Category Archives for "Intraday Analysis"

Time to cool off?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks opened under 1,800 and failed to reclaim this nice round support level by the close. The market is still 50-points above the 50dma following its 160-point, nearly straight-up bounce off the October lows.  This is the eighth-week the market’s been above the 50dma and is the longest stretch since we did nine-weeks back in January and February.  No matter what side of the bear/bull debate we fall on, it is perfectly reasonable to expect the market to retest support at the 50dma in coming weeks.  Sometimes that involves a pullback, other times it simply means pausing so moving average can catch up.

MARKET SENTIMENT
The last few weeks have been worry-free once our politicians quit their bickering and raised the debt ceiling, removing the risk of a catastrophic default.  Since then it’s been clear sailing with the tail winds of Yellen’s confirmation hearing and stronger than expected October employment numbers.  But the thing is the market is a worrier by nature and it cannot go long before fear over some impending disaster creeps in.  Today’s weakness is largely attributed to a bad day on the German markets and increasing concern over Taper in our part of the world.

Markets often move in waves as the pendulum of sentiment swings between fear and greed.  It’s been a good run and we should expect a move the other direction at some point.  But when the fear creeps in, embrace it, don’t be afraid of it.  Nervous sellers dumping shares at a steep discounts is the way confident traders make money.  Their fear is our profit.

TRADING OPPORTUNITIES
Expected Outcome:
Anyone holding out for higher prices in the near-term needs to see the market reclaim 1,800.  This proves dip-buyers are alive and well.  Without that, we could see the market slip back to the mid 1,700s as value oriented buyers wait patiently for more attractive prices.

Earlier this year the traditional “sell in May” was a bad idea, as was the conventional wisdom  that September and October are horrible months to own stocks.  Now we have many of those same people pointing out how strong December traditionally is.  2013 hasn’t payed much attention to conventional wisdom, so I wouldn’t count on the Santa Clause Rally either.

Alternate Outcome:
Reclaiming 1,800 and setting new highs this week shows this rally isn’t ready to take a break and wants to keep going.  While we can debate the sustainability of such a move, only price pays and we cannot argue with a rallying market.

Trading Plan:
Traders need to quickly decide on what timeframe they are using.  Longer-term investors will sit through any near-term weakness and use these opportunities to buy more of their favorite stocks.  Shorter-term investors should lock in recent profits and look to buy back in at lower levels.  The most aggressive can short the market with a stop above 1,800.  If we reclaim and hold 1,800 we need to reevaluate expectations of near-term weakness.

MSFT daily at end of day

INDIVIDUAL STOCKS
TSLA blew up in shorts faces as a German regulatory agency deemed the car safe following recent reports of battery fires. That sent the stock up $20.  But is this a fundamental catalyst that will get the momentum bandwagon going again?  That is harder to say.  I have my doubts, but if the stock reclaims the 50dma, then let the party continue.  If it hits its head on this level, we likely still have more selling in front of us.  No matter how safe the car is, the public if fascinated by this story and expect any future car fires to be front page news.  This is no different from the TM gas pedal incidents or Gulf Coast shark bite scares.  The more rare the event, the bigger the news it is, especially when someone catches video of it on their smart phone.

AAPL is off to the races again as the iPhone and iPad are flying off the shelves this holiday season.  While that was expected, more surprising is the PBS News Hour reported that MSFT‘s Surface was the best-selling tablet at Best Buy over the weekend.  While this was aided by aggressive pricing, buyers might actually be looking for more utility out of their tablets than Angry Birds and Candy Crush.  I believe the future lies in full featured tablets and MSFT/INTC are the only ones providing these capabilities.  While many accuse MSFT/INTC of falling behind the times, I actually think they are ahead of the pack on this one.

Plan your trade; Trade your plan

Waiting for the bounce

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:10 EDT

MARKET BEHAVIOR
Stocks slipped under 1,800 in midday trade as dip buyers were unwilling to defend that support level.

MARKET SENTIMENT
Stocks go up and stocks go down.  We had a strong, 150-point rebound from the October lows and no matter what side of the fence we fall on,we shouldn’t be surprised by occasional selling along the way.  The bigger question is if this is just another routine, buyable dip, or the start of a stumble into year-end.

To bounce we need dip buyers.  These are either bargain hunters who find deals too good to resist, or regretful traders who missed the prior run and jump at the chance to get in at earlier levels.  Since we are only one percent from all-time highs, we can pretty much eliminate bargain hunters as a source of support.  These buyers wait for better discounts and will holdout until at least the 50dma before finding prices too attractive to resist.

Without bargain hunters, that leaves us dependent on chasers to continue pushing us higher, the proverbial next greater fool.  While these people are always out there, we want to know how much money they have left to throw at this market.  Given the strong move since the start of the year, we can assume many of the chasers prepared to buy this market have already bought.  While there are mountains of money stashed in savings accounts and bonds, that represents a multi-year story as it flows back into the market and has a limited impact on day-to-day trading.

TRADING OPPORTUNITIES
Expected Outcome:
With everyone justifying why we should own stocks at these levels tells us these people are already fully invested.  With fewer skeptics to convert into buyers, that makes it more likely the market will struggle to continue making strong gains.  Prices move when people change their minds and trade that new outlook.  Since many are now comfortable owning this market, that means we might be running out of new buyers.

Alternate Outcome:
Rallies go far further and longer than anyone expects.  There’s been a loud chorus calling for a pullback since March, yet here we stand 300-points higher.  There is no reason this remarkable rally needs to stall out here and we could easily surge another 50 or 75-points into year-end and the buying frenzy continues.

Trading Plan:
With limited upside and material risk underneath, the risk/reward favors locking in profits and resisting the urge to buy the dip, at least for a little bit.  The most aggressive can short this violation of support with a stop above it.

Plan your trade; trade your plan

Where’s the fear

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks pushed ahead to new highs following Janet Yellen’s confirmation hearing.  We are just a few points from 1800, something that was unthinkable only a month ago.

MARKET SENTIMENT
It feels like there are only two opinions in the market, that stocks will keep going to the moon or we are in a bubble about to burst.  Where is the middle ground?  The people who say we need to take a breather and digest recent gains before marching higher?  Where are the nuanced opinions that say we need to pullback to the 50dma or traders should lock-in profits?  All I hear are these two polar extremes of buy, buy, buy and sell, sell, sell.  Maybe, just maybe, the truth lies between these two emotionally charged opinions.

I find it interesting how many people blindly attribute this market’s success to QE.  This year’s strength can’t possibly be because we shook off all the major risk factors people were worried about.  When is the last time you heard Contagion?  How about Cyprus?  Sequester?  Double-Dip?  More recently we put Shutdown and Default in the rear view mirror.  Who needs money printing when the market keeps removing all the uncertainty people were hiding from?

And here is why this is important.  If everyone believes QE is inflating this market and Yellen will continue the easy money policy, they will forecast higher prices for as far as the eye can see.  But what if it wasn’t easy money propping up this market, but overcoming fear and uncertainty?  My theory is this market rallied on overblown fears turning into non-events.  If that is what really drove us to all-time highs, we need fear, not QE to continue going up.  But this is the first time in at least a year and a half where the market is not obsessing over some impending catastrophe.  Without fear, this rally might be running out of gas regardless of what the Fed plans on doing.

TRADING OPPORTUNITIES
Expected Outcome:
For the record, I am long-term bullish and think we are only a fraction of the way through a secular bull market.  When everyone says buy and hold is dead is the best time to buy and hold.  This is exactly what I am doing with my retirement account because I don’t need those funds for decades.  But in the near-term, I swing-trade extremes in sentiment with my trading account and it sure feels like the bearish views from earlier in the year are quickly being overtaken by boundless optimism.  The time to be excited about this market was in January, February, and March, not after a 25% runup.  Anyone just warming up to this market is a day late and a dollar short.  Buy when we are afraid, not when we feel safe.

Alternate Outcome:
These things go so much further than anyone expects.  That is what makes picking tops so perilous.  We might know exactly what will happen, but if we are early, in the market that is the same thing as wrong.  Everyone knows this rally will eventually stall, we are only debating the timing.

Trading Plan:
The market is most dangerous when it feels the safest.  Between endless QE and no material risks on the horizon, it sure feels like a safe time to hold stocks.  While I easily could be early, I feel the risks are growing with every leg higher.  If you don’t want to sell, at least use a trailing stop to protect recent profits.  Making money in the markets is easy, the hard part is keeping it.

TSLA daily at end of day

INDIVIDUAL STOCKS
TSLA cannot get out of its own way.  Markets are making all-time highs, yet the auto maker is stuck near five-month lows.  There is a crisis in confidence and that is never a good thing in a stock that ran up more than 400% in half a year.  It will eventually recover, but let it prove itself first by reclaiming $150 and the 50dma.  For current owners, hope is not a strategy and we always need an exit strategy.  If the broad market stumbles, that weakness will hit high-fliers especially hard.

