either way, this is a horrible place to be short the market.  If we look at the market like a spring, the post-election selloff unwound a lot of the downside potential and there is not a lot left in the downside move.  At the same time the emotion driven selloff has compressed the spring to the upside.  I’m not always right, but I’m okay with that if my mistakes are small and my correct calls are large.

Stay safe

Quiet, but constructive day

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

The holiday lead to a tight, low-volume day, but given what happened last week we can count that as a victory.   There is not a lot of hope left in the markets and many of the weak hands have been chased out as we crashed through key technical levels.  The abundance of pessimism is making an optimist out of me.

MARKET BEHAVIOR

The market is finding its footing, at least temporarily.  We closed 1377 on Thursday, 1379 on Friday, and 1380 on Monday.  Monday’s trade fell within a tight range, seven points between the high and low, on exceedingly light volume, no doubt due to Veteran’s Day.  It is encouraging to see we made it through the weekend without compounding last week’s crisis of confidence.

We continue trading under the 200dma.  All the stop-losses set under 1400 and the 200dma have already been triggered and that selling event has come and gone.  From here it is harder to identify an obvious stop-loss underneath the market.  This is good because it is far less likely the market will stumble through another large concentration of stop-loss orders, triggering a new avalanche of selling.

Between all the selling that has already occurred and the lack of a critical technical level underneath us, the bears are going to have to work a lot harder to extend this move lower.

MARKET SENTIMENT

It is challenging to find a positive news story in the financial press.  Fiscal Cliff this, Euro Debt Crisis that…..  The press is even reading body language and facial expressions of our politicians trying to figure out what is going on behind the scenes.  The question for us is how do we trade this?

The first thing to recognize is we don’t trade news.  News is largely random and unpredictable.  In addition, the modern internet era made it next to impossible for the average trader to get ahead of the crowd before headlines become priced in.

But if we can’t trade the news, what do we trade?  We trade other people’s expectations of the news.  This is a small but crucial nuance.  People, not events, create emotion-driven, asymmetrical trades and high-probability profit opportunities.  For example, if everyone fears a Fiscal Cliff, then we assume these traders have already priced it in.  Common sense tells you anyone expecting an imminent market crash would sell ahead of it and quite possibly short the market.  Using that logic, we can infer anyone talking about the perils of the Fiscal Cliff has already reduced their exposure.  Based on the chatter in the press and investor groups, the Fiscal Cliff risk is already largely priced in and much of the selling expecting this event has already occurred.

No doubt we could see more selling if conditions deteriorate, but what happens if the Fiscal Cliff is not as bad as everyone fears?  This is where the asymmetrical trade kicks in.  The market fears the unknown and often prices in a larger risk premium than the event deserves, meaning much of the downside has already been accounted for.  If things did in fact get ugly, there isn’t a lot of downside remaining.  But if on the other side, if things go as expected, the market will rally because the uncertainty, fear, and risk of the worst is removed.  And if things go better than expected, the market will surge ahead.

This is what creates the asymmetrical trade.  The market will selloff more if things go worse than expected.  The market will rally if things go as expected.  And the market will pop if things go better than expected.  In one case the market moves down, in two cases the market goes up. And not only are the discrete outcomes in our favor by a factor of two to one, so are the probabilities and magnitudes of those outcomes.  The expected and most likely resolution will lead to a rally because it removes risk and uncertainty.   Only the low probability, worse than expected, will lead to further price declines.  And even if we do see prices decline, a large portion of the selling has happened ahead of time, meaning there is less downside remaining.

In the markets there are no guarantees, but there are probabilities.

TRADING OPPORTUNITIES

By no means is it completely safe to own stocks down here at 1380, this is the stock market after all, but without a doubt buying stocks today is far safer than it has been at any point over the last four months.  In fact, the riskiest time to own stocks was back in September when we were trading over 1450.  That is the paradox of the markets; it is safest when it feels the most dangerous, and it is most dangerous when it feels the safest.

We will know in a few days if the selloff continues or bounces.  The market has already made two legs down and that is usually enough to refresh a bull market.   If we are moving into a bear market, there are often three legs down, meaning we could see another bout of selling before the market temporarily bounces.

We have a chance for a strong rebound that takes out the shorts, or one more leg lower.  Those are not horrible odds for owning stocks at these levels.  My guess is pessimism has climaxed and we’ll head higher.  As mentioned earlier, news is largely random and without a doubt we could have a headline take our legs out, but if things stay the same or improve modestly we should see the markets bounce back.

Stay safe

If you found this post interesting, consider retweeting it on StockTwits.  You’d be amazed at how many additional people find this from each retweet.  And if you don’t have a lot of followers; discovering, tweeting, and retweeting interesting content is the best way to build a following.  Thanks, Jani

Selloff takes a breather

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

The market ends flat, but many traders and pundits expect further weakness, a sign that can be interpreted as much of the selling has already occurred.    We might have lower-lows in our future, but look for a bounce here as late shorts get squeezed out of the market.  Near-term volatility will make this a swing-trader’s market.

MARKET BEHAVIOR

Market finished mostly flat on Friday after some ups and downs, but given the price action of the previous two days, this is a significant victory.   Volume was higher than average, but less than either Wednesday or Thursday.  For the time being, panic driven selling has abated.  This is a good thing because selling can trigger even more selling in a snowball effect.  The pause today gives traders the weekend to regroup and reevaluate their portfolio.  After some time away from the markets, investor’s nerves might calm down and we might see more rational trade next week.

MARKET SENTIMENT

Given the plunge over the last couple days, almost all the weak hands have been shaken out.  But the thing to remember is this pessimism is creating the fuel that will power the next rally.

People who are excited about the market are fully invested and can’t move the market any higher.  A pessimist is out of the market and the only thing he can do is buy stocks and push the market higher.  This is why contrarian investing works.  Optimists are powerless to move a rally higher, only pessimists can do that.  Too much optimism and a rally stalls; too much pessimism and things are primed to take off.  Learn to fear confidence and embrace pessimism.

From where we stand, it is hard to imagine the fear over headlines getting worse.  If you talk to any investor, the only question is whether Obama, the Fiscal Cliff, or Europe will crush the stock market first.  That kind of widespread pessimism, confusion, and fear among retail investors creates golden opportunities.  If these guys want to give away their money, I have no qualms taking it.

TRADING OPPORTUNITIES

The market looks very buyable here.  The panic driven selloff paused and gave investors a chance to regroup.  An avalanche of selling is a dangerous thing to jump in front of, but after the dust settles there are deals to be found.  If the market continues to find support here, look to wade in.  No reason to plunge in all at once.  Buy a little, let that show a profit, and then buy a little more.  If the market rolls over, your portfolio risk is mitigated because you are holding a smaller position. Chalk that loss up as a cost of doing business and look for the next entry point.

If we do rally next week, it will be interesting to see what kind of rally we get.  Often we can see a powerful surge higher as the shorts get blown out of the water.  These pops rarely last long before collapsing, so if we see big gains, get ready to lock in profits and wait to buy the pullback.  If we churn sideways and grind higher slowly, you can continue holding for an extended period of time.

We could see some near-term volatility as the market tries to figure out which way it wants to go and most likely we will be in a buy-the-dip, sell-the-rally mode through the end of the year.  If a savvy investor takes profits early and often over the near-term, it really doesn’t matter if the market heads higher or rolls over, you’ll win either way by trading the swings.  The only advantage individual investors have in this game is our nimbleness; don’t fail to take advantage of it.

