Category Archives for "Free Content"

AM: Testing the 50dma

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:09 EDT

AM Update

MARKET BEHAVIOR
Stocks traded sideways at the 50dma following yesterday’s 1.4% selloff.  Volume for the dip was only a few percent above average, surprisingly light for the largest loss in months.  This shows many money managers remain on vacation and the lighter volume exacerbates volatility.  Light volume can also be explained by confident holders unwilling to sell dips and few are rushing for the exits.

MARKET SENTIMENT
Yesterday’s one-way selling is taking a break as most wait to see what happens next.  This pause alleviates some of the anxiety and gives traders time to make rational and deliberate decisions.  That doesn’t mean the selloff is over, only that the initial wave of emotional selling came and went.

Ironically the most bullish move is more selling.  Dipping under the 50dma triggers a second wave of stop-loss and emotional selling, setting the stage for a capitulation bottom.  This is exactly what happened in June, leading to our recent 140-point surge, but that is only one possibility.

Source: Yahoo Finace 8/16/2013

Yahoo Finance had another insightful poll this morning.  Over 60% of respondents are either not worried about the dip or buying this weakness.  That shows complacency creeping in, not surprising since every other selloff this year ended in a rebound to new highs.  The challenge with sentiment is figuring out how far this will go before toppling over.  We certainly have a majority, but do we need 80% before it becomes unsustainable?  Just like everything in the market, there is no clear answer and it largely depends on how quickly sentiment shifts as the market dips.  A rapid selloff accompanied by a sharp reversal in sentiment will find a bottom quickly.  That is what happened in June.  A slower grind lower as stubborn owners refuse to sell will take longer and is typical of an erosive bear market that takes us down a few points at a time.  Plunges are scary, but bounce quickly.  Grinds lower don’t scare us, but they do more damage as the series of lower highs drains our accounts under our noses.

TRADING OPPORTUNITIES
Expected Outcome:
The market is at a critical juncture and the best place is cash until we have more clarity.  While this could be another buyable bounce, we want to see the market hold these levels for a few more days before we assume the market found a bottom.  Temporary dip-buying can prop up a market for a couple of days, but holding for four days demonstrates real support.

Shorts can stay short, but should move their trailing stop down to 1670 to protect recent gains.  In the choppy summer market, we are best served by taking profits early and often.  That has been the best counter-trend trade this summer and is not a bad decision here.

The most bullish signal will be a violation of the 50dma followed by a strong reversal.  That shows stop-loss, emotional, and short selling exhausted itself in a capitulation bottom.  Bears expect us to crash through the 50dma but if that doesn’t happen, they have to be flexible enough to recognize further emotional selling is not happening and they need to lock in profits.

Alternate Outcome:
Without a doubt the market is becoming more and more complacent as proven by the Yahoo Finance poll.  All these confident holders are a few points from becoming panicked sellers.  Recent economic concerns over earnings from WMT, CSCO, and M are giving some money managers doubt and their lightening up could be the start of something more.  Remember, markets only move when people change their minds and adjusting outlooks based on these bellwether companies could be the straw that broke this rally’s back.

Trading Plan:
Patience is the name of the game.  While we come to this with biases and expectations, let the market make its move first.  It is better to be a little late than a lot early.  A bounce off the 50dma early next week is buyable.  Breaking the 50dma by itself is not automatically bearish.  We need to see an acceleration that shows previously confident holders are rushing for the exits.  If a dip under the 50dma quickly stalls, that means selling is drying up and we can buy the rebound above the 50dma.

TSLA daily at 2:09 EDT

INDIVIDUAL STOCKS
TSLA closed the earnings gap and is down 10% from the post-earnings high.  A lot of people bought the earings breakout and shorts covered, but since then few have been willing to pay top dollar and are waiting for better prices.    This stock has a history of strong surges followed by month-long consolidations, so even under best conditions we should expect sideways trade here.  The bigger test will be when the 50dma catches up in coming weeks.  Will we get another bounce, or will that be an excuse for people to lock-in profits?  The next greater fool theory applies to all momentum stocks no matter how sound the underlying fundamentals.  TSLA will top when there is no one left to buy.  Just ask anyone who held AAPL through the record-setting iPhone5 launch last year.