FB recovered the 50dma, but volume was anemic and didn’t signal a valid buy-point.  Keep waiting for that strong volume bounce off the 50dma.  If we don’t see that, don’t jump in because we could slip back under this widely followed moving average, especially is the broad market stalls in coming weeks.

Plan your trade; trade your plan

Buy the breakout?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks turned early weakness into all-time highs as this market keeps defying the skeptics.  The one-way rebound from the morning lows reeks of shorts tripping over each other trying to get out.  While not as strong as last Friday’s reversal, it ranks among the best gains we’ve seen over the last couple of months.  We continue trading near the upper end of a trading channel that dates back to spring and are well above the 50dma.

MARKET SENTIMENT
I’m contrarian by nature and today’s short-squeeze makes me suspicious.  We’ve come a long way, there are few worries to be found, and the market pops on “unexpected” news Yellen wants to continue Ben’s policies.  No doubt I’m late to the skeptic party, but that is by design.

It was a painful day to be short and many of the buyers were bears forced to cover their losing positions.  While bulls cheered the reversal and all-time highs, the red flag is seeing powerful trade from an already extended market.  Often we embrace powerful moves as signals of strength, but that only applies when there is a huge weight holding the market back.  That is the source of the coiled spring poised to explode higher.  We don’t have that setup here because worries are few and far between.  When we see unjustified strength, we must suspect looming exhaustion.

TRADING OPPORTUNITIES
Expected Outcome:
Now that most shorts have covered, who is left to buy?  That is a really good question.  One I cannot answer.  I don’t have a crystal ball and cannot call tops, but I do trade odds and right now the market feels extended.  While we can easily continue higher, without widespread fear as fuel, the chances of a big move are limited and at best this will grind higher.  On the other hand, if we run out of buyers, there is nowhere to go but down and we have well over 100-points of clear air between us and the 50dma.  While I’ve been a big proponent of this market because confident owners keep supply tight, if we run out of buyers, it doesn’t matters how tight supply is.

Now don’t get me wrong, I’m not expecting a market crash or anything of the sort.  It just feels like it is time for a step-back before resuming our climb higher.  We trade probabilities and risk/reward.  Right now the risks are large and rewards are small.

Alternate Outcome:
These things go so much further than anyone expects.  While we’ve come a long way, there is no reason we cannot continue higher as underweight money managers keep chasing this market into year-end.

Trading Plan:
We are in this to make money and when the potential upside is limited and the downside large, it is wise to take money off the table.  Since May the trade has been buying weakness and selling strength.  Right now we are at new highs and risk is greatest when we have no fear.

MSFT daily at end of day

INDIVIDUAL STOCKS
TSLA was left out of the broad market’s party as it continues struggling with $140.  The euphoric, one-way buying is taking a break and it needs to reclaim $150 and the 50dma for the stock to get its mojo back.  TSLA departed trading fundamentals a long time ago and bulls cannot use them to justify buying and holding here.  This is a momentum name and until it regains it, we are best suited staying away.

AAPL also failed to enjoy the market’s good fortune.  All of this year’s good news is behind us and it will be months before there is another upside catalyst.  The stock is holdable as long as it stays above $510, but things could get ugly if it slips under $500 and the 50dma.

Surprise, surprise, MSFT is the newest momentum stock.  Only after something is ridiculed and left for dead does it present an interesting buying opportunity.  While everyone obsesses over AAPL and what a great value it represents, MSFT is the far better stock to own because it is going up and that is the only thing that matters.

Plan your trade; trade your plan

Bridge For Sale

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
On Veterans Day, Stocks did a lot of nothing on extremely light volume.  We continue holding near all-time highs following Friday’s powerful rebound on stronger than expected employment numbers.

MARKET SENTIMENT
The front page of Monday’s WSJ was dominated by articles claiming the market is poised for a correction.  If anyone thinks journalists can call market tops, I have a bridge for you.

Sir John Templeton is famously quoted for saying “Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”  It feels like this market is somewhere between skepticism and optimism.  No one believed the market could rally this year, but that is exactly what it did.  There was Obama’s reelection, Default part I, Sequester, Europe/Cyprus, Obamacare, Sell in May, Syria, Taper, Rising Interest Rates, Sept/Oct market crashes, Shutdowns, Default part II, and countless other excuses people used to stay away.  This is the rally no one trusts, yet it does nothing but march higher.  That sure sounds like skepticism to me.

Now we find ourselves in clear air for the first time in a while.  The market is no longer obsessing over headlines and the strongest criticism the cynics can come up  is “over bullishness”.  As the WSJ articles pointed out, many of the 2008/2009 sellers are slowly warming up to stocks again.  While journalists and bears would have us believe retail investors starting to come around signals a top, it isn’t early retail investors that signal a top, but the last of the holdouts. It isn’t when a couple of neighbors start talking about stocks at backyard BBQs again, but when everyone is bragging about their stocks.  While we are clearly progressing through the life-cycle of a bull market, we are still a long way from having the masses speculating in stocks again.

This steady conversion of risk averse into stock buyers is what will support the market for months, even years to come.  Between all the money hiding out in bonds and cynical hedge funds underperforming the bull market, there are plenty of buyers still available to push this bull market well beyond what anyone expects.  We don’t top when the cynics are calling for a top, we top when they give up.  As the WSJ articles and endless stream of critics show, we still are not there yet.

TRADING OPPORTUNITIES
Expected Outcome:
While there is still upside left in this bull market, markets move two-steps forward, one-step back.  Bull markets refreshes themselves one of two ways, a sharp pullback, or a long period of trading sideways.  With this many people calling for a top, it won’t take much of a dip to dramatically swing investor sentiment.  The potential dip will fall further than bulls are prepared for, but not as far as bears are hoping.  Between those two opinions, we will find a bottom.  Or alternately, this market could refresh by boring everyone to death with relentless sideways trade, forcing both bulls and bears give up in frustration.  Either way we need to cool off a little bit.

Alternate Outcome:
There is no reason stocks cannot ramp up another 10% before year-end, collapse under the 200dma by the same deadline, or do both.  Markets surprise us far more often than they do what we expect.  Of course between the bulls expecting further gains and bears calling for corrections, the least expected outcome might be a whole lot of nothing.

Trading Plan:
Until further notice, continue buying weakness and selling strength.  We are at the upper end of the recent consolidation and it would not surprise me to see the market surge into new ground on short-covering.  How the market behaves following those new highs will go a long way toward tellings us if we should sell the strength or buy the breakout.

Plan your trade; trade your plan

If you want more tactical trading analysis of this market, consider subscribing to the Real-Time Trading Alerts.

Expect the choppiness to continue

By Jani Ziedins | Intraday Analysis

Regular readers of this blog will notice a new tab above this post.  I am excited to announce the launch of a Real-Time Trade Alert service that allows subscribers to follow my trades in real-time.  If you are interested in learning more, click the Real-Time Trade Alerts tab above or follow this link.  For everyone else, have no fear, I intend on keeping the CrackedMarket blog exactly as it is and will continue publishing it free of charge.  

S&P500 daily at 1:22 EDT

MARKET BEHAVIOR
Stocks slipped in early trade, but they found support at 1755 and recovered a large chunk of the losses by midday.  The market continues trading between 1750 to 1770 as it consolidates recent gains.

MARKET SENTIMENT
We are stuck in this range above 1750 since few are willing to sell their winning positions while others are afraid to buy near all-time highs.  This standoff will continue until we either run out of the modest number of buyers necessary to offset the normal churn in ownership, or we hold these levels long enough that prospective buyers feel more comfortable wading in.  Either way, expect the resulting sideways trade to remain choppy with failed breakouts and breakdowns as the market takes time to build critical mass for the next directional move.

TRADING OPPORTUNITIES
Expected Outcome:
This is a tough place to own stocks since these head-fakes higher and lower tempt us to act impulsively.  This price-action is better suited for day-traders that can respond to the intraday swings, or long-term traders that ride it out.  Swing-trading choppy markets is difficult because it gives off so many false signals.  Over the near-term, we are best suited buying weakness and selling strength over short periods of time.  Think of it like day-trading over 48 or 72 hours.

Over the next couple months, expect the market to drift higher into year-end barring any headline driven crisis.  Underweight money managers will need to stuff their portfolios with the right stocks before they close their books for the year.  That will keep a bid under the best performing stocks.

Alternate Outcome:
I am concerned about the lack of fear in the market.  While I don’t expect a bear market any time soon, we could see a swift move lower if the market starts obsessing about a new risk factor not already priced in.  The problem with unknown unknowns is we don’t know anything about them and it will catch most everyone off guard.  Hopefully by paying attention, we will respond before everyone else.