Stay safe

If you found this post interesting, consider retweeting it on StockTwits.  You’d be amazed at how many additional people find this from each retweet.  And if you don’t have a lot of followers; discovering, tweeting, and retweeting interesting content is the best way to build a following.  Thanks, Jani

The selloff continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets continued sliding today, but the selling seemed to abate some by looking at the volume.  Buyers are still a little gun-shy and we need their buying to put a bottom in this slide.

MARKET BEHAVIOR

Markets continued the selloff and broke through the 200dma.  Volume was lower than Wednesday, showing the mad rush of selling was slowing, but the decline continued because buyers were unwilling to step in.  As horrible as things appear, we are less than 7% off a 52-week high.  But that is a double-edged sword, while we are still having a great year, that also means there is a lot of air beneath us.

The 200dma often provides support in a bull market and testing that moving average is a healthy part of moving ahead.  The question is if we are leaving the bull market behind and moving into a bear market where the 200dma becomes a ceiling.

MARKET SENTIMENT

The difference between this selloff and other selloffs we saw in 2011 and 2012 is this time sentiment was already fairly low before the selling started.  Optimism is the fuel of selloffs because you need hopeful owners to spook out of the market.  If everyone is already pessimistic, there are no hopeful people left and supply dries up, leading to increasing prices.

2008 was a different animal because while sentiment was already low after a yearlong bear market, traders still failed to understand the true risk of mortgage-backed securities and credit default swaps.  So even though sentiment was already low, it was still far above where it should have been given the dangers the market was exposed to.

But how is that different from now with the European Debt Crisis and the Fiscal Cliff?  The difference is today you can walk into any Starbucks and find a random stranger who knows the ins and outs of these impending crises.  Back in 2008, even smartest people on Wall Street didn’t have a clue what a MBS or CDS were.

In the markets you can ignore what everyone is talking about because it is already priced in.  That is the difference between 2008 and today.  We’ve been talking about European Contagion for almost three years now and I can’t even keep track of how many Fiscal Cliffs there have been.  Financial journalists could recycle articles from two years ago and no one would even notice, that’s how long we’ve been talking about this stuff.

TRADING OPPORTUNITIES

The truth is no one can say for certain if we will bounce off of the 200dma or crash through it.  Trading is a game of probabilities and we have to wait for the high-probability trade.  As I’ve shared earlier, I think the market is setting up for a nice buy, but it is foolish to get in front of this steamroller.  Let the gamblers try to pick the bottom.  There will be plenty of profit left even if you are a little late to the rebound.

Stay safe

Buy the dip?

By Jani Ziedins | Intraday Analysis

Markets sold off hard after Obama’s reelection, but most likely this is a buying opportunity for the brave and savvy trader willing to take heavily discounted shares off of emotional and panicked sellers.

MARKET BEHAVIOR

A wave of emotional selling hit the market this morning as we dipped under 1400 and pushed close to the 200dma.  If we were looking for an enthusiastic purge day to clear the deadwood for an upside move, this could easily qualify as that day.  The market bounced at 1388 in late morning and held above that level for the remainder of the day.

Little surprise the emotional selling lead to the biggest volume we’ve seen in a couple of months.  The big question we are left wondering is if this was just the first day of a larger selloff, of if this was the high-volume capitulation point that will let the market bounce back from the funk it’s been in since September.

MARKET SENTIMENT

A lot of Republicans were devastated over the election yesterday and hit the panic button this morning.   It seems clearly obvious to some people who Obama is going to wreck this country and take the economy and markets along with it.  Isn’t that what was supposed to happen in 2009 too?  Yet here we are with a fragile recovery and a market that is higher by over 100%.  Now don’t get me wrong, I’m not an Obama supporter, but I’m smart enough to realize that the economy and recovery will continue chugging along no matter who is in the White House.  If people want to panic and sell you their stock at a steep discount, I say buy it.

Today was a dramatic move and everyone was watching the markets to see how it reacted this morning.  In addition to a selloff due to the election, we also broke under 1400 triggered a wave of technical of stop-loss selling.  No doubt today was a big day in the market, big enough in fact to change the dynamic of the people who are hold stocks.  The emotional and fearful sold by the fistful to the brave and the savvy.  This change in composition is what will enable the market to rally.  Hopeful holders are fair-weather owners and are demoralized easily.  Calculating buyers are far more confident and willing to stick it out.  A large chunk of available supply hit the market today and we should see far less in coming days.

TRADING OPPORTUNITIES

I’m not a day trader and don’t try to pick exact tops or bottoms.  I might be early and we could see a couple more days of weakness ahead, but the panic induced selling is creating a great profit opportunity for the contrarian that is willing to go against the crowd.  But remember, in cases like this it is more prudent to be a little late than a little early.

No doubt today could lead to a multi-day move lower, but I don’t think it will because bigger moves lower require lots of optimism to fuel the selling.  The market has been fairly pessimistic lately and the Obama reelection was the final nail in the coffin, not the first.  I expect most of the big money managers came into this expecting an Obama win since Obama has led in both popular vote and key swing states for most of the year.  I suspect most of today’s selling came from weak-kneed retail investors and their selling will dry up pretty quick.  In often the hardest trade to make is the right trade.  Right now the most difficult trade is buying this market.  Don’t jump in front of the steamroller, but look to buy soon after the market recovers its footing.

Stay safe

Obama wins

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Obama wins.  Get ready for the contrarian trade and buy the market as pessimism climaxes.

MARKET BEHAVIOR

The market rallied and pushed toward the 50dma on Tuesday.  No doubt bears were chased out of the market as we reclaimed all of Friday’s selloff.  Low volume over the last couple days made the market more vulnerable to larger swings and enabled this volatility.  With the election decided, hopefully calm trade will return to the markets.  Of course I have little doubt the market will start obsessing about something else before the end of the week.

MARKET SENTIMENT

I suspect there were a fair number shorts anticipating the market to crash on an Obama reelection, but rather than reward their ‘insight’ the market sent them scurrying home with their tail between their legs Tuesday.

It will be interesting to watch how the market reacts Wednesday when the result is official.  Will we see a wave of retail investors who were hoping for a Romney win calling their broker and telling them to sell everything?  Or will we see the rest of the shorts expecting the market to crash under an Obama win get chased out as we break above the 50dma?

No matter what your political affiliation, you have to respect the support the market is finding in spite of all the dire headlines ranging from fiscal cliffs to European contagion.  The trap a lot of traders fall into is they try to predict what the market ‘should’ do instead of taking clues from what the market is doing and how other traders are positioned.  There are a million reasons the market should go down, but it knows that and it chooses to go higher instead.  That is a very powerful signal.

TRADING OPPORTUNITIES

As for the contrarian trade, what is the least expected outcome after an Obama reelection and an impending fiscal cliff?  A rally.  The knee jerk reaction to Obama’s win could be a selloff on Wednesday, but get ready to buy that dip once the slide runs its course.

There are four things, and only four things that move the markets.  Abundance of buyers, abundance of sellers, lack of buyers, and lack of sellers.  This is nothing more than supply and demand.  If we have a selloff tomorrow, it will be short-lived because we’ll run out of sellers pretty quickly.  And who knows, we might not even see that selloff if most traders sold ahead of the election and the market choses instead to crush bears short the market by rallying strongly out of the gate.