Speaking of AAPL, it is pausing at $500 following the Icahn pop.  While a lot of retail investors are excited to ride on his coattails, it is fairly safe to assume he waited until after he bought his entire position before promoting it to the world.  That means his buying will no longer prop up the stock and he is simply along for the ride like everyone else.  In fact, depending on how much he bought, he could be responsible for the some of the recent rally up to the 200dma.  We will soon learn what happens without his massive war chest bidding up the price.

The market is eagerly awaiting AAPL’s “low-cost” phone so it can stem the market share losses to cheaper Android phones.  The thing investors need to worry about is if this iPhone5c is too successful and actually becomes AAPL’s leading seller at the expense of its more profitable big brother.  There is precedence in the iPod lineup.  Soon after launching the smaller and less expensive iPod mini, it quickly became AAPL’s best seller.  The Mini was eventually replaced with the Nano and now the larger and more expensive full size iPod is on life support.  If the iPhone5c’s price and profits are half that of the iPhone5s, AAPL will eventually need to double sales just to stay where they are at.  This is why many are concerned about hardware price wars catching up to AAPL’s stellar profit margins.

Plan your trade; trade your plan

AM: Crashing through support

By Jani Ziedins | Intraday Analysis

S&P500 daily at 3:01 EDT

AM Update

MARKET BEHAVIOR
Stocks sliced through 1680 and fell to the 50dma before finding support.  Since the start of the year every dip to the 50dma was a buying opportunity.  Is the market giving us another gift, or is this a preview of bigger things to come?  It largely depends on if we assume the sideway summer trade continues or if this is the start of a new directional move.

MARKET SENTIMENT
It is late in the earnings cycle, but poor outlooks from CSCO, WMT, and M stoked fears about economic slowing.  Add in upbeat weekly employment numbers that threaten QE and we have the perfect recipe for selling.  At least that is what the financial press wants us to believe.

While today’s 1.5% decline is dramatic, anyone paying attention expected it as we crashed through all the stop-losses littered under obvious support at 1680.  No matter the reason, many disciplined traders hit the sell button when the market crossed their stops.  Once that wave of autopilot selling ran its course, we saw further weakness as fearful and emotional holders bailed out.  Currently the slide is pausing at the 50dma as some traders buy the dip and nervous holders wait to see if support will hold.  The new level everyone is watching is the 50dma and this creates an all new tranche of stop-losses clustered under this level.

Two days ago the media claimed we bounced on some Fed member’s bullish comments, yet today we tank on renewed Tapering fears.  Really?!?!?  The only way these claimed events are moving markets is if they cause traders to change their mind.  Markets only move when people buy and sell, and people only buy and sell when they change their outlook.  Did Tuesday’s Fed comments turn Tapering bears into QE bulls?  Did today’s strong weekly employment numbers turn QE bulls into Tapering bears?  Of course not, traders are far more stubborn than that!  We all come to the markets with beliefs and biases.  One headline here or there is not going to change anyone’s mind on popular issues, and thus it is not moving the market.

But that only applies to hotly discussed issues where people already made up their minds.  Things are completely different when it comes to new, unexpected headlines.  Weak outlooks from WMT, M, and CSCO caught some investors off guard.  We saw cracks in the retail and economic story earlier in earnings, but most wrote this off as company specific stories.  That is harder to do when the weakness is confirmed by industry leading companies.  Those disappointments caused some traders to reevaluate their outlook and lightening up on portions of their portfolio.  That is the true seed of this selloff.

While QE and Tapering is ancient history in a forward-looking market, we always need to pay close attention to new and unexpected developments.  Right now some traders are starting to worry about economic strength and we need to see if this concern spreads and leads to further selling.

TRADING OPPORTUNITIES
Expected Outcome:
Buy the dip or sell the weakness?  That is the million dollar question.  Any disciplined bull is long out of the market as we crashed through their stop-losses, while many bears used this weakness to add to their short positions.  All good trades, but where we go from here largely depends on if this is more of the same, or the start of something different.

Until further notice all dips are buying opportunities and we have to give the benefit of the doubt to the trend.  Trends continue countless times but only reverse once.  It doesn’t take a mathematician to figure out the high probability trade is sticking with the trend, but knowing what will happen and trading it successfully are two totally different things.

Alternate Outcome:
Even if the market eventually bounces, would could still see more near-term weakness.  Catching falling knives is always a dangerous hobby and we need to wait to see how traders respond to these levels before stepping back in.  As for shorts, there is a good chance the 50dma will provide support like it has every other time this year, but expect another leg down if we dip under this widely followed technical level and trigger another wave of stop-loss selling.