Trading Plan:
This market is best suited for day-traders or long-term investors.  The failed breakouts and breakdowns make it hard for intermediate traders.  If anyone must trade the market, trade the range by buying the dip and selling the rebound.

TSLA daily at 1:23 EDT

INDIVIDUAL STOCKS
A lot of volatility in TSLA ahead of its earnings.  Unless trading earnings is your thing, it is best to stay away from this for a day or two.  If Musk found the cure for cancer, then it is an easy buy after earnings.  Anything else and we will have a hard time pushing past $200.  Most, including Musk, recognize this stock is way ahead of itself.  While the “next greater fool” thing works great for a while, it always comes to an end and everyone in this name needs to have an exit plan so they don’t get left holding the bag.

BBRY is a dead man walking.  It really feels like the company could not find a buyer at any price.  That doesn’t bode well for anyone holding the stock in anticipation of an acquisition.   With MSFT taking NOK, it is hard to see another natural fit for someone else in the tech space looking to break into this market.  Unfortunately for many optimists, BBRY still looks like a long-term short.  In the near-term, a gambler could play for a bounce back up to $7.50.

GLD struggles to find a home as fears of contagion, inflation, and all the other justifications for stockpiling gold evaporate.  Over the next couple years it will probably slip into triple digits.  While some claim everyone should hold some gold in their portfolio, I’m far more partial to things that increase in value.

Plan your trade, trade your plan

Outside day

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks set another record high in early trade, but it was all downhill from there as we closed lower by half a percent.  The last 15-trading sessions put together a tremendous run, so it is no surprise a down day was waiting for us.  Markets go up and markets go down, and today’s price action was simply one of those down days.

MARKET SENTIMENT
I heard a lot of chatter about an outside day or an engulfing candle.  That is when both today’s high and low are higher and lower than yesterday’s high and low.  While I’m not real big on trading technical signals, we use this widely made observation to figure out what other people are thinking and how they will trade it.

By most accounts this is a negative pattern, but in this case it will be a self-fulfilling prophecy.  When prospective buyers expect lower prices are imminent, they wait for the market to come to them.  While holders remain confident and are not worried about a few down days, if buyers sit on their hands, prices go down no matter how confident holders are.  Many professional money managers are behind their benchmarks heading into the last two months of the year.  While they feel pressure to chase, they are reluctant to buy a market that was up 13 out of the last 15 sessions.  They will wait for the market to come in a couple percent before they feel good about buying the dip.  That pressure to chase will keep this selloff relatively shallow as big money buys every dip, but over the medium-term, a little sideways consolidation is constructive and supports a sustainable rally into year-end.

The catalyst for today’s drop was the Fed staying the course.  In a vacuum, this would be considered bullish because it continues the easy money policy.  Things get more complicated when we factor in what other traders expected and how they were positioned.  Most saw this coming from a mile away and were already positioned for an uninterrupted continuation of QE.  This leads to a buy the rumor phenomena as traders act in anticipation of an event.  But since everyone say this coming, there were few left to buy the news today and we fell due to the vacuum of demand.  Remember, markets only move when people trade, and people only trade when they change their mind.  This Fed meeting didn’t change anyone’s mind, and thus no one bought the news.

TRADING PLAN
Expected Outcome:
Expect further weakness over coming days as traders sit on their hands following today’s engulfing candle.  We will likely slip to prior support near 1740 before dip buyers jump to the rescue.  This could be a couple of days or couple weeks, but the important thing is this is only temporary weakness and we will resume making new highs before the year is over.

Alternate Outcome:
If the expected outcome is a little down and then a little up, then the alternative is a big move either direction.  Given how far we came over recent weeks, it is hard to see an explosive move to the upside.  With the budget and debt ceiling pushed to another day, there is little hanging over the market to act as an upside catalyst when the risk is removed.  Given where we are, there is more risk to the downside if we are blindsided by a new risk element not already factored in.  This isn’t Taper or Default, but something all new.  I don’t know what or when, all we can do is wait and respond proactively when we see it.

Trading Plan:
Anyone out of the market, here is your chance to get back in.  We will likely see a dip to support near 1740.  Depending on how aggressive dip-buyers are, we might not even fall all the way to support before desperate buying turns the market around.  Or we could see the market penetrate support and set off a wave of stop-losses before rebounding.  No one has a crystal ball and we simply have to wait for the situation to develops.  Bulls should not try to catch a falling knife if  we start selling off.  Wait for it to find a bottom and stabilize.  There will be plenty of time to get back in when we find support.  Better to be a little late than a lot early.  On the other side, bears with a short positions need to recognize this is a counter-trend trade and that means taking profits early and often.  Making money in the market is easy, the hard part is keeping it.  Bears have seen a lot of good downside trades and they would be having a good year if they were disciplined about taking profits.

Plan your trade; trade your plan

Another new high

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks finished at the highs of the day and set another record close.  Holding recent gains suggest we are moving past the sideways summer trade and setting up to finish the year with a bullish up-leg.

MARKET SENTIMENT
Recent volatility cleansed the markets of weak owners and replaced them with a new crop of holders that demonstrated a willingness to sit through uncertainty and weakness.  These holders are being rewarded for their confidence and patience as everyone with a diversified portfolio is sitting on profits.  When holders are rewarded for holding and sellers regret selling, it further encourages traders to hold weakness and buy dips.  While many will claim this complacency is dangerous and signals an imminent top, we must remember these things go further and longer than anyone expects.  Markets don’t top due to confident holders, they rally because no one is selling and this keeps supply is tight.  We don’t top until we run out of buyers, and given all the defensive and reactive selling we saw through the summer, there is plenty of demand itching to get back into this market.

Yahoo Finance put out a poll today that many bears will point to as a sign of complacency because the single largest response was from traders “not worried” about the rally.  While this 48% is far above the 20% bullish responses we saw a couple of months ago, it is not concerning yet.  If we consider the other responses, we see a quarter are selling defensively and another quarter are still sitting on the sidelines.  That means 52% still don’t trust this market and remain potential buyers.  48% bullish and 52% bearish is many things, but it isn’t “irrational exuberance”.

Source: Yahoo Finance 10-25-2013

TRADING OPPORTUNITIES
Expected Outcome:
Today’s strong close shows the rally is not ready to roll over just yet.  A few weeks ago I thought we might see a sell-the-news following the debt ceiling compromise, but holding these levels for over a week demonstrates we are not running out of buyers.  Anyone left out of this rally is looking for ways to get in.  This pressure to chase will cause many to buy any and every dip.  The more people we have buying dips, the shallower and less frequent they become.

Alternate Outcome:
This rally will end like every one before it. It is easy to predict what the market will do eventually, the hard part is getting the timing right.  This rally leg is nearly a year old and the bull market is turning six soon, but there is no reason confident owners and money moving out of bonds cannot prop up this market for another twelve months.  This is not a prediction, simply stating that markets often go further and longer than anyone expects.  But it will end and it will happen when no one expects it.  We can ride the confidence and complacency higher, but stay vigilant and look for cracks signaling deeper trouble.

Trading Plan:
Recent strength is putting pressure on underweight money managers who were waiting for the widely expected correction to take some sting from their under-performance.  But instead the market is leaving them further behind and they have little choice but to chase into year-end.  Ride this rally higher and use a trailing stop to protect recent gains from the unexpected.  A stop under 1730 is not a bad place for a recent buyer to limit his exposure.

Plan your trade; trade your plan

Still holding up

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:17 EDT

MARKET BEHAVIOR
Stocks made new highs in early trade, but slipped to break-even by midday.

MARKET SENTIMENT
The market is muddling along as profit-taking cannot dent recent gains, yet new buyers are reluctant to chase new highs.  Previous volatility shook out many weak owners and those left standing demonstrated they are comfortable holding.  While some claim this complacency is a bad thing, it actually supports prices.  Comfortable owners don’t sell weakness or fear mongering, meaning they keep supply out of the market and make it easier for markets to continue climbing in spite of all the calls for a top.  Don’t worry about comfortable owners, but fear a dwindling supply of potential buyers.  Given how many sold Taper, Shutdown, and Default headlines, there are plenty of recent sellers looking for a way to get back in this market.  Their dip buying will support prices and fuel the next leg higher.

TRADING OPPORTUNITIES
Expected Outcome:
Hard to argue with what is working.  Holding above 1740 for the 6th day shows there is ample demand at these levels and the next move is likely higher.  Profit-takers and cynical new-high-shorters have largely sold anything they were going to sell, meaning supply is drying up.  Even though investors are wary of new highs, it doesn’t take a lot of demand to push us higher when supply is tight.