As for a longer view, I really don’t see how the market could crash from here since almost all the negative headlines are already priced in.  You can safely ignore everything everyone is talking about.  The only thing to fear is what no one is talking about.

I could easily be wrong because there are no guarantees in the market, but right now the high-probability trade is a rally because the way other traders are positioned.  After everyone sells, supply dries up, and there is nowhere to go but up.  We might see some near-term softness, but that only gives us even more attractive levels to buy in at.

Stay safe

If you found this post interesting, consider retweeting it on StockTwits.  You’d be amazed at how many additional people find this from each retweet.  And if you don’t have a lot of followers; discovering, tweeting, and retweeting interesting content is the best way to build a following.  Thanks, Jani

Vote with your heart, trade with your head

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets took a day off ahead of Tuesday’s election.  Vote with your heart, but trade with your head.  This is Obama’s election to lose and don’t let political biases or talking heads influence your trading decisions.  The market is getting close to a point of maximum pessimism and that creates an excellent buying opportunity.

MARKET BEHAVIOR

The market traded between 1410 and 1420 again.  We dipped at the open, but recovered to finish in the green, near the day’s highs.  It was nice to see the markets find a floor after Friday’s reversal, but no doubt today was just filler as everyone awaits Tuesday’s election.

Technically we found rock-solid support at 1400 going all the way back to early August.  Breaking under this would trigger a large wave of stop-loss selling and send us to the 200dma in a hurry.  But at the same time, we could bounce off 1400 and never look back.  The market is trading sideways and looking for its next move.  Will that be higher?  Will it be lower?  Will it be higher and then lower?  Or lower before higher?  Great question and as traders we need to figure that out.

MARKET SENTIMENT

The headlines make it sound like the race for the White House is deadlocked.  But the thing to remember is the media is in the business of selling advertising, not educating the public.   To sell advertising they attract eyeballs by looking for creative ways to create juicy headlines and spin sensational stories.  And you better believe they are doing that here by cherry picking their data to craft a hotly contested presidential race so people will tune in.

This is not a bad thing, it keeps the electorate engaged and boosts voter turnout, but we are in the business of trading the markets and we need to leave all partisan biases at the door.  We can root for one side or the other as individuals, but as traders we need to come into this with our eyes wide-open

In spite of the headlines, the state polling data clearly shows this is Obama’s election to lose when looking at the electoral college map.  No matter what we think, want, and hope for, the high-probability trade is an Obama reelection.  Go vote, support, canvas, and everything else for your candidate, but position your portfolio for an Obama win.  Like the markets, there are no guarantees in politics and Romney could very well pull out the upset, but trading is a game of probabilities and we need to make the high-probability trade no matter what we hope for personally.

TRADING OPPORTUNITIES

Given the pervasive hope for a Romney win, especially among retail traders bamboozled by the media, creates an opportunity for a trade.  We could easily see a selloff after an Obama reelection if emotional traders dump shares due to an irrational expectation Obama will wreck this country.  That selling will climax quickly and create a great entry point for the trader who understands politics, how the markets work, and supply and demand.  Within a couple of days everyone who wants to pull their money out of equities because of Obama’s win will have done so, meaning all the sellers have sold.  At that point supply dries up and the market rallies.

Of course we don’t need to see the market selloff if most traders already sold in anticipation of the result and we could start rallying as early as tomorrow.  Watch the market and be ready to buy the breakout, whether that is tomorrow or next week.

ET CETERA

Speaking to the sentiment that this president or that president is the worst ever, don’t fall for it.  Our founding fathers created the most brilliant form of government ever conceived.  We don’t live in a monarchy or a dictatorship where one person has all the power.  What matters here is the system, not the individual.  You might like one guy more than the other, but don’t fall into the trap that one side has all the answers and the other is just a bunch of idiots.  Neither side has a monopoly on good ideas and it is the compromise between the two parties that made this the greatest and most prosperous nation in the history of the world.

Politics is an ugly sport, but the worse it looks, the better it is working.  The way you can test this is looking at Congressional approval ratings.  A low approval rating shows everyone is equally pissed off, meaning Congress found the right balance point where each side gave up something meaningful in order to reach the ideal compromise after taking all the competing views into consideration.

Stay safe

If you found this post interesting, consider retweeting it on StockTwits.  You’d be amazed at how many additional people find this from each retweet.  And if you don’t have a lot of followers; discovering, tweeting, and retweeting interesting content is the best way to build a following.  Thanks, Jani

The breakout is dead, long live the breakout

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

The breakout stumbled as the market gave up all of Thursday’s gains.  We are retesting support at 1410 and both bulls and bears are licking their wounds from the last two days of trade.  Next week’s election is setting up as a turning point for the market and we need to get ready to buy the next breakout.

MARKET BEHAVIOR

Stocks surged higher on a better than expected jobs report, but reversed within the first hour and ultimately gave back most of Thursday’s gains as well.  Stating the obvious here, but there was no follow-on buying to support Thursday’s upside breakout.  It appears Thursday was nothing more than a short-squeeze/bull-trap and no doubt it zinged a lot of traders.

Bumping our head on the 50dma and 1430 resistance is not encouraging and no doubt the last two days of bipolar trade have put a dent in bull and bear accounts alike.  On a positive note, we are still above 1410 support and we’ll see how traders respond to a test of this level on Monday.

MARKET SENTIMENT

With the election early next week, big money was unwilling to buy the breakout and is taking a wait-and-see approach.  Volume was above average, but less than Thursday’s breakout.  The somewhat muted volume shows people were not panicked and rushing for the exits en masse.  It was a lack of buying rather than a flood of selling that sent us lower.

The ironic thing about today’s failed breakout is it makes the next breakout more likely to succeed.  With so many bottom-pickers getting humiliated by all the recent head-fakes, they are losing confidence and thus less willing to buy the next dip.  What this means is the next time we see the market pop, it will be driven by more real buying from major institutions and fewer fair-weather bottom-pickers.  Why this matters is big institutions are not traders and they are far more willing to hold their positions and even add to them.  With that kind of support, an institution sponsored rally is far more likely to stick than one driven by bottom-pickers.

I don’t know when the next rally attempt will happen, but I do know there will be far fewer bottom-pickers leading the charge.  If there are fewer bottom-pickers, then by default there must be more institutional buyers, and that is the higher-probability breakout I want to jump on.

TRADING OPPORTUNITIES

We could see additional weakness on Monday as traders contemplate the outcome of Tuesday’s election.  It feels like there is still a lot of hope Romney will pull off the upset, but as we all know, hope is a poor strategy.  We need to anticipate what will happen, not what we hope will happen.  Unless the polls on Monday start showing a real advantage for Romney, the markets will begin anticipating an Obama win.  A lot of those hopeful Romney supporters might start selling due to an irrational fear of a market crash if Obama wins reelection.  The market rallied through Obama’s first-term and there is no rational reason to expect it will spontaneously fall apart under his second term.  Only a small sliver of the market holds this extreme view and the selling will dry up fairly quickly.