Trading Plan:
More likely than not we are still stuck in the summer sideways chop and the better trade for bears is locking in recent profits.  If we slip under the 50dma we can press our shorts, but there is nothing more frustrating than watching a bounce gobble up all our profits.  As for the bull, there is no reason to catch the falling knife.  Wait for support to build at the 50dma.  That likely means holding this level for another three days.  It is better to be a little late than a lot early.

Plan your trade; trade your plan

AM: More of the same

By Jani Ziedins | Intraday Analysis

S&P500 daily at 3:33 EDT

AM Update

MARKET BEHAVIOR
More of the same as the market remains stuck between 1680 and 1700.  Aside from a couple short excursions, the market traded between these levels for the last month.  Traditionally the longer a market consolidates, the bigger the resulting move.  Every sideways consolidation this year ended in an upside breakout and when it doubt, stick with the trend.

MARKET SENTIMENT
We are in the final weeks of summer and shouldn’t expect much.  The big decision makers are returning from summer vacation and just getting settled.  Look for larger moves in September and October as big money takes their portfolios off autopilot and starts buying and selling in larger quantities.

Consolidations typically favor a continuation and most reversals end in an exhaustion surge.  Traders are notoriously afraid of heights and more comfortable buying dips than breakouts.  That’s why many distrusts the market at all-time highs, yet love AAPL under $500.  The thing we need to remember is people already traded what they talk about.  If someone loves AAPL, they are fully invested.  If they claim this market’s gone too far, they already moved to cash.  The ideas people talk about and promote tells us how they are positioned.  If the chorus claims the market is ready to top, it means the crowd already sold.  If everyone says AAPL is going higher, they already own as much as they can hold.  The reason contrarian investing works so well is markets only respond to changes in supply and demand and people only trade when they change their mind.  If the crowd loves something, there are few left to buy and a large group of potential sellers.  If the crowd dislikes something, there are few left to sell and plenty of buyers available.  This is one of the best years in market history because no one trusted it and AAPL slumped 40% because everyone loved it.  Go against the crowd, not the trend.

TRADING OPPORTUNITIES
Expected Outcome:
These things go longer and further than anyone expects and that is clearly the case here.  No matter how high this feels, there is still more upside left.  Markets decline faster than they rally.  Holding 1680 for a month is the opposite of a swift selloff and suggest the high probability trade remains higher.

Alternate Outcome:
Hundreds of millions of shares changed hands over the last month.  Many new buyers are using 1680 as support and will sell a dip under this level.  Once the selling starts, it has a tendency to cascade as more stops are hit and the wider pool of owners become nervous.  Selling begets selling and before we know it we find ourselves down fifty points.  While I don’t expect that, hard stops keep us out of trouble.

Trading Plan:
It is hard to make money in this lethargic, sideways market and the risk/reward is not on our side.  Waiting for the resolution of this consolidation will provide quicker and safer profits.  A sustained break of 1700 is our signal to go long and failing to hold 1680 is our chance to short the market.  Expect the real fireworks in September and October as we either continue this rally into year-end, or finally start the correction everyone’s been waiting for.

Source: Yahoo Finance 8/14/2013

INDIVIDUAL STOCKS
It really felt like the overly bullish fever in AAPL broke.  It was no longer the overwhelmingly most talked about stock on StockTwits and I largely stopped getting hate mail every time I criticized the company.  No doubt that shift in sentiment allowed for this $100 move higher, but how much upside is left?  There was a revealing, if not downright scary poll on Yahoo Finance today.  Well over 50% of the respondents are not simply bullish on AAPL, but they said they are willing to “bet the farm” it will recover old highs.  It is shocking how excited people are about a stock that is 30% off its 52-week high.  The bullish arrogance is also back in the StockTwits AAPL stream.  No doubt these people have a lot of be excited about, but I wonder what level most of these people bought?  Rather than making a lot of money, I suspect many are excited about losing less.

While there is a lot of upside momentum, for the company to truly make a comeback we need to see a return to strong growth and a decisive reversal of the nonstop market share losses.  It’s been a great trade for those that bought the breakout following earnings, but we only make money when we sell our winners.  Every AAPL bull needs to have their price that is good enough.  Many rode this down from $700 and hopefully they learned their lesson about using trailing stops.