Alternate Outcome:
The market is relieved after weathering a storm of volatility and headline uncertainty.  It is making new highs as we avoided the worst-case scenario and took a lot of risk off the table.  But with less risk priced in, it leaves us vulnerable to a new headline that is not expected.  Markets by nature are always looking for something to worry about and expect it to find something, real or imagined in the not too distant future.

Trading Plan:
Anyone out of the market can use today’s continued support above 1740 as an entry point.  If we were at unsustainable levels, the market would have rolled over by now.  But as usual, there are no guarantees and we need to cover ourselves with a stop-loss under recent support.  Slightly under 1730 gives us enough room to ride out the inevitable dip and test of support at 1740.

INDIVIDUAL STOCKS
AMZN crushed bears with yet another short-squeeze.  Fighting a stock purely on valuation is a quick way to the poor house.  Wait for price-action to crack on fundamental weakness.  This also applies to other high fliers like FB, NFLX and TSLA.  Let some other poor fool die on the cross of valuation.  When these stocks crack, there is plenty of room to fall and we can easily afford to miss the first 10%.  It is better to be a little late, than a lot early.

Plan your trade; trade your plan

Is the market complacent?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks slipped in early trade, but found support near 1740.  We covered 110-points in two-weeks and were up nine of the last ten session; a red day was more than expected.  We remain solidly above the summer’s trading range and comfortably above the previous high of 1729.  The market often sees a directional move following a sideways summer.  We remember the scary drops, but directional trades also take us higher, and so far the upside breakout remains intact.

MARKET SENTIMENT
Nothing calms markets like rallying prices.  We transition from fear of an economic collapse due to default to all-time highs is less than two-weeks.  Not a bad reversal for those positioned to profit from a capitulation bottom, but that was then and this is now.  While fear largely evaporated, we must remember markets don’t move on fear and greed, but buying and selling.  Even though we feel better, to understand what comes next, we need to figure out how previously nervous traders are positioned following the rebound.  Did they recognize their mistake and buy the rebound within days of finding a bottom?  While that is a level-headed and disciplined reaction, often traders don’t act rationally.  After mixing in pride and stubbornness, expect a fair number of recent sellers watched this rebound in complete disbelief.  They didn’t recognize their mistake and reverse their position, they sat there paralyzed by indecision, stuck between visions of a collapse and fear of being left behind.  While much of the fear left the market, many shell-shocked traders are still sitting on the sidelines and have yet to embrace the rebound.  Even though sentiment improved, it will take time for those left out to wade back in.  This stream of buying will push the market higher into year-end.

TRADING OPPORTUNITIES
Expected Outcome:
The market will consolidate recent gains and could pullback to 1700 or 1710, but we flushed out many of the weak sellers between the June and August lows.  Expect higher prices as confident holders keep holding for more.  Don’t mistake confident owners as signs of a top, but an indication continued tight supply.  Owners holding through modest weakness and keep a floor under the market.  The real key is watching demand.  When we run out of buyers, it doesn’t matter how tight supply is.  With the huge supply of regretful sellers sitting on the sidelines, we don’t need to worry about exhausting demand anytime soon.

Alternate Outcome:
While the market came to terms with recent headlines, we are getting comfortable and that leaves us vulnerable to a new and unexpected headline that traders have not priced in.  We could go months without a worry and cannot trade the unknown, but we can wait for it and trade it decisively when it comes.

Trading Plan:
We came a long way and there is nothing wrong with locking in profits.  For those that insist on holding, keep a trailing stop under recent support at 1700. 1710, or 1730 depending your level of risk.

AAPL daily at end of day

INDIVIDUAL STOCKS
Watching AAPL‘s product event yesterday was revealing, not so much for the incremental hardware and software upgrades, but for how they laid out their core strategy going forward.  I have to wonder if they are having a BBRY moment with their stubborn insistence on sticking to their current strategy.  Cook and Company took several shots at MSFT‘s “confused” strategy and insisted AAPL’s approach to tablets and computers would not change.  Is this similar to BBRY making fun of AAPL’s touch screen and lack of physical keyboard, claiming professionals would never embrace a soft keyboard?

In my view, AAPL is making a mistake keeping tablets and computers in separate silos.  They insist people don’t want to use a tablet like a computer and a computer like a tablet.  But let me tell you, I have enough fingerprints on my Macbook’s screen to prove otherwise.  Anyone who borrows my laptop is always trying to use the nonexistent touch interface, but Jobs said it is awkward to reach up and touch a laptop’s screens and he always knows best.  Of course he also said a 7″ tablet is “DOA” and now the iPad Mini outsells its bigger brother two to one.

Mobile operating systems, processors, and software are nothing more than placeholders until hardware specs catch up and we can fit full-powered processors and software in a tablet form factor while maintaining respectable battery life.  We should be there within two-years given the leaps INTC is making with its low-power processors.  Funny thing is AAPL already embraces these new processors in their MacBooks, achieving a shocking 12-hour battery life in the 13″ MBA.  Why do they think people don’t want a souped up tablet/keyboard combo that completely replaces their laptop?  MSFT’s “confused” strategy is to give customers everything they want and need in a single device, while AAPL thinks people want to own and use two separate devices.  How can they possibly think that when they lead the revolution that put a phone, camera, mp3 player, GPS, and web browser in a single device?  The future will continue consolidation and AAPL’s two-pronged strategy will be as obsolete as point-and-shoot cameras and hand-held GPS units.

AAPL also made a big deal about “turning the industry on its ear” by giving away software for free.  Never mind that Google’s been doing it for years and the Surface RT already includes Office, but now that AAPL is doing it, it is revolutionary.  Earlier this year Cook claimed AAPL is a software company.  I’m not sure how a software company makes money when they give away their main product for free.  Google is an advertising company that gives software away for free so they can sell more ads.  By giving away its software for free, AAPL is making a strong case that it is a hardware company and they give away the software in order to sell hardware.  What little software AAPL previously sold, they are now giving away for free, so I don’t buy the “we’re a software company” line.

And as far as software goes, I downloaded Mavericks and they need to give it away for free because it is such a minor upgrade I have yet to notice a difference.  They added iBooks and re-skinned the calendar.  Wow, color me impressed.  Oh wait, how could I forget, they added iMaps, meaning I need to hide this half-baked app on my computer just like I did on my iPhone.

Plan your trade; trade your plan

The Chase is On

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:27 EDT

MARKET BEHAVIOR
Stocks ramped up following an employment report that missed expectations.  This pushes us to fresh all-time highs as we continue the nearly year-long rally off the post-election lows.  This move clearly broke the summer’s 1500-1600 trading range and is in the middle of its next directional move.

MARKET SENTIMENT
The market is well above previous highs and anyone holding a diversified portfolio is sitting on profits.  This rebound rewarded everyone who held recent weakness, making them even less likely to sell the next dip.  Fewer sellers equals tight supply, allowing us to continue rallying on modest demand.  Low-volume strength has been the theme of the year and it will likely continue into year-end.

This run-up is pressuring anyone still sitting on the sidelines.  Those that sold recent weakness are looking for ways to get back in and this surge leaves them stuck between a rock and a hard place.  Do they chase new highs, or wait for a pullback?  So far anyone waiting for a pullback keeps falling further and further behind.  They can only wait so long before they are forced to buy this strength and the pressure to chase will keep a bid under the market as the desperate buy every dip.

The market is up 20% for the year and most money managers are well short of their benchmarks.  This is the easiest buy-and-hold market no-one trusts.  Even bulls are suspicious of this strength and wondering if they should lock-in profits.  This doubt is the fuel that keeps propelling us higher.

This morning’s price-action indicates many traders still believe bad is good as they bought the weaker than expected employment.  The theory goes that prices rally on excess liquidity from QE and a struggling economy makes it more likely the Fed will keep printing money.  At least that is how the financial press is justifying today’s strength, but the truth is bears are running out of reasons to hate this market and their buying keeps pushing us higher.

Source: Yahoo Finance 10/22/2013

TRADING OPPORTUNITIES
Expected Outcome:
The theme of 2013 has been a relentless rally that humbled anyone questioning its strength.  While this market will end like everyone before it, it will go further and longer than anyone thought possible.  Expect participants to transition from fear to greed as owners stop selling weakness and buy every dip.  While markets top on complacency and greed, they rally as these feelings take over and we only top once everyone gives up fighting the strength.  So far we are early in this transition and more upside remains.  The adjacent survey shows that while bullish sentiment increased from the low 20s a couple of months back, more traders are neutral on this market and we are still a long way from irrational exuberance.