There is no reason to try and pick a bottom.  Let the market do its thing and wait to jump on the next solid rally attempt.  Like everything in the market, there is no guarantee the next rally attempt will work, but this is a game of probabilities.  We want to make all our trades with the wind at our back.  Most of the known bad news is already priced in the market and pessimism will climax under an Obama reelection.  Once that selling runs its course, supply will dry up and there will be nowhere to go but up.  Chance favors the prepared mind.

Stay safe

If you found this post interesting, consider retweeting it on StockTwits.  You’d be amazed at how many additional people find this from each retweet.  And if you don’t have a lot of followers; discovering, tweeting, and retweeting interesting content is the best way to build a following.  Thanks, Jani

Breaking the logjam

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Nice rally in the market today, finally breaking us from the 1410 logjam.  But be careful of the bull trap and wait for further confirmation before plunging in.

MARKET BEHAVIOR

Nice upside breakout from the 1410 consolidation.  Who would have thought we simply needed a hurricane to flatten a quarter of this country in order to get the market rolling.  But the market is notorious for doing the least expected thing, and that is exactly what it did here.

Technically we are just under previous support at 1430 and we will know by tomorrow if this level has become resistance.  If not, we could smash through it and vault above the 50dma.

MARKET SENTIMENT

No doubt a lot of shorts got caught up in this rally and had to run for cover.  But that leaves us asking if there was real buying behind this pop or if it was mostly a short-squeeze?  What we need to see is follow on buying Friday to prove this is the real deal.

The jobs report will be the excuse for the market to move one-way or the other.  And honestly, regardless of the number, the market could run in either direction.  Obviously a big number means the economy is gaining strength and the market could rally.  A weak number demonstrates the opposite and could send the markets lower.  But a strong number could also tank the markets because it might mean an easy reelection for Obama and it gives an excuse for Bernanke to tighten the purse strings.  On the other side, a poor result could cause the market to rally because it improves Romney’s chances and will keep the spigot of easy money wide-open.

This means the market has a blank check Friday move in whatever direction it is most inclined.  If people want to buy, they will find the excuse to buy.  If they want to sell, they’ll have a reason to sell.  To get ahead, we need to figure out what the market’s mood is.  Do people want to own stocks here, or would they feel more comfortable watching from the sidelines?  Are they going to buy the jobs report, or sell it?

TRADING OPPORTUNITIES

Last week I mentioned the best way to humiliate everyone would be to trigger a short-squeeze before turning lower and falling under 1400.  We are halfway there with today’s short-squeeze.  The question remains if the market will turn around and head lower tomorrow.  It largely depends on if it will hurt more people to continue rallying or to reverse lower?  Since we are in the middle of a range, it is less clear.  The trend is lower, but the market is not selling off on bad news, which is bullish.

There are only a couple of trading days left before the election and no doubt the outcome will play a big role in the market’s psyche.  That easily could be the catalyst that leads to the next directional market move.

As I’ve shared before, I remain bullish over the medium term, but we could see some weakness over the next few days.  But either way, be on the lookout for the right point to buy stocks, not short them.  While I don’t have a lot of confidence in today’s rally, a couple more supportive days will be enough to win me over.  Even more attractive, a drop under 1400 makes for an easy buy point.  But please don’t short this market.  If we do turn lower, it will be just a dip before rebounding.  If you absolutely must lean into the market, be nimble and take your profits quickly.

Stay safe

If you found this post interesting, consider retweeting it on StockTwits.  You’d be amazed at how many additional people find this from each retweet.  And if you don’t have a lot of followers; discovering, tweeting, and retweeting interesting content is the best way to build a following.  Thanks, Jani

Remarkably stable trade

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets traded flat for another day.  The stability was encouraging after the prolonged market shutdown and the devastation caused by Sandy.   But we can’t stay at this level forever and we are bound to breakout one way or the other.

MARKET BEHAVIOR

Remarkably stable trade following Sandy and the extended market closure; we were up a little, down a little, and then the S&P500 closed unchanged.  The question we have to ask ourselves is if the market last Friday so perfectly anticipated the hurricane and news out of Europe it didn’t need to adjust prices today?  Seems a far-fetched notion and no doubt the market still needs to fully account for these events in coming days.  Of course while the market was flat overall, there were some dramatic moves in individual stocks.  AAPL and the tech sector tanked, and hurricane recovery related companies popped like a cork.

Technically the market continued trading around 1410 and closed just above it at 1412.  While we’ve seen 1% intraday ranges recently, we continue closing at practically the same level for the last week.  This tight trade is coiling up the spring for a more dramatic move once we breakout of this range.  The longer we stay here, the bigger the move out of here.

MARKET SENTIMENT

It felt like a patriotic day in the markets, as no one wanted to short after all the devastation and suffering from Sandy.  But at the same time no one wanted to jump in and start buying either.  So we traded around for a bit before finishing flat.  No doubt this stalemate between bulls and bears will resolve itself one way or the other.  On Friday is the jobs report and who can forget about the election on Tuesday given the visual and auditory pounding many of us are taking from the relentless stream of campaign commercials.

It will be telling to see how the market acts leading up to the election.  Can we continue holding this range until the outcome is announced, or will the market anticipate a winner and make it’s move late this week or early next?  Romney is making the race more competitive than it’s been, but the electoral map still favors Obama.  If Romney continues gaining strength, we could even find ourselves with Romney winning the popular vote, but Obama taking the Electoral College.  But no matter who wins, the markets and economy will march on.  It always has and it always will regardless of what the partisans claim.

TRADING OPPORTUNITIES

The market is setting up for a bounce, the only question is when.  Will we bounce right out of this consolidation?  Or will we see a drop that flushes out weak holders and we rebound only after breaking 1400?  In no way will we see a massive selloff given any of the headlines people are currently talking about, whether that is Europe or an Obama reelection.  If the average Joe is discussing the economic impact of these events, the savvy trader can safely assume it is already priced in the markets.

Our job as opportunistic traders is anticipating what isn’t priced in.  Right now my best guess is the world won’t disintegrate when Obama is reelected and trading that relief rally is probably the next high probability trade in front of is.  We might see an initial drop ahead of or after the election, but that weakness is giving us an even better price to get in at and creating more profit opportunity for the savvy trader.

Trade the market and other market participants, not what you think the market should do.  Too often is does the exact opposite of what most people expect and that is what makes contrarian investing so successful.

Stay safe

Half-empty or half-full

By Jani Ziedins | Intraday Analysis

Wednesday will be the first time people will have the opportunity to trade their changes in sentiment due to Sandy, Europe, and the election.  The market almost never goes this long without trade and that can lead to a healthy skew between sentiment and portfolios.  Of course keeping the markets closed prevented wild swings in the market and will most likely lead to a rational open.  The interesting thing will be watching how trade evolves after the open as the market starts looking forward to employment reports and elections.

MARKET BEHAVIOR

As everyone knows, the markets have been closed for two days.  In many ways this was a blessing for countless participants because it stopped them from making stupid and emotional trading decisions.  Keeping the markets offline through the duration of the storm prevented low-volume and fear from triggering volatile swings in the market.  Stability in is essential in cultivating investor confidence and was a major factor in the decision to keep the markets closed even though the exchanges had the backup resources available to continue electronic trading.

Not having pricing information for four days has left a lot of holders nervous about the value of their portfolio, but with markets waiting to open until after the storm dissipated and everyone has a better sense of the damage will greatly decrease the probability of a fear induced selloff.