Plan your trade; trade your plan

AM: Bears get whacked again

By Jani Ziedins | Intraday Analysis

S&P500 daily at 3:26 EDT

AM Update

MARKET BEHAVIOR
Stocks sunk in early trade, but bounced off support at 1680 and turned green by mid-afternoon.

MARKET SENTIMENT
Bears have been in control as we declined in five of the last six sessions, but the best they could muster was a 1.3% “selloff” from all-time highs.  Even with the wind at their back they still couldn’t shake confident holders and this Teflon rally continues levitating on tight supply.

Recent weakness emboldened bears, convincing them this was finally their moment, but today’s bounce shows they are early yet again.  This market will suffer a material decline at some point, there is no disputing that, but early is the same thing as wrong and many bears have been wrong for eight months and counting.  They will be right at some point, but because of the dynamics in the markets, it won’t happen until the crowd gives up on calling a top.

This has been one of the best and easiest years in market history, yet people still don’t trust it.  This is the very reason we keep going higher.  Many blame our strength on irrational exuberance, but it is in fact a product of the exact opposite, irrational pessimism keeps this rally alive.  Most traders were battered and scarred by the damage in 2008 and early 2009 and like anyone suffering from PTSD (post-traumatic stress disorder), they keep reliving those events in their mind and normal and ordinary events trigger acute flashbacks.   How this supports the rally is it keeps the worrywarts with an itchy trigger finger on the sidelines.  Without skittish traders, there are few in the markets to trigger a stampede rush for the exits.  Without that exaggerated volatility, the market rallies nicely on a steadily improving economy.

TRADING OPPORTUNITIES
Expected Outcome:
Today’s bounce off the lows has all the hallmarks of a short-squeeze.    The one-way rebound is driven by the pain of shorts forced to cover as the market relentlessly moves against them.  We’ve been talking all summer about taking profits early and often because this market will take them away days later.  Rather than collect profits, many bears turned greedy and are getting forced out for a loss today.  But they are not the only ones.  Bulls who held on too long were recently squeezed out in recent weakness.  Choppy markets favor the nimble and that’s been the best call this summer.

Alternate Outcome:
Keep watching 1680.  The sideways churn brought in a lot of new owners with a stop under this obvious technical level.  Break that and we will see a wave of selling, possibly triggering a follow-up cascade of emotional selling.  The next widely followed level is the 50dma and is where we are headed if we cannot hold 1680.

Trading Plan:
The bears just cannot get the job done and this gives the edge to bulls.  Expect short covering to push us through 1700, but be mindful of slipping under 1680.  After spending a few weeks inside this tight range, be prepared for a strong move either way.

INDIVIDUAL STOCKS
AAPL is on fire between breaking the 200dma, the impending product event, and most recently Carl Icahn announcing a large stake on Twitter.  Those sent shorts running for cover, but this strength looks like a better selling opportunity than buying one.

Apple has great products if we still lived in 2010, the last year AAPL really surprised anyone with real innovation, the Retina Display in the iPhone4.  No one uses Siri, iMaps was a disaster, the iPad Mini was simply playing catch up to Android, and iTV’s been a dud since it came out in 2006.  If you go to Best Buy, the Apple table is the most boring section of computer/phone department.    Surprisingly enough, the most interesting products are all Windows computers, laptops, and tablets.  While a 20″ all-in-one Windows desktop is boring enough, they go and make the monitor into a giant, removable tablet with its own battery!  That’s far cooler than anything we’ve seen out of AAPL recently.  Even the laptop/tablet hybrids are getting innovative and exciting.

AAPL daily at 3:26 EDT

The last decade saw a relentless consolidation of digital devices.  Phones, PDAs, cameras, GPSs, and MP3 players have all been rolled into a single device, making many once dominant companies obsolete.  When is the last time anyone bought a Palm Pilot, iPod, GPS, or point and shoot camera?  What is the one stand-alone device left?  Our computer.  Soon we will no longer choose between taking our tablet or laptop computer because they are merging into a single device.  Unfortunately for GOOG, AAPL, and ARM, only MSFT and INTC are hard at work on the next generation of full powered devices.  As investors we need to look for the next big thing and the blending of computers and handheld devices is the next logical step.  Who wants a neutered mobile device with a mobile processor, mobile OS, and mobile apps when they can have a full powered computer in their hand that run anything and everything they need.  In five years our phones will be our computers as we plug them into docking stations on our desks or wirelessly connect them to a dumb-terminal tablets.  Invest in the companies downsizing full powered devices, not the ones entrenched in keeping the mobile market alive.