Alternate Outcome:
The Fed and our politicians kicked their respective cans down the road and we are still awaiting the ultimate day of reckoning.  While the market is coming to terms with fiscal and monetary austerity, the uncertainty surround these events still pose risks.     But since these two topics have been so widely dissected and traders largely formed an opinion, they are less likely to trigger new waves buying and selling.  The bigger worry is an unexpected headline that no one is talking about and not priced in.  Markets only move when people change their minds and without a doubt there is something lurking out there what will cause traders to lower their expectations.  We don’t know what it is or when it will happen.  All we can do is wait and react before everyone else.

Trading Plan:
The last few weeks saw monster gains and we should be looking for places to take profits, not initiate new positions.  The cautious can sell into this strength and the optimistic can move up their trailing stops.  Given today’s strength, we could put tight stops under 1740 or 1730.  Those that want to give the market a little more room can use 1710.  Either way, don’t let recent profits evaporate.

NFLX daily at 1:29 EDT

INDIVIDUAL STOCKS
Shocking reversal on NFLX as Reed Hastings sabotages the stock one more time by insinuating the stock is getting ahead of itself.  The stock opened $35 higher and is now down more than $20.  A reversal this dramatic is unlikely to be a one day event.  High flying stocks are almost entirely sentiment driven and this reversal will likely rattle the confidence of holders and prospective buyers.  Expect demand to dry up over coming days as potential buyers wait to see if weakness persists and in a self-fulfilling prophecy, this lack of demand will pressure prices further.  If anyone wanted to short this stock, here is your invitation.  I would use yesterday’s close as a tight stop, or better yet use an option strategy to control your risk.

AAPL is in the process of releasing its new iPads.  Most of the news likely leaked out ahead of time and is already priced in.  Like the iPhone refresh earlier in the summer, we could see a buy the rumor, sell the news if AAPL doesn’t produce anything exciting and unexpected.  Jobs always killed it with his “one more thing”, but it’s been years since AAPL surprised us with anything unexpected.

TSLA is another momentum stock struggling in recent days.  It tested and slipped under the 50dma for the only the second time since this monster run began back in April.  Bulls are waiting for the dip buyers to jump in like they have every other time, but eventually there comes a point where everyone who wants some already has some.  Keep an eye on the 50dma and if we fail to hold this widely followed moving average, selling will likely continue.  Most recognize this is a momentum stock and its bubble will pop eventually.  There is nothing wrong with riding it up, but don’t take the round trip.

Plan your trade; trade your plan

Holding recent gains

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:50 EDT

MARKET BEHAVIOR
Stocks dipped modestly by midday, yet continue hanging on to 1740 following the Debt Ceiling bounce.  Earlier in the day we set another all-time high as the market continues moving beyond earlier fears of Taper, Syria, Shutdown, and Default.  The rate of gains has slowed in the second half of the year and we are currently at the upper end of this channel.

MARKET SENTIMENT
Markets typically decline swiftly and grind higher, but the last six-months flipped this conventional wisdom on its head as we grind lower and explode higher.  The market is up nearly 100-points in less than two-weeks and this surge follows similarly powerful rebounds in April, June, and August.

While most bears claim this market is complacent and overbought, the evidence points to the contrary.  These explosive moves are a direct result of unsustainably negative sentiment.  The crowd pushes the market lower in anticipation of the next correction, yet the spring explodes higher in their face each time.  Too often people mistake trend for sentiment and that is exactly what bears have done.  Just because we are at all-time highs doesn’t mean we are complacent.  Traders are notoriously afraid of heights and few are embracing this strong market.  Instead they are predicting a correction following every bump in the road.  But these constant predictions of a correction keep the rally from overheating and topping.  As long as the crowd remains suspicious, the uptrend will persist and every dip is buyable.

TRADING OPPORTUNITIES
Expected Outcome:
While the recent rebound provided an excellent profit opportunity for those willing to bet against the herd, that spring is now sprung.  Clearly we cannot continue the current rate of gains and the market needs to consolidate or at the very least slow down.  Recent gains leave us with an excellent profit-taking opportunity and is the right trade for many.  As gains slow, there is less reason to hold risk for modest upside.

Looking ahead, most of the big fears have been mitigated and the risk of a dramatic move lower on existing concerns is unlikely.  Many that sold defensively in recent months need to get back in, leading to year-end rally and that constant bid under the market will grind higher over the final two months.  It is up to the individual investor to decide if grinding profits are worth the risk of the unexpected.

Alternate Outcome:
While we largely put to bed the worst fears over Taper, Syria, Shutdown, and Default, we never really had to fear them because everyone was already talking about them and thus already priced in.  We rallied as the outcome was better than the worst case and all is right with the world again…….at least until the next crisis.  Currently there is not a lot of fear priced into the market and we will rally in this calm, but that is what leaves us vulnerable to the next unseen risk.  The problem with trading the unknown is there is no way to know when it is coming and how big it will be.  All we can do is wait and respond to the next crisis before the rest of the market fully appreciates the new risk.  For the time being bears need to be patient.  Don’t sell because we are too high, sell when the market is caught off guard.

Trading Plan:
Recent gains over such a short period make a nice place for proactive traders to lock-in profits and wait for the next trade.  Others can wait for more upside, but move up your stops to protect recent gains.  If the market grinds higher into the end of the year, we should hold above 1710.  If we fall under this level, we need to reevaluate our end of year outlook.

AAPL daily at 1:50 EDT

INDIVIDUAL STOCKS
AAPL is surging higher ahead of the iPad refresh and tight supply for the iPhone5s, putting us at levels not seen since January.  It will be interesting to see if the excitement is warranted since the iPad upgrades are expected to be as evolutionary as the iPhone5s.  The market largely expects a Retina display on the mini and a new form factor for the 10″ model.  While these will help AAPL stay competitive with other tablets, it will not lead to a large wave of upgrades since these devices lack heavy subsidies.  Last year AAPL ran up to $700 on its reputation as an innovator and market leader, but even with recent upgrades to the iPhone and iPad lineups, we still haven’t seen anything truly innovative and disruptive out of AAPL in years.

TSLA is down 6% as it retests the 50dma.  If the stock finds support and bounces off this moving average, it is buyable, but if it fails to hold, expect a wave of selling to hit the stock as it crashes through large swaths of stop-losses.  If that happens, don’t buy the weakness and wait for it to find a bottom first.  With high-fliers, it is better to be a little late than a lot early.

Plan your trade; trade your plan

No deal, but markets are optimistic

By Jani Ziedins | Intraday Analysis

S&P500 daily at 11:48 EDT

MARKET BEHAVIOR
Stocks surged at the open on hopes of a resolution to the looming Debt Ceiling.  The market is less than 1% from all-time highs as it largely priced in a deal.

MARKET SENTIMENT
We popped following the collapse of the House GOP’s alternative to the budget/debt crisis, meaning there are not competing solutions to be fought over.  Ideally the House will vote on the Senate compromise and find enough moderates from both sides to pass the bill without support of extremists on either side.

Markets are forward-looking and anyone waiting to buy the compromise is already too late.  Safety and profits are rarely mentioned in the same sentence on Wall Street and to make money we need to buy risk when the odds are in our favor.  Over the last couple months, nervous traders sold at steep discounts, creating profit opportunities for more confident investors.  To be successful at this game, we need to recognize when selling is slowing down and creating entry points for opportunistic traders.  There is no such thing as a risk-free trade, but paradoxically the more nervous we are, the safer the trade, and the safer we feel, the riskier the trade.

TRADING OPPORTUNITIES
Expected Outcome:
The rebound continues in spite of the political bickering.  I expected a little more volatility due to the stream of headlines leaking out of negotiations, but the market is holding up better than expected because most of the nervous are already out of the market, leaving few to sell each bump in the road.

Without a nervous dip ahead of the compromise, we will likely see a pullback following the surge/short-squeeze on a deal.  Buy-the-rumor, sell-the-news is a frequent occurrence when prices rally strongly into an expected event and there are few left to buy the news.

Alternate Outcome:
With only hours before the much hyped Oct 17th deadline, we could see weakness Friday morning if we don’t have a signed deal.  Passing this deadline is mostly psychological in nature because the US Govt won’t start missing payments for a couple more weeks.  While we don’t want to get in the way of a declining market, most likely any weakness ahead of the deal is a buying opportunity since traders will quickly look past this episode before the ink is even dry.

Trading Plan:
The market wants to keep heading higher, but buying a deal here is late in the game and will likely pullback either before or after a compromise is reached.  The right time to buy the dip is when everyone is scared, not when most assume a compromise is imminent and a post-deal surge is widely expected.  More cautious traders that bought the dip can move up their trailing stop or sell into recent strength.  While there is likely more upside, we are in this to make money and we can only do that by selling our winners.  Always have a plan to take profits.

Trade your plan; plan your trade

Waiting on DC

By Jani Ziedins | Intraday Analysis

S&P500 daily at 11:59 EDT

MARKET BEHAVIOR
Stocks opened weak as the political debate rages on, but resulting trade stayed in a tight range above 1700.