MARKET SENTIMENT

The one thing about having the markets closed it is prevented us from getting a read on what other traders were thinking, and more importantly how they were positioning their portfolio.  Being closed for four days let people’s opinions and sentiment drift away from how their portfolio is positioned.  Wednesday we’ll see a lot of trading bringing sentiment and portfolios back in line.

We can look to global markets for clues on how we might open on Wednesday.  Europe struggled Monday, but rallied nicely on Tuesday due to some good news in that part of the world.  The dollar also weakened versus major currencies and the pattern over the last few years has been a weak dollar boosts equity prices.

There has also been a fair amount of talk that while the storm will negatively impact economic activity in the near-term; the rebuilding boom will boost economic activity for some time to come.  It will be interesting to see which half of the glass the market focuses on when it opens.  Often the markets are really good at looking past the present and pricing based upon future expectations, especially when present events are fairly well quantified.

A lot of my trading ideas come from swings in sentiment and how that affects trading, but while we’ve seen wild swings in sentiment over the last few days, no one has been able to trade their emotions.  While this is a good thing for most people because trading fear is usually a bad idea, it is taking away a trading opportunity for anyone willing to pounce on that emotional market crack.

TRADING OPPORTUNITIES

This is purely a guess on my part, but we could see one of two potential trades tomorrow.  The market could open up as investors look at the silver lining and anticipate the economic boom from rebuilding.  Or the market could open lower if investors who felt trapped by the closed markets just want to get out.

I don’t know which side will win that tug-of-war at the open, but I suspect the market will then trade the rest of the day in the opposite direction of the open.  So if it opens strong, it will selloff through the day.  If it opens weak, it will rally through the day.

Based on some of the trader commentary I’ve picked up on over the last couple days, my gut senses a lot of positive talk and it feels like the market will open higher, but that optimism could fade through the day and stocks decline from that early high.  The question that needs answering is who will buy after that early pop to keep the market headed higher?  And with everyone on edge after the storm, selling could beget more selling throughout the day.

But either way, there is no reason to force a trade tomorrow and Sandy will be ancient history by Wednesday afternoon, as the market starts obsessing about employment and the election.

As a bull, I’m rooting for a healthy selloff over the next few days to get all those half-empty people out of the market so the rest of us can start focusing on all the opportunities ahead of us.

Stay safe

If you found this post interesting, consider retweeting it on StockTwits.  You’d be amazed at how many additional people find this from each retweet.  And if you don’t have a lot of followers; discovering, tweeting, and retweeting interesting content is the best way to build a following.  Thanks.

Head fakes and sideways trade

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Another day of head fakes and sideways trade.  Expect the market to reveal its hand next week, but the question is which way will it take us?

MARKET BEHAVIOR

Another day of sideways trade.  Early on it looked like the market wanted to breakdown, but that turned into a head fake as it quickly bounced back to 1410.  This is the fourth day we’ve traded around this level and obviously this can only last so long before the market reveals its next move.

There are four possible outcomes.  The two obvious ones are breakout or breakdown, but what about the other two?  The market is often devious and will mislead us before revealing its true intentions, so a fake breakout before turning lower, or a feigned plunge before rebounding hard.  Sometimes the market plays straight poker and others it bluffs; that is what makes it so hard to for traders get an edge.  Right now the trend is lower and more often than not the trend continues.  We need to plan for further weakness until the market proves otherwise.

MARKET SENTIMENT

The market is holding 1410, at least that is what it wants us to think.  This stability is frustrating bears and seducing bulls.  It’s saying, “Come on in, the water’s fine.”  But the thing to remember is the easy trade is often the wrong trade.  If the market feels like it is firming up and tempting us to venture in, it is probably a trap.

Frequently the hard trade is the right trade.  We need to ask ourselves what is harder to do right here, hold or sell?  Has this pullback put fear back into the market?  How scary can a 4% decline really be?  Is that enough to chase out weak hands and clear the way for a move higher?  Or does the market need to drive a spike through the heart of hopeful bulls still hanging on by their fingertips?  Fear fuels rallies and right now there is not nearly enough fear in the markets to power a meaningful rally.

TRADING OPPORTUNITIES

This week has been a day-trader’s paradise with the strong directional intra-day moves, but the market made very little progress for either bulls or bears as three of the last four days closed within one point of each other.  Every move by one side has been matched with an equal response by the other.  Where does that leave us?  When all else is equal, stick with the trend.  We need a high-volume capitulation point to shakeout weak investors to set the stage for the rebound.

We’re within shouting distance of 1400 and that represents both psychological and technical support.  No doubt a dip under this key level will trigger all sorts of autopilot stop-loss selling and aggressive shorting by bears.  But that selling will be the end of the move, not the start of something bigger.  Once the stop-losses are executed and the shorts sold, the selling and supply of available shares will dry up in a hurry and there will be nowhere for the market to go but up.  The market will bounce somewhere between 1400 and the 200dma so if you are short, don’t get greedy and be ready to harvest your profits before they disappear.

And of course the above is just my best guess based on sentiment, historical patterns, and probabilities.  Nothing is certain in the markets and it is foolish to trade that way.  The market could bounce next week and push up to 1450 crushing any and all shorts.  It could also plunge through the 200dma on panic selling when Obama is reelected.  While either of these moves might cause me to lose some money, I don’t mind because these new moves create more opportunity.  I trade extremes in sentiment and my best trades are going against big moves.  This stuff in the middle of the range is the hardest to anticipate and has the lowest probabilities.  I might get this move wrong, but a wrong trade here just leads to another opportunity to profit.   I’ll never make all the money and I’m fine with that.

Stay safe

If you found this post interesting, consider retweeting it on StockTwits.  You’d be amazed at how many additional people find this from each retweet.  And if you don’t have a lot of followers, discovering, tweeting, and retweeting interesting content is the best way to build a following.  Thanks.

Volatile, but indecisive

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

A lot of nothing in the market.  We broke out to the upside, made a new low, and then finished in the middle.  Not the most decisive of days, but we’ll get there soon enough.  The trend is lower and that is the direction we should plan for.  I would be suspicious of any rally from here without a decisive shakeout first.

MARKET BEHAVIOR

We had a volatile, but indecisive day.  The S&P500 exceeded Wednesday’s trading range on both the upside and downside, but it finally finished in the middle of the day’s range.  While the day eventually ended higher as compared to Wednesday’s close, it would be hard to say the action was bullish or bearish.  The market opened higher but then sold off, and it made new lows and then bounced back.  It gave a little something for both sides to hang their hat on, but it was a lot of nothing for the rest of us.  To get a better read on the market we’ll need to watch for more decisive clues tomorrow.  But the trend is lower and with all other things being equal, the trend will continue.  We should expect further weakness in coming days unless the market conclusively tells us otherwise.

MARKET SENTIMENT

Bulls had the opportunity to trigger a short-squeeze at the open and bears could have started an avalanche of selling with the new low, but neither was able to get the job done.  What we can tell from today’s trade is both sides are dug in and prepared to stand their ground.  Bears resisted the assault on the upside and bulls were resilient in the face of a push lower.  But these were fairly modest moves and no doubt a larger penetration in either direction will put the hurt on and lead to a cascade of stop-loss selling.