But that is the long-term view.  In the near term, AAPL might seem some strength in anticipation of their product launch, but this is more likely setting up a buy the rumor, sell the news trade.  We can hold the 200dma, but be prepared to sell strength because this is a relief rally, not a return to the glory days of market beating innovation and dominant market share.

As for the surge on Icahn’s announcement of his stake, that is simply one man’s opinion and has nothing to do with the larger fundamental story.  Look for this surge to reverse in coming days as the euphoria and herd buying wears off.

Plan your trade; trade your plan

AM: Is sideways good or bad?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 3:02 EDT

AM Update

MARKET BEHAVIOR
Stocks stumbled at the open, slipping to 1683 as the lethargic summer trade continues.

MARKET SENTIMENT
Everyone knows markets fall faster than they climb.  A few day selloff can wipe out months of profits and is why we fear them so much, but can we use this typical behavior to figure out this market’s next move?  We spent most of the last month above 1680.  If selloffs occur over a few days, holding these levels for so long strongly suggests this market is not on the verge of crumbling.  In fact, if we look at the other side where rallies take time and are drawn out, a month-long consolidation suggests a continuation is more likely.

Over the last four-weeks we’ve seen plenty of profit-taking, defensive selling, and aggressive shorting, yet the market continues holding near all-time highs.  We’ve gone through modest weakness and had countless ominous headlines regarding QE, yet most holders refuse to sell and that tight supply is propping up prices.  Once we exhaust the supply of proactive sellers, the market will continue higher like it has every other time this year following widespread calls of a top.

TRADING OPPORTUNITIES
Expected Outcome:
There are no guarantees in the market and successful trading is a game of probabilities.  Without a doubt the market could implode any moment, but the fact it resisted selling off for so long suggests the next move is still higher.  We are still stuck in the listless summer trade and should continue taking profits early and often.  Most big money institutions are in a holding pattern until the senior decision makers come back from vacation.  Seeing how strong the year’s been, this fall could be interesting.  Will this be another brutal September, or is the least expected trade, a 12-month rally, the most likely outcome?

Alternate Outcome:
While it is encouraging the market is holding near all-time highs, where are the buyers needed to breakout to new highs?  Markets top for one of two reasons, panic selling following an unexpected development, or exhausting the supply of buyers on bullish headlines.  The clearest sign the market is breaking down is violating key support levels.  Right now 1680 is the level to watch.  Beyond that is the 50dma, quickly approaching 1660.

Trading Plan
There is not a lot to do while we hide out in this 1680 to 1700 range.  A bull can keep holding and bear can stay short, but at this point they are fighting over loose change.  Often the hardest trade is to sit on cash and wait for a better opportunity.  We come to the market to trade and it gets boring real quick when we don’t have money at risk.  (I’m as guilty of this as the next guy)  The real money will be made waiting for the market’s next directional move.  The longer we consolidate, the larger the resulting move will be.

Plan your trade; trade your plan

AM: Selling stalls

By Jani Ziedins | Intraday Analysis

S&P500 daily at 3:34 EDT

AM Update

MARKET BEHAVIOR
Stocks bounced between 1690 and 1700 as the indecision continues.  While we haven’t recovered 1700, today’s strength looks to end the streak of down-days.

MARKET SENTIMENT
The recent dip opened the door to further selling, but the market didn’t take the bait.  Even with all the QE fear mongering, the best bears could manage so far is a trivial 1.5% slip from all-time highs.  For context, the previous two QE initiated selloffs started with intraday plunges of 2% and 1.4%.  Clearly the last three-day “selloff” was nothing like May 22nd’s and June 19th’s breakdowns and the resulting trade will also look different.  We trade the market, not our biases, and so far the uptrend is holding up nicely.

QE driven selling in May, June, and over the last three-days flushed out most traders afraid of an impending Tapering correction.  It is foolish to expect a major market selloff, yet continue holding stocks, so common sense tells us most Tapering worrywarts are long gone. This proactive trading phenomena gives the market its forward-looking behavior.  Back to QE, at this point even the baristas at Starbucks know tapering is just around the corner, so there is no QE trade other than ignoring all the hype.  Forget QE and move on to the next thing.