MARKET SENTIMENT
If we believe the headlines, we are on the verge of getting a deal out of the Senate, but how the House reacts is anyone’s guess.  No doubt there will be many Tea Partiers that will vote against anything, so it is really a matter of Boehner putting a compromise up for a vote and then splitting the GOP between moderates and fundamentalists.  From there we have to reconcile the Senate and House bills.

The Oct 17 deadline is really just an invented date and passing it doesn’t automatically trigger a default.  At this point it seems likely this debate will carry past the deadline since it will take time to merge the two chamber’s bills, but we can probably stretch through the weekend without roiling the markets.  We might get another credit downgrade, but Wall Street saw how trivial the economic impact was following the 2011 S&P downgrade, so it shouldn’t lead to a large selloff here.  Further, the ratings agencies saw how S&P lost credibility when they downgraded US debt and it continued to increase in value.

So far the daily trading pattern has been opening weak as traders are disappointed with debate dragging on and bears hoping to jump on a market selloff, but then recovering losses by midday as the selling fails to gain momentum and we run out of sellers.  Headlines don’t matter when anyone afraid of them is already out of the market.  We saw this train coming from a mile away and anyone expecting a Default bailed out weeks ago.  Those still hanging on show a willingness to own in the face of these headlines and are not rushing to sell every bump in the road.  Success in the market is not anticipating headlines, but understanding how traders will react to these headlines.  No matter how bad it sounds, if there is no one left to sell, markets hold up due to tight supply.

TRADING OPPORTUNITIES
Expected Outcome:
The market largely expects a resolution and much of those gains have already been priced in.  We could see a dip back to the 50dma if be wake up Oct 18th without a deal or we could see a sell the news after a deal is reached.  But that is what markets do, they go up and then they go down. We’ve had four up days pull us off recent lows and red days are inevitable.  I don’t expect a large selloff following a deal letdown since this entire event was invented in Washington and has no real structural impact for the economy or the markets.  This was a speedbump and soon we will back to normal.

Alternate Outcome:
While most expect us to avoid default, the market is afraid of the consequences if we plunge off the cliff.  While we have cooler heads hammering out a compromise, no doubt there will be a lot of resistance from the rank and file when the bills are put up for a vote.  Expect this to drag on past the Oct 17th deadline.  If previously confident traders see this as a hard-line and wake up Friday morning, selling everything they have at the open, we could see a cascade of selling take us lower.  While unlikely, we need to be wary of a spooked market.

Trading Plan:
Anyone waiting to buy the resolution will be too late.  And not only that, many expect the market to pop on a resolution, meaning it is largely priced in.  At this point it is a bit late to chase the rebounds strength and it is better to wait for the impending pullback, either as the debate drags on, or we sell the news following a resolution.  Many shorts are hoping for a default plunge and their covering will provide a one day short squeeze, but expect buying to dry up since most bulls already own the market.  No matter what, a bullish market should hold the 50dma and violating this means we need to reevaluate our bullish outlook.

Plan your trade; trade your plan

Signs of hope

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:48 EDT

MARKET BEHAVIOR
Stocks slipped at the open as a Debt Ceiling deal remains elusive.  We are within days of default, but the market remains relatively calm and is less than 2% from all-time highs.  We recovered the 50dma last week and are holding near 1700 in anticipation of the inevitable Debt Ceiling/Gov’t Shutdown compromise out of DC.

MARKET SENTIMENT
Stocks recovered from last-week’s lows of fiscal doom-and-gloom as the fear of default transitioned to expectations of a last-minute deal.  While the market seems bipolar when it changes its opinion so quickly, we must remember it is not a single entity, but a collection of individual opinions.  The appearance of contradictions arises due to a churn in ownership as those that feared default sold at a discount to investors looking past current headlines.  As we ran out of fearful owners rushing for the exits, supply dried up and we bounced on the confidence of new owners expecting a resolution.  Markets are not about what will happen, but what people think will happen.

Source: Yahoo Finance

TRADING OPPORTUNITIES
Expected Outcome:
While we still don’t have a deal, stocks are holding up as most expect one over coming days.  While this leads to near-term support and stability, it also mitigates the size of upside following a deal.  Since most of the rebound occurred in anticipation of a deal, there isn’t much left to follow the news.  This will likely turn into a buy the rumor, sell the news trade, so there is little reason to chase a breakout.  That doesn’t mean the market will rollover, just that the grind higher will resume and traders will have plenty of time to get in on their terms.

Alternate Outcome:
Since most expect a resolution, that leaves lots of downside if we fail to reach a deal.  A default will send a stampede of sellers rushing for the exits at the same time.  This is the Black Swan trade, a low probability outcome with catastrophic consequences.  A prudent trader will protect long positions with cheap insurance and an opportunist could place a low-cost bearish bet that will pay off handsomely if the low-probability event becomes a reality.

Trading Plan:
The high probability trade is owning this market, but watch the Black Swan closely and recognize a default could send us down 15% in a matter of days.  While we could buy the dip last week, as second dip on default is one to be avoided and even shorted.

Plan your trade; trade your plan

Short squeeze on signs of compromise

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:22 EDT

MARKET BEHAVIOR
Stocks gapped higher on an apparent softening of the standoff in DC.  Stocks recovered the 50dma by midday as shorts scrambled to cover.  The surge reclaimed support at 1680 and unwound two and a half days of what now looks like fearful, herd selling.

MARKET SENTIMENT
While we don’t have an agreement from our politicians, the shift in rhetoric by both sides signals they are moving toward a workable solution.  This alleviates some of the worst-case fear that stubbornness would push us into default.  While there are still risks this fragile coming together will blow up over minor details, in typical market fashion, prices surge in anticipation of a deal and anyone waiting for the news confirmation will be a day late and a dollar short.

Much of today’s rebound is driven by short-covering and the rate of gains will taper, possibly even pullback after shorts finish covering.  Lets be clear, we haven’t ended the standoff and should expect ongoing political posturing to continue contributing to volatility, but the sharp selloff the last couple days shook free many of the weak holders, leaving far more confident owners in their place.

Source: Yahoo Finance 10/10/2013

As we discussed yesterday, many long-viewed investors saw little reason to sell the near-term political uncertainty and this tightened supply once the more active traders ran out of stocks to sell.  Fundamentals and headlines don’t move markets directly, only supply and demand does that.  No matter what the news or trader expectations, when we run out of sellers, we bounce on tight supply.

TRADING OPPORTUNITIES
Expected Outcome:
Know when to hold’em, know when to fold’em.  Savvy traders sell strength and buy weakness, but most often our gut instinct is to buy strength and sell weakness.  There is a very elusive line between confidently holding through a temporary dip and stubbornly riding the market lower.  That fine line is the difference between winning and losing.  Of course the least stressful trading strategy skips this ambiguity and sells strength, letting others debate holding or selling the weakness.

While the market is going through a temporary reprieve from the risks of default, this political battle is far from over and we are simply delaying the day of reckoning.  While a meeting of minds shows a more conciliatory side of our politicians, expect the rhetoric (and volatility) to pick back up in coming days and weeks.

Alternate Outcome:
While our politicians can be commended for moving a few inches off their initial positions, they have not changed their goals and are simply buying more time to fight for their positions.  Recent flexibility from Obama is rekindling hope in some that they can continue pushing on Obamacare.  While that is obviously a non-starter, that threatens to return this standoff to square one and reignite fears of a default.  Just when we start feeling better about the political process, our elected representatives do something to disappoint us.

Trading Plan:
Tough day to be a short and shows why counter-trend trades need to harvest profits early and often.  On the other side, bulls should expect some of this euphoria to pass as the political bickering resumes.  There is little urgency to chase this rebound since we will likely consolidate between 1680 and 1700 until the debt ceiling is actually lifted.  At the same time, the market is buyable for anyone looking to get in.  Keep a stop under the 50dma and shorts can use this same level to re-short the market if negotiations breakdown and a default is back on the table.

TSLA daily at 2:22 EDT

INDIVIDUAL STOCKS
AAPL is up, but failing to keep up with the broad market’s gains.  While the rally back to $500 was impressive, the last few weeks of sideways trade killed most of that momentum.  Everyone still loves AAPL, but that is its biggest problem.  Companies like NFLX and FB staged spectacular turnarounds because they were some of the most hated stocks following their high-profile selloffs.  AAPL never reached that wide level of disdain and ridicule, meaning it is not ready for a similar comeback.

TSLA is still holding above the 50dma.  A breather after such a strong move is normal and expected, but watch for a wave of stop-loss selling and shorting to hit the stock if it dips under $160.  If this leg stalls, the stock is buyable.  If it accelerates, watch out as the crowd rushes for the exit at the same time.  Remember, TSLA is just a stock and a meaningless piece of paper once it stops going up.  If you love the car, buy one, but don’t fall in love with the stock.