The trend is lower and the trend is more likely to continue than reverse, so we should plan for further weakness.  But at the same time, bears are getting pretty aggressive and we might see a short-squeeze thrown in before heading lower just to keep things entertaining.  The market doesn’t like to be predictable and a short-squeeze before plunging lower would zing both sides and humiliate everyone equally.

At this point I am looking for a plunge lower on gigantic volume to signal this correction is bottoming.  I would be reluctant to buy a rebound from this level without a huge selloff.  Lacking that, the rally won’t have the ammunition and sentiment necessary to sustain a move higher.  The market rises on fear and we need to scare everyone to get this rally going.  The only exception I would consider is if the market traded strong for four or more days.  I could get on board with that kind of strength, but that rally wouldn’t have the same upside potential as a market that had a decisive shakeout.

TRADING OPPORTUNITIES

There is no reason to be in this market and the conservative trader is in cash.  Let the gamblers figure this out and wait for a higher probability trade to emerge.  For the gamblers out there, the best trade continues being short this market, but only the most confident, experienced, and disciplined traders should attempt this.  A lot of money can be made quickly shorting a correction, but timing is everything and oversold markets bounce back hard, steamrolling anyone who showed up late to the party.  We’re in the later innings of this correction and probably only have one more leg lower before rebounding.  If you don’t have a profit cushion already in place from shorting earlier in this move, I’d suggest staying out and waiting to trade the rebound.  The risk/reward dynamic for initiating a short here isn’t worth it.  We are within a couple of weeks of the rebound, so wait patiently for that trade.

ET CETERA

Just to clarify my commentary about the impending election, expecting the market to rally after Obama is reelected has nothing to do with my personal political views or affiliations.  I don’t support or endorse Obama and my commentary is exclusively related to anticipating the market’s reaction.  And as far as that goes, it is pretty obvious to me, if everyone expects the market to tank if Obama is reelected, then clearly it will rally.  Supply and demand at its best.

Stay safe

Selling slows down

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets closed on the day’s low but most likely we’ll find support at these levels for a couple of days before we see further declines.  An Obama reelection is setting up nicely for “sell the rumor, buy the news” trade.  The most unexpected outcome is for the market to rally after an Obama win and that is exactly why it will rally.

MARKET BEHAVIOR

Markets ended modestly lower after yesterday’s big selloff, but still held up relatively well given the last several days of trade.  We mostly arrested the decline and did not trigger another day of avalanche stop-loss selling, but the market did close on the day’s low.  What does that mean for tomorrow?  Will we see more sellers get shaken out as we undercut support at 1400, or did today’s weak close induce most of the selling and we’ll see prices rebound tomorrow?

MARKET SENTIMENT

The impetus is on bears to continue pressuring the market.  There were a lot of latecomers selling and shorting today, but usually the obvious trade is the wrong trade.  That leaves us trying to figure out which direction the largest number of gullible traders are going; are they anticipating a market crash, or are they buying the dip?

Today didn’t feel like a lot of dip buying and we saw the shorts pile in over the last hour of trade.  Of course selling often begets selling and declining prices can transform a confident bull into a spineless seller in no time.  But those cases are extreme and reserved for infrequent market crashes.  We are not crashing here, just correcting from an overbought condition and as such, we are already a good way through this correction.

Volatility is picking up as fear is creeping back into the market.  But any bull should be excited about this transition because we need fear to rally.  Fear is what keeps traders out of the market and watching from the sidelines.  But over time those traders wade back into the market and their buying pushes prices higher for the trader savvy enough to get in early.

TRADING OPPORTUNITIES

My honest assessment is we will find stable footing for a couple of days, maybe even see a rebound attempt as bottom-pickers rush in and shorts get chased out.  But not long after we’ll see another leg lower once that buying dries up.  Then as quickly as the market drops and pierces support, it will bounce back from a climax bottom.  And of course all of this lines up nicely with the impending election.  I expect weakness anticipating an Obama reelection and a rally after the election when the market moves past politics and focuses on whatever new obsession it discovers.

Stay safe

Hopeful bulls get kicked in the gut

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Stocks had a bad day and the selling is not done yet.  Lower prices are in our future, but we’ll see a couple false bottoms along the way.  Each of those rallies will be selling opportunities.  But at the same time, don’t get greedy on the short side and be prepared to take profits soon because this is just a pullback and not a crash.

MARKET BEHAVIOR

Stating the obvious here, but the markets had a bad day.  Friday’s weakness is continuing after a brief pause Tuesday.  We clearly shattered support at 1430 and sliced through the 50dma.  Volume is higher, but not off the charts.  No doubt this is putting fear into hopeful bulls and making them question themselves, but so far there has not been a mad rush for the exits on tremendous volume.  Technically we’re resting in the upper end of August’s consolidation.  Will this provide support or are we going to break 1400 and possibly test the 200dma?

Clearly downside volatility is back in the markets and shaking up the complacency that was creeping in.  Is today enough of a shakeup?  Or will this thing go longer and lower than most expect?  And of course we have to watch for a multi-leg move lower with sucker’s rallies along the way.

It looks like the uptrend has been broken and we are seeing lower-highs and lower-lows.  There is no big news story shaking up the market, just demand drying up and prices falling without new buyers left to prop up the market.  Will bottom-pickers come in and prop up the market again, or do we need to fall far enough to tempt value buyers with irresistible discounts?

MARKET SENTIMENT

This decline has clearly rattled bulls, but has it shaken them out?  Are they selling by the fistful, or desperately holding and hoping for a bounce?   We need to shake the tree and see climax selling before this will exhaust itself and reverse.  Was today that day?  Or will the lower selling volume subject us to a multi-step decline with bottom-pickers trying unsuccessfully to prop up the market?

Markets top on complacency and bottom on irrational fear.  We had complacency and that lead to this pullback, but have we hit irrational fear yet?  By that measure, I think we still have a way to go before this thing bottoms.  I’m not predicting a crash like we saw in 2008 or even this summer, but we do need to put fear back in the markets in order to create fuel for the next rally leg.  Markets rally in the face of fear and decline on the back of hope.  We have a way to go before all that hope is replaced by fear.

The reason these contrarian trades work is basic supply and demand.  People trade their outlook and when they are bullish, they are fully invested.  But when everyone is bullish, that also means everyone is fully invested and there is no one left to buy and continue pushing prices higher.  At that point prices fall due to a lack of demand.  And on the opposite side, when everyone is most fearful, everyone has already sold and supply dries up.  Tight supply means rising prices and that is what causes the bounce.  Bringing that insight to this analysis, we are looking for everyone to sell before we can bounce back.

The above is an intermediate-term outlook, but in the more micro view I expect we’ll see multiple bull-trap rallies along the way that suck in aggressive bottom-pickers and tempt nervous bulls to continue holding.  That will temporally increase demand and tighten supply, pushing prices higher in a relief rally.  But these are short-lived phenomena and after a day or two the decline will resume.  We will keep sliding until most of the sellers are flushed out and value investors see such fantastic discounts they won’t be able to resist buying stocks by the truckload.