Without a doubt ignoring what everyone is talking about is one of the hardest parts of contrarian trading.  (The other is not confusing trend with sentiment.)  When we break it down and look at it rationally, it is fairly obvious everyone predicting doom and gloom is already out of the market.  When most are expecting the worst, the bulk of the selling is already behind us and without new supply, markets often rally.  This single idea drove us from November’s 1340 lows and continues pushing us higher as long as the cynics keep fighting this rally.

TRADING OPPORTUNITIES
Expected Outcome:
If this market was going to break wide open, it would have happened by now.  Today’s support is constructive and suggests we are not done making new highs.  The previous three days of selling was all on recycled headlines and was only temporary.  This rally will end at some point, but it will be on new and unexpected developments, not the stuff everyone is already talking about.

Alternate Outcome:
Markets top for one of two reasons, bad news or good news.  The bad news is fairly obvious so I won’t get into it, but good news selloffs lead to longer and deeper corrections.  Good news selloffs happen when everyone is bullish and fully invested.  At that point there is no one left to buy and nowhere to go but down.    We could see either of these bearish outcomes in the near future and need to keep an eye on both.  The first and most obvious sign the market is breaking down is seeing it fail to hold previous support.  We can continue buying dips, but we must always respect our stops.

Trading Plan:
The modest selloff and recent strength doesn’t support the bear case.  It is better to get out early when losses are small, then push our luck and wait for the pain of mounting losses to force us out.  If a bigger selloff is in front of us, there is plenty of time to jump on that bandwagon when it finally shows up.

Bulls can buy/continue holding a break of 1700.  The recent low of 1685 makes a decent stop.

TSLA daily at 3:35 EDT

INDIVIDUAL STOCKS
TSLA is holding post earnings gains nicely, but every sustainable rally needs basing and consolidation.  Without that foundation and pruning of irrational exuberance, the stock is setting up for a bubble style of collapse.  To remain sustainable, the stock needs to check back to the 50dma at some point in coming months.  Maybe we trade sideways until it catches up, or we dip down to it.  I hope it does one of those two because the alternative is a bubble style collapse to $50 over a period of weeks.  That isn’t bad if we get out early, but that is easier said than done.  Just ask anyone who owned AAPL at $700.

Speaking of AAPL, the stock is on track for its third down-day following a brush with the 200dma.  This is a nice place to take profits and maybe that is all this weakness is, but we could also be slipping as few large investors are willing to chase the stock up to recent highs.  Its been a nice run and the only trade on AAPL this year has been buying weakness and selling strength.  Since this is the highest we’ve been since January, this might be a good time to lock in profits.

Plan your trade; trade your plan

PM: The 1% selloff

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks slipped a little further under 1700 but finished off the day’s lows.  Volume was well below average as few bought or sold Wednesday’s weakness.

MARKET SENTIMENT
Tapering strikes again, at least that is what the consensus claims.  The logic goes something like the following.  We recovered all of May/June’s Tapering selloff because of the Fed’s promised to keep printing money.  This obviously means the QE bubble reinflated itself, but I don’t buy it.  It is tempting to simplify the market into a single entity, but it is really complex tapestry of self-interested individuals.   Just because we recovered the Tapering selloff losses doesn’t automatically mean the QE trade is back.  To be exposed to the same risks we need to recreate the exact same ownership makeup we had two months ago.  Everyone who sold the selloff needs to buy back in and every buyer of the selloff needs to sell out.  What are the odds this happened?  Traders are a stubborn bunch and the most difficult thing is admitting we are wrong.  Very few sellers of Tapering bought back in simply because the market bounced.  In their mind they are right and it will only be time before the market finally sees what they see.  These traders continue sitting on the sidelines, hoping and praying the market rolls over to validate their previously emotional decision to sell.  We’ve all done it at some point.  It is far easier to accuse the market of being wrong than admit we are wrong.  Without a doubt the market rebounded decisively from that selloff, but it was not because of people chasing QE.  That trade is dead and buried.

Anyway, that is a really long-winded way of saying don’t pay attention to the QE/Tapering fear mongering.  Most of those weak hands bailed weeks ago and the market already priced in Tapering.  Maybe it is September, or maybe it is January, but does it really matter?  Everyone knows it is coming and those that are afraid of it are already out of the market.  Sell the rumor, buy the news.