Plan your trade; trade your plan

Are markets complacent?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:09 EDT

MARKET BEHAVIOR
More weakness as emotions run high ahead of the looming Debt Ceiling.

MARKET SENTIMENT
The best way to classify market participants isn’t fundamental/technical/momentum/value, but timeframe.  Traders and investors have holding periods ranging from fractions of a second to decades and that says a lot about how they trade and their effect on near-term supply and demand.  Why this matters is it gives us clues to who might buy or sell at any given time.

Several big money managers came out publicly and said they have no intention of selling the debt ceiling weakness.  Bears point to statements like that, claiming it is proof of complacency.  No, that is simply the product of a longer time horizon.  Anyone who is looking ahead six or twelve months is not paying much attention to a two-week political standoff.  The only reason they follow near-term weakness is looking for opportunities to buy discounted shares, and that is exactly what these managers said they plan on doing.

Most daily price moves are driven by shorter-viewed traders trying to anticipate headlines and market moves.  We will start with the extremely active High Frequency Traders.  This is a billion dollar sliver of a trillion-dollar market, yet this small pool of money accounts for more than 50% of the daily trading volume.  We can say similar things about day and swing traders.  They are a very small group as measured by combined portfolio size, but because they trade hundreds of times a year, they carry far more influence in daily market moves than institutional money that holds positions for a year or longer.

Right now short-term money is selling by the fistful ahead of the widely expected crash.  While these active traders have a lot of influence over daily price moves, their limited size means they don’t have the firepower to extend moves.  When shorter viewed investors sell the headlines, but longer-viewed investors continue holding, that means the downside move will stall as soon as the short-term traders run out of money.  In June selling stalled and ended that selloff.  The same thing happened again in August.  While there are no guarantees in the market and selling often shakes the conviction of previously confident bulls, longer-term investors unwillingness to sell near-term headlines is supportive and bullish because it keeps supply out of the market.

TRADING OPPORTUNITIES
Expected Outcome:
While it is hard to be confident in environments like this, current worries are as artificial as the politicians causing them.  Assuming our political leaders don’t take us off the cliff, these issues will be behind us in a matter of weeks and this weakness is a buying opportunity.  While that is a big assumption, the only way to make money in markets comes from taking risks; traditionally the bigger the perceived risk, the bigger the ensuing reward.

While the rhetoric is as divisive as ever, a likely resolution is coming to light that lets both sides save face and kick the can down the road.  Obama wants a “clean” bill and the GOP wants face-to-face negotiations.  That means we will likely get a small lifting of the debt ceiling and budget extension, leading to more structured deficit and tax negotiations between the parties over the next month.  While a similar resolution lead to the arbitrary Fiscal Cliff and Sequester, that is still preferable to continued gridlock and default.  By most measures the market and economy swallowed the Sequester without problem, so a sequel is not necessarily a bad thing.

Expect the volatility to persist and a minor relief rally on a temporary extension of the budget and debt ceiling.

Alternate Outcome:
As long we continue marching toward default, there is a real risk we will crash and burn.  While political gridlock is SOP, failing to pay our bills will have very real consequences for our economy and ability to sell debt in the future.  Short-term treasuries are the oil that keeps money moving in our economy.  Perception of liquidity and zero-risk is what makes Treasury Bills an attractive vehicle for banks and major employers to hold liquid funds.  Cut that off for even a couple of days and people can no longer get loans or make payroll, sending the economy into temporary chaos.  This has never happened before and no one knows how it will end, meaning the market will sell first and ask questions later.

Trading Plan:
Tuesday’s selloff triggered stop-losses under recent lows and flushed out many of the hopeful, leaving us with a larger percentage of owners less concerned about the near-term political noise.  This is potentially supportive of current levels.  There is no reason to catch a falling knife, but if we hold these levels for a couple more days, it suggest the emotional selling ended and most owners are willing to continue holding this uncertainty.

If we avoid default, most of the selloff has been realized and this is a decent place for a bear to take profits.  The best way to trade a default is using cheap options as a lottery ticket in the unlikely case our politicians take us off the cliff.

And of course there is no reason to be in the market here.  Hopefully many bulls locked in gains at higher levels and are looking for a good entries to take advantage of these discounted shares.  Savvy bulls embrace pullbacks because they let them make even more money.

AAPL daily at 1:10 EDT

INDIVIDUAL STOCKS
AAPL remains in between $500 and the 50dma, but it is resting just above this rapidly rising moving average.  While it doesn’t have the same influence as levels where large numbers of traders bought or sold shares, it is widely followed and often used in forming trading opinions and outlooks.  Rumor is the iPad refresh will happen later in the month with the 10″ iPad adopting the Mini’s slim design and the Mini getting a Retina display.  These are nice incremental gains, but because iPads are not subsidized, we see a much slower upgrade cycle as compared to the iPhone.  Buyers will appreciate these enhancements, but expect most iPad owners to stick with their current model.

The broad market uncertainty is taking the air out of TSLA as it finally tests the 50dma for the first time in several months.  While not a fundamental flaw in the story, we have to be careful with any stock that has come as far as quickly as TSLA has.  TSLA’s bubble will likely burst on a fundamental catalyst, meaning recent weakness is likely a buying opportunity, but you need an iron gut to hold this one when it is down 10%+ over a few days.

Plan your trade; trade your plan

Slicing through the 50dma

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:11 EDT

MARKET BEHAVIOR
Stocks are selling off  as the political gridlock in DC rages on.  We are clearly under the 50dma and broke recent lows, triggering a new wave of stop-loss selling.  The next level of support is back at the August lows.

MARKET SENTIMENT
Tentative bulls hoping to profit from a quick resolution pop are getting chased out as the fear of a default increases with each day.  Traders are not selling because they think these negotiations will end in calamity since most rationally recognize we will put this speedbump behind us in a matter of weeks.  They are selling because they fear the market will collapse under their feet and are trying to get out first.  The problem with emotional selling like this is they are giving discounts to more bold traders willing to hold through this uncertainty.

While it is no fun to see a position lose money, we need to look past the headlines and see what comes next.  While a default seems unlikely, a more realistic outcome is another US debt downgrade.  In 2011 the S&P downgrade lead to a sizable selloff and is what bears expect here, but back then we didn’t understand the consequences of the S&P downgrade.  Having lived through it, most realize the downgrade was trivial as US Treasuries actually increased in value.  Markets fear the unknown and when it comes to ratings agencies opinions on US debt, we now know they don’t mean a whole lot.

Some big money traders are trimming their positions as the market comes in, but others are looking to buy their favorite stocks at a discount.  There was little reason for big money to chase stocks near all-time highs given the headline uncertainty, but now that prices have dipped to more attractive levels, longer-viewed investors are starting to buy the dip.

TRADING OPPORTUNITIES
Expected Outcome:
Expect volatility to persist until the political gridlock is behind us.  The best trades are often the hardest to make and the more this market sells off, the more profit opportunity it gives us.  We are traders and should embrace volatility, not fear it.  The August selloff ended with a swift plunge under the 50dma and today could also be a similar capitulation point.  Don’t expect a sharp rebound, and we can wait for the market to find support before making any news buys.

Alternate Outcome:
Most expect our politicians will push us to the brink, but not go over.  While that means most holders anticipated this volatility and are unphased by it, what is not priced in is an actual default.  We’ve seen credit downgrades before, but an actual default is uncharted territory and the market will sell off hard if our politicians take us there.

Trading Plan:
The lower we go, the more upside the rebound has.  It is not wrong for a longer viewed investor to own in anticipation of the expected resolution, but adjust your position size to account for the increased volatility and risk.  And of course there is no reason to have a position on at all.  The best trades are when the wind is at our back and this choppy market is a tough place for both bulls and bears.  We have at least another week of this political gridlock in front of us and expect the volatility to persist.

Plan your trade; trade your plan

Sideways chop continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:07 EDT

MARKET BEHAVIOR
Stocks slipped in early trade following an unproductive weekend in DC.  While the market is disappointed by the lack of progress, stocks only gave back Friday’s gains before finding support.  As uncertain as the headlines appear, up to this point the market is content trading sideways near previous highs.  The market is holding the widely followed 50dma, but failing to hold this the next major level of support is the August lows.

MARKET SENTIMENT
Stocks are chopping sideways as neither bounce nor breakdown attracts follow on buying/selling.  This is consistent with the wide expectation the political drama will stretch to the 11th hour, but ultimately get resolved.  A Yahoo Finance poll shows the overwhelming majority expect a protracted debate, but a resolution prior to default.  This outlook supports prices as most owners are unwilling to sell the headline noise since they view this as temporary drama.