TRADING OPPORTUNITIES

The trend is clearly lower with the market making a series lower-lows and lower-highs.  It is best to trade the trend, so be extremely careful with any buying and be ready to harvest any long profits early and often.  This is one of the few times when it makes sense to short the market.  We’ll probably see a stair-step pattern lower with false bottoms along the way.  Sell the rallies and buy the dips.  We’ll probably push lower and test 1400 and the 200dma over the next few weeks.  But remember the market sells off far more quickly and we’ll find the bottom soon.  Don’t get greedy and be ready to take your short profits soon.

The election is a huge psychological milestone and that could trigger a reversal in the markets.  Obama leading in the polls could make for a soft market, but expect an Obama win to send the markets higher.  This isn’t a referendum on an Obama presidency, but the markets habit of selling the rumor and buying the news.  An Obama win will already be priced in the market by election night and it will be ancient history as far as the market is concerned before the votes are even tallied.

Stay safe

Bottom pickers getting sucked in

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

The early selloff reversed and the S&P500 finished flat for the day.  Was this the panic driven capitulation that marks a solid market bottom?  Not likely.  The high-probability trade remains lower.

MARKET BEHAVIOR

Friday was the biggest single-day decline in months as bulls are losing control of this market.  In the last few months, down-days were muted and lacked a meaningful punch.  The real power came from upside moves, but that dynamic is obviously changing.  The ironic thing is the bear camp regained its strength only after its numbers dwindled.  But that is the way the market works, the side with the greatest numbers is the weakest.

Since June every pullback has been a buying opportunity and that trade has become fairly obvious.  Is it time for the market to change its personality to keep it from being too easy and predictable?  We’re about to find out.

MARKET SENTIMENT

There is so much analysis and research out there about what a ‘normal’ market does, but then the prognosticators always follow that up by saying the market we are in is not normal.  We have the Great Recession, Euro Contagion, unprecedented money printing, and countless other reasons why this time is different.  But can anyone name a time that felt normal as it happened?  Is there anyone who traded a normal market where everything was so predictable and easy that they were making more money than they knew what to do with?  The two takeaways, the market is never easy and looking back ten years from now this market won’t seem so special.  The repeating patterns that are evident in hindsight in past chaotic and unique markets will also be present in post-analysis of today’s market.  It is our job to see these ‘obvious’ patterns in real-time and profit from them.  This market is no more special than any other market, once we lose that bias, it becomes a lot easier to understand the market.

We had a big down day on Friday, the largest price decline in months.  The selloff continued this morning, but reversed in the last hour of trade to finish unchanged.  Is this a clear reversal or simply a dead cat bounce?  Given how low the volume was, it would be hard to count this as a panic-driven capitulation point and a legitimate bottom.  Most likely bottom pickers are looking for the rebound and were sucked into this low volume reversal.  Price is truth and gains are gains no matter what the volume, but this bottom is highly suspicious.  I feel we need some real gut-wrenching down-days to clear the deadwood before we can resume the rally.  Dropping under 1400 over the next few days would certainly do that.  I don’t know if that will happen, but the sooner the market spooks out the weaker hands, the sooner the rally can resume.

No doubt the impending election is weighing on the markets and tonight’s debate will influence expectations of the outcome.  We’ll probably see another week of volatility, but we are in the home stretch and many people are already casting their ballots in early voting.  The market will pick the winner soon and will have already moved on to the next thing by the time Election Day rolls around.  My best guess is we’ll see weakness into the election and rally after.  But that is just a guess.  We need to follow market sentiment daily and adjust our expectations as new information becomes available.

TRADING OPPORTUNITIES

Most likely today’s rebound is a dead cat bounce and anyone who is trading the long side should cash in early and often. We could see prices climb for a day or two, but we really need additional high-volume down-days that clearly violate technical support levels.  This selling panic driven selling creates buyers for the next rally.  It still seems like this late-stage rally is built on hope and the market needs to crush that optimistic sentiment.  Markets rally in the face of fear, not on the back of hope.  Lets get some of that fear back so the market can resume its uptrend.

The higher probability trade remains lower, but we could see a bull-trap rally over the next day or two before breaking support.  And of course my predictions of support violations could be premature and we retest the upper-end of the trading range over the near-term.  But there are never certainties in the market.  We make the high-probability trade and over time the odds will work out in our favor.

Stay safe

Taking a breather

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR

Markets opened slightly lower Thursday morning.  There was news, some of it good, some of it bad, some of it indifferent.  But there is news every day; what matters to us is how other people trade.  We’ve had a steep run the last three days and obviously that can’t continue indefinitely.  Today seems to be the day the market pauses to catch it’s breath.  But where do we go from here?

We are a few points from an upside breakout, or we are a few points from the ceiling of a trading range, or we are peaking before a correction.  Up, down, or sideways.  How insightful of me.  But we have to look at the ammunition each side has so we can determine which outcome is more likely than the others.  Trading with the odds in our favor is how we make money in this game.

MARKET SENTIMENT

Is there fuel for a move higher?  A lot of bulls are invested, so we need to get other people to buy into this market to continue the move higher.  Are the undecided ready to commit?  Are the bears ready to give up and go long?  We’ve had a good move higher and a lot of the undecided have already committed to this market.  The recent short squeeze flushed out a lot of bears.  So who is left to prop up this market?

On the other side, bears have been getting killed and many have given up.  They might not believe in this rally, but they can’t stomach getting in the way of this steamroller rally any longer.  The recent three-day short-squeeze flushed out another handful of bears.  There is a market saying, don’t fight the tape and I expect many undecided and bears are being won over by the strength of this market regardless of the fundamentals and headlines.

Looking at those, it seems like there is more long bias in the market than short bias.  We are not at extreme levels that skew the probabilities clearly one way or the other, but there seems to be more slightly fuel for a move lower. But on the other side of the equation,  momentum is higher and often these things go further and last longer than most people expect.  This is because many people wait for that pullback, so the buying is initially restrained, but these tardy traders start buying every dip and that props up the market for an extended period of time.

What I’m really saying is momentum is higher, but sentiment is setting up for a move lower.  Momentum can carry us for a bit longer, but that just skews the sentiment imbalance even more.  This is how the markets work.  Tide comes in, tide goes out.  Markets go up, markets go down.

TRADING OPPORTUNITIES

Start looking for longs to lock in profits on and watch for weakness to short.  Don’t get in front of this steamroller by trying to pick a top, but if weakness forms, jump on the short and ride it through the 50dma.

I will be traveling and won’t be able to post on Friday.  Have a nice weekend.

Short-squeeze continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets continued the 50dma bounce for the third day, but how much longer can this keep up?  Where are the new chasers going to come from?  Bears are demoralized and bulls are breathing a sigh of relief.  The market’s picked on bulls for long enough, it might be time to make the bulls sweat some.

MARKET BEHAVIOR

Stocks rallied nicely for the 3rd consecutive day, pushing the S&P500 to 1460.  The chart looks like a double-bottom, bouncing off of the 50dma three days ago.  But what makes double-bottoms work is the demoralizing second down-leg that undercuts the previous selloff.  This second low shakes out the last of the weak holders and clears the way for the rebound.  I’m not sure last week’s low reached that sentiment capitulation point.  Another thing is robust double-bottoms take a bit longer to form.  The speed of the three days is more of a short-squeeze than a solid foundation.

MARKET SENTIMENT

What we need to do is evaluate is how other traders are responding to this market.  Obviously bears are getting their butt kicked for the umpteenth time and morale and resolve on that side of the fence is hitting a new low.  In the bull camp, people who sat through the pullback are breathing a sigh of relieve as their decision to hold the dip paid off.