TRADING OPPORTUNITIES
Expected Outcome:
The market is going through a modest pullback, hardly 1% off of all-time highs.  I expected support at 1700, but that was obviously a tad optimistic. The market undercut my stops and I sold for a modest profit.  It is not as much as I had a couple of days ago, but it sure beats losing money.  I still don’t believe this is the start of a larger selloff, but there is no point in having stops if we don’t use them.  But rather than take my ball and  leave in a huff, I’m ready to buy back in when the market retakes 1700.

Alternate Outcome:
The market broke support and presents the best shorting opportunity we’ve seen in a couple of months.  A bear can short here with a stop above 1695 or 1700.

Trading Plan:
Buy a recovery of 1700 and short further weakness.   Summer trade can be both volatile and listless as we’ve seen.  Take profits when we have them because they will likely be gone days later.

FB daily at end of day

INDIVIDUAL STOCKS
AAPL continues its struggle with the 200dma.  This is a decent place to lock-in recent profits since this is more a relief rally than something supported by renewed fundamental strength.  If we keep holding under the 200dma for a few more days we can buy back in and ride it up to $500.

TSLA knocked the ball out of the park with its earnings after the close.  How much higher this goes is anyone’s guess, but it needs to find new buyers to continue making gains.  Previously it feasted on a seemingly endless supply of shorts, but it really feels like most shorts have run for cover.  If Thursday’s early pop fizzles into the close, consider jumping out because it shows buyers are getting scarce.  Stocks like this often top on good news when everyone is most bullish and fully invested.  At the very least move up a trailing stop to $140 or $145.

FB continues hanging in there around the $38 IPO level.  The stock that is supposed to nose over will likely continue higher.  It failed when everyone loved it and now it thrives when everyone doubts it.  Go against the crowd, not the trend.

Plan your trade; trade your plan

AM: Buy the dip or sell the weakness?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:53 EDT

AM Update

MARKET BEHAVIOR
Stocks dipped under 1700 in the biggest test of this young breakout.  Early weakness pushed the marked down to 1693 before it found a floor in mid-morning trade.

MARKET SENTIMENT
Is this the start of a larger selloff or just another head-fake designed to shake out weak hands and humiliate bears?  We will likely have our answer by the end of the day.  It is no surprise the market tested support and triggered a wave of stop-losses clustered under this psychologically important round number.  What we do not know yet is if the selling will quickly exhaust itself and bounce back, or accelerate lower as weakness shakes loose previously confident holders.

Without a material catalyst driving this selloff, this adjustment is simply balancing supply and demand.  These moves tend to be far more tame than headline driven events that send panic through the market, such as June’s frenzied Tapering selloff.  This rally’s days are numbered, but it will be an unexpected headline that sends everyone running for cover, not generic weakness.

TRADING OPPORTUNITIES
Expected Outcome:
We know markets cannot go up every day, yet it still catches us off guard every time it dips.  Everyone wants a rally to pullback so they can buy more, but when it does many end up selling the weakness instead of buying it.  If this game were easy, everyone would be rich and we know that is not the case.

This morning’s dip under 1695 shook out many disciplined holders, but just because we sold defensively does not mean we cannot buy back in if the market finds support near levels we were watching.  Technical levels are better thought of as regions instead of lines.  The market is an inexact science and support at 1693 or 1695 is close enough to 1700 that if we recover early losses this will count as holding prior support.  Only time will tell, but not seeing losses accelerate after slipping under 1700 shows selling is slowing, not picking up.

Alternate Outcome:
We always need to be careful when the market tests support because the best signs a market is selling off is to see it selloff.  We found a nice bottom at 1693 if it holds, but if the bounce doesn’t hold, we need to get out.  This failure also signals a decent short entry.

Trading Plan:
It is okay to buy/hold the bounce off 1693, but be wary of further weakness and sell/short a violation of today’s low.

AAPL daily at 1:53 EDT

INDIVIDUAL STOCKS
AAPL made a new relative high as it broke $470 for the first time in half a year, but if failed to hold these levels for very long.  No doubt profit-takers and short-sellers are hitting the stock following these new highs.  The question is who has the larger war chest, the momentum crowd or the swing-traders anticipating a reversal.  To me this looks like a good place to lock-in profits and buy back in if the stock retakes $470.  We are in this to make money and the only way to do that is selling our winners.