Over the last four-years, traders suffered flashbacks to the 2008 Financial Crisis and predicted doom and gloom around every corner.  They were trading like it was 2008 in 2010, 2011, and 2012.  This lead to sharp selloffs following every hiccup, but over time traders realized this was not 2008 and every bump in the road did not smother the recovery.  This is why recent events are not nearly as volatile as they were a couple of years ago.  What was a 15% crash three years ago is a 3% dip today.  Owners have come to the realization the budget and deficit are simply temporary roadblocks and not a major structural deficiency.    When looking ahead six-months, it is easy to for bulls to ignore the near-term noise and continue holding in spite of the immediate headline risk.

Source: Yahoo Finance 10/7/2013

The sideways chop comes from short-term, headline driven traders who buy good news and sell bad news, but since they are such a small piece of the overall market, their buying and selling stalls quickly.  The more interesting dynamic revolves around the expectations of a resolution and limited weakness leading up to this widely expected event.  With so few people selling the headlines, there will be fewer traders to buy the resolution.  No doubt we are 3% lower on the uncertainty and a resolution will remove that, but it is setting up an interesting “Black Swan” trade.  While the high-probability outcome is a resolution and modest pop, on the off-chance our politicians screw this up, that would trigger a dramatic sell off.  Black Swan trades are akin to playing the lottery.  Most of the time you lose, but when you win, you win big.  The best way to take advantage of a Black Swan opportunity is buying cheap, out-of-the-money options as a hedge for a long position, or an outright bet.  Protracted negotiations are already priced in, but a default is not and that creates a trading opportunity.

TRADING OPPORTUNITIES
Expected Outcome:
The high probability trade is sideways chop until a resolution and then a modest pop on the elimination of this uncertainty.  Since the selloff has been so modest, the expect rebound to be equally modest.  Most of the buying will come from short covering and then we resume the previous debate over Taper, economy, and earnings.  Since we are in a bull market, that trend will likely continue into the end of the year.

Alternate Outcome:
There are no guarantees our politicians will get it right.  Since the US Govt has never defaulted on its debt, no one knows what to expect and that will lead to weeks uncertainty and fear of the worst case.  Not paying bondholders will create a liquidity crisis as some employers are unable to make payroll and banks are unable to lend money.  Even a few day delay will ripple through the economy and  no doubt going forward investors will no longer look at US Treasuries with the same sense of security and negligible risk.  This will affect our Govt’s ability to borrow money and the interest rates we pay on that debt.  Things will get ugly if we default and will likely trigger a swift 10-15% selloff

Trading Plan:
The market is trading sideways waiting for a resolution.  While the high probability outcome is a modest pop when a deal is reached, there are opportunities for a Black Swan trade using out-of-the-money options to hedge a long position or make an outright bearish bet.  At the current time, the market is stable and scary headlines are not triggering an avalanche of selling.  That likely means the spring is not coiled to the downside and shorts are better served locking in recent profits.

TSLA daily at 1:07 EDT

INDIVIDUAL STOCKS
AAPL is stuck in between the 50dma and $500.  Virtually all of the major bullish catalysts are behind us, a new iPhone and increased the dividend.  About all we have left before year-end is an expected refresh to the iPad lineup.  It is hard to be long or short the name in no-man’s land and a trader should wait for a breakout/breakdown.  For the time being, AAPL is mostly dead money as it continues its transition from beloved growth stock to boring dividend stock.

TSLA is currently the hottest momentum stock  and recovering nicely from a viral car fire video that spread through the internet and mainstream press last week.  So far the company has responded well to this situation and it is not a risk to future sales.  Those that want to buy a Tesla will still buy one.  The bigger question is how deep this pool of buyers is.  While we’ve seen long wait-lists for exciting new cars like Toyota’s FJ Cruiser and Ford’s redone T-Bird, sales of both of these vehicles eventually tanked  because there was little demand after the core group of buyers got theirs.  $100k is a lot of pay for a 3rd car and will be a major hurdle once all the rich early adopters have theirs.  TSLA is on to something here, and there is a lot of excitement around the brand, I just wonder how many of the people who gush about the car can actually afford one.  At this point, the biggest risk to the stock is a sales plateau once the backlog is caught up and is the most likely event to burst this bubble.

Plan your trade; trade your plan

Ignore what everyone is talking about

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:50 EDT

MARKET BEHAVIOR
Stocks were modestly higher as the Shutdown stretched on for a fourth day with no end in sight.  Through midday trade, the market continues holding support at the 50dma for the fifth consecutive day and remains near the upper end of the summer’s trading range in spite of the headline driven uncertainty.

MARKET SENTIMENT
As obsessed as traders are over developments in Washington, or lack thereof, the market is holding up remarkably well, only down 2.6% from all-time highs.  Most bears claimed a gov’t shutdown was not priced in, but the resulting trade proves otherwise.  This is just another example of the more people talk about something, the less we need to worry about it.

While most investors recognize the temporary nature of the Shutdown, there is greater concern over a potential default on Federal debt.  There is no precedent for this and the longer the budget and debt ceiling standoff continues, the closer we come to this deadline.  Nerves remain relatively restrained so far because Boehner assures us the GOP will not allow us to default.  At least that is one thing both sides agree on.

Moving past politics, we’ve seen relatively limited selling in spite of the uncertainty.  This means those afraid of the Shutdown bailed out a while ago, while those still holding are not focused on near-term headlines.    Bulls and bears alike expect the market to pop on an eventual resolution, so no one wants to be the guy who sold just before that bounce.  With so many owners sitting on their hands, that limits supply and keeps a floor under the market.

Successful investors don’t think about what the market should do, but what other traders are doing and how that affects future trade.  With all the worrywarts already out of the market, we hold up quite nicely in spite of the headlines and political posturing.

TRADING OPPORTUNITIES
Expected Outcome:
When the market should crack wide open, but holds firm instead, that means our core thesis is flawed and we need to reevaluate.  Strength in the face of this uncertainty is bullish because it shows most holders don’t want to sell no matter what the headlines scream.  The resulting tight supply makes it far easier for the market to stabilize and ultimately rally once this situation is resolved.  Since the selloff leading up to this was fairly modest, don’t expect a powerful rebound.

Alternate Outcome:
With each passing day, those expecting a quick resolution sell to more confident investors with a longer view.   The one assumption most holders have is this situation will be resolved without too much damage to the economy or markets.  While this is still the most likely outcome, there is a chance this political game of chicken goes horribly wrong.  At this point the GOP’s pride and credibility is at risk and could result in them stubbornly holding out long past what is rational and reasonable simply for the sake of saving face.

Trading Plan:
Stocks are holding the 50dma, all be it with some sideways chop.  The most adventurous can buy support with a risk adjusted position size, but they should recognize the real risks of new lows next week.  But holding support for this long in the face of this uncertainty means we are not poised to crash lower, meaning the real risks of owning are not as large as they feel.  Most of the time that reality vs emotion skew sets up a favorable risk/reward.

Shorts waiting for the market to split wide open should reevaluate their positions because the market had every opportunity and invitation to sell off, yet is holding firm.  That likely means there are fundamental flaws in the bear’s thesis that need to be identified and considered.

Expect volatility to persist, but continued support suggests a crash on current headlines is unlikely.

TSLA daily at 12:50 EDT

INDIVIDUAL STOCKS
AAPL is holding the 50dma, but cannot reclaim $500 following the successful launch of the iPhone5s.  While there was a lot of excitement leading up to the new product cycle and strong rally up to $500, but the rally is stalling.  Maybe we are simply building a base and consolidating recent gains before resuming higher, but the thing that makes bases work is it convinces many the run is over and so far shareholders remain upbeat.  Many billionaire investors have come out in support of AAPL, but that concerns me because it means most of these people are already fully invested.  If everyone believes in this story and already owns shares, who is left to buy?  Things that are too high usually keep going higher (TSLA) and those that are too cheap usually keep getting cheaper.  Unfortunately AAPL falls into that latter group.  I’m sure the company will do fine, but the stock could easily be entering a mature phase, meaning it is more attractive for its dividend than price appreciation.  This happened to previous titans of tech and it is foolish to assume AAPL is different.

Speaking of TSLA, the stock is bouncing after a couple of days of sharp selling following another downgrade and a battery fire caught on video.  So far the stock is respecting the 50dma, and remains holdable, but this stock is extremely extended from its original pivot point and that makes each subsequent breakout less likely to succeed.  Remember, all stocks are bad unless they go up.  DO NOT fall in love with TSLA.  Date it and leave it when the ride is over.  While we might still see some upside, this is clearly a momentum/bubble stock and anyone arguing to the contrary risks giving back all their profits when it inevitably returns to a more reasonable valuation.

Plan your trade; trade your plan