If we look at who was buying this recent rebound, it was a lot of bears getting squeezed and forced to buy back their shorts for a loss.  We also have swing and momentum traders jumping on the bandwagon.  But what about big-money value buyers?  Are they a playing a role in this 30-point rally?  On that I’d have to say no.  Value buyers are in the more cautious and deliberate crowd on Wall Street.  Sharply rising prices makes them step-back, not chase with reckless abandon.

So what insight does this give us?  Shorts and swing-traders are climbing over each other to buy this market, but they represent a small sliver of traders and their buying will taper off quickly.  Value investors are taking a step back after the jump in prices and their buying won’t be there to continue the surge higher.  And finally, weak bulls are still hanging on because we didn’t get a high-volume selloff on the second dip.  It seems to me we are close to running out of buyers and could find some weakness over the next couple days.  If buying completely dries up, then we could even retest the 50dma and finally get that high-volume capitulation bottom that makes a sustainable move higher possible.

The markets are always about supply and demand.  For the market to continue this surge higher, we need to find new buyers.  I have a hard time figuring out who that next buyer will be to keep this rebound racing ahead.

TRADING OPPORTUNITIES

My long-term view continues to be bullish, but we could see weakness in the near-term.  We’ll probably settle into a trading range or slightly decline leading into the election, but finish the year with a rally.  As bad as the headlines seem, it the markets are closing in on a 20% year.  It is hard to do better than that.  But what made it possible was all the negativity.  When everyone is pleased with the market outlook, the only place to go is down.  So here is hoping everyone continues their pessimism next year too.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL continues living under its 50dma.  Tuesday had a nice pop, but this stock has too many blind followers to let is decline without a fight.  This is the stock everyone wishes they bought at $200, $300, $400, $500, and $600.  As a result, investors will pile in on every pullback.  That will keep any decline gradual because there is always bid under the market.  I’m a big fan of Apple products, but the stock might need a cooling off period following such a tremendous run.   Rather than keeping it as a core holding, it might make for a better trading stock going forward.  Buy the dips and sell the rips.  It would be a shame for anyone who made a great profit on this stock to let is slowly slip away.

Stay safe

The Romney short-squeeze

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Stocks put the hurt on bears as most of last week’s selloff was taken back.  But without a convincing shakeout below support, a lot of weak holders are still hanging on and that will probably keep the market range bound.  For the time being, the best trade for the time will be getting back into swing trading.

MARKET BEHAVIOR

Markets are putting the screws to bears in a short-squeeze as stocks are up strongly without an obvious catalyst.  Today we’re witnessing the natural ebb and flow of supply and demand.  Tide comes in, tide goes out; stocks go up, stocks go down.  People want to assign a reason for every move, but often it is simply a function of the herd moving too far one way.  Buyers push the market higher, but eventually the market runs out of new buyers, demand tapers off, and prices nose over.  On the other side, sellers push the market lower, but soon everyone who wanted to sell has sold, available supply dries dry up, and prices to rebound.

As I stated in previous posts, I would be more convinced on the sustainability of this rebound if we had a material shakeout under key support levels.  Without that, it is likely this bounce is part of a new trading range.  It could be an ascending or descending channel, but we’ll probably bounce around until one side becomes overcrowded and the market will breakout to the opposite side.  But until then swing trading will be back in vogue.  1425 is the lower boundary and 1475 is the upper boundary.  In coming days when the market test either of these levels, we’ll evaluate sentiment in real-time and determine if that is a breakout or a head fake.

MARKET SENTIMENT

The slide over the last two weeks chased out some weak holders and tempted aggressive bears to short, but on a scale of one to ten, this shakeout was a five at best.  It was slow and shallow enough that most weak holders could ride it out.  These weak holders are always potential sellers and that impending supply will remain a headwind for the market.  The best upside potential occurs when all the weak hands flee the market and there are very few sellers remaining.  At that point supply dries up and prices takeoff.

No doubt volatility will come from the impending election with bookmakers ever-changing handicapping of the race.  Obama was the clear favorite, but recent debates let Romney catch up.  My best guess for today’s bullishness is hope that Romney will score another debate win tonight.  If the President stumbles in a second debate, that could upend the assumed Obama victory and give Romney a legitimate chance at taking the White House.

TRADING OPPORTUNITIES

Tomorrow’s open will depend entirely on Romney and Obama’s performance tonight.  If Obama takes control, expect the market to return to status quo and more softness.  We’ll probably see the selloff continue to the election and then a rally into yearend.  If Romney impresses again, expect the market to rally into the election and then sell-off into yearend.  These will make good swing trades, but for position traders one-step forward, one-back is no different than one-step back and one-forward.  But if we are returning to a range bound market, the best trade is buying weakness and selling strength.

Stay safe

50dma bounce

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

The S&P500 bounced off the 50dma in slightly higher volume.  It is finding buyers are these levels, but the trade seems constrained and is not in the same category as the upside pops we’ve seen recently.  Those pops were fueled by an overly bearish market getting squeezed, this time it looks more like the selling simply exhausted itself.  Did today’s support mark the reversal of the slide, or is this a temporary relief-rally before another wave of selling hits the market?

Buying at the 50dma is the obvious trade.  But does the market want to cooperate with the hopeful bulls that are holding on by their fingernails right now?  Can the market resist the temptation to flush out and humiliate all those hopeful traders?  We’ll have our answer in a few days.

MARKET SENTIMENT

There are three buyers of today’s bounce.  Shorts locking in profits.  Swing-traders and bottom-pickers jumping on what they think is the reversal.  And finally value investors dipping their toe in the water after prices have declined to an attractive level.

Short-covering and bottom-picking are temporary events.  The sustainability of a rally is determined by the conviction of value investors stepping up at these levels.  To this point value investors sat on their hands as the market declined due a lack of buying.  Have we come down far enough to get them interested again?

Without a high-volume shakeup penetrating key support levels and triggering a wave of stop-loss selling, where are the new buyers going to come from?  Any rally without a capitulation bottom is built on a foundation of sand because it lacks that large pool of available buyers ready to chase the market.  Further, many of the weak holders are underwater and hoping a rebound will let them get out of at breakeven.  That will create selling pressure on any climb back to new highs.  I’m a bull here, but I’d feel better with a gut-wrenching whoosh lower that cleans the slate.

We can’t ignore presidential politics when discussing market sentiment.  Romney is surging in the polls after a strong showing in recent debates.  No doubt unexpected Romney strength could cause the market to rally into the election.  But if this is the case, the trade becomes buy the rumor, sell the news.  The markets will pop on a surprise Romney win, but more often than not the market makes as many people look foolish as it can.  If everyone is convinced a Romney win will make stocks takeoff, the market will confuse and humiliate everyone by heading lower instead.

TRADING OPPORTUNITIES

I think more weakness is needed before we can rebound decisively.  We could see more upside following today’s bounce, but the market will likely return to the 50dma before too long.  The quickest way to resume the rally is to have that flush out event now and then move on.

At this point I’d suggest keeping what you’ve got.  If you are trying to hold your stocks through the correction, keep holding.  If you took profits and are looking for the next buying opportunity, hold back for a bit longer.  It is too late to sell and too early to buy, so just sit tight.

Stay safe