TSLA continues its rout of shorts as it passes the $145 level.  I would be nervous holding this through earnings tomorrow since so much positive news has been priced in over the last three months as the stock more than doubled.  The goal isn’t to own the hot stock, or to pick the top, but to make money.  At some point we need to say enough is enough and take profits.  While the trade is not over, we will likely get a chance to buy this stock at lower levels in coming weeks as it pulls back and consolidates recent gains.

GLD rebounded to the 50dma recently, but is unable to reclaim this widely followed moving average.  Many claims the stock market is climbing on the Fed’s reiteration of support for QE, but the gold and Treasury market tell a far different story.  All the evidence points to Tapering getting priced in and anyone waiting for a Tapering selloff in equities is going to be disappointed.

Plan your trade; trade your plan

AM: Still holding gains

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:43 EDT

AM Update

MARKET BEHAVIOR
Stocks opened lower, testing support near 1700 before finding a floor and bouncing.

MARKET SENTIMENT
If we hold these levels, it will be the third day where buyers and sellers support Thursday’s breakout to all-time highs.  Nervous holders and opportunistic bears sold preemptively during July’s consolidation under 1700.  The exhaustion of that selling pressure cleared the way for these recent gains.

The lack of a strong upside move shows cynics are sticking with their positions, whether that is underweight or outright short.    Traders changing their minds is the only thing that moves prices and this modest climb shows participants’ reactions are fairly muted.  As with everything in the markets, there are two valid sides to every story.  The bull says steady price moves are sustainable and support a continuation of the uptrend.  The bear counters by pointing out the apathetic trade shows a lack of engagement and diminishing enthusiasm for chasing new highs.  They both have a good arguments, but this is how it must be because the market price is always the exact balance point between bulls and bears.

Source: Yahoo Finance 8/5/2013

If we assume both sides are intelligent and thoughtful, where do we find our trading edge?  We look for clustering of opinions.  This groupthink is the crack in the Efficient Market Hypothesis we exploit on this blog.  No matter how bullish people claim this market is, the consensus remains cautious and reluctant to buy new highs.  Yahoo Finance had another poll showing people still don’t trust the economic recovery with only 23% saying employment is getting better.  This pretty much mirrors a similar GDP poll from last week.  No matter how bullish people claim the market is, most people are afraid of this market and that is fuel propels this extraordinary rally.

TRADING OPPORTUNITIES
Expected Outcome:
While the breakout appears stalled as we trade near support for the third day, this is constructive behavior suggesting a continuation, not a topping.  New highs invite a wave of profit-taking by holders and shorting by cynics.  This selling is short-lived and if the market holds support with this weight on its shoulders, the uptrend will resume as soon as the selling dries up.  This is what pushed us above 1700 and it will continue the move through 1710 and beyond.

Alternate Outcome:
There are always two valid views on every market and at some point the bears will get this right.  Maybe we’ve come too-far, too-fast.  Maybe this lethargic breakout signals exhaustion.  Maybe economic numbers and Fed Tapering will finally catch up with the market.  Maybe there will be an unexpected shock to the system.  Maybe selling will beget more selling as we fall down the rabbit hole of panic selling.  Maybe, maybe, maybe.  Something will happen because it always does, our job is to get out of the way before the market takes us down with it.

Trading Plan:
Keep holding with a stop under 1695.  Wait for a swift break of this level before laying out a short.

INDIVIDUAL STOCKS
Another strong performance by AAPL as it challenges the 200dma for the first time in nearly a year.  Is this the start of AAPL’s resurgence or just more strength to sell?  If the stock breaks $470, this will be the highest mark since early February.  If we believe the stock is stuck in a $400 trading range, this is a great time to lock in recent gains.  If we think AAPL is making a comeback, we should be buying stock on margin, not selling it.

Most stocks rally on fundamental outperformance, even if it seems unrealistic.  NFLX, TSLA, and LNKD are all superstars with outrageous valuations.  The one thing they have in common is uncommon growth and a habit of far exceeding expectations.  For many years AAPL fit this category and that propelled the stock from $200 to $700 over a few years, but is this recent bounce supported by strong growth or beating already high expectations?  Or was this simply being less bad than already lowered expectations?

Today’s buyers will point to the recent veto by the White House on a patent injunction, but the stock barely reacted when this injunction originally came out and it only affects nearly obsolete models like the iPad2 that are on the verge of being discontinued anyway.  Plus this is a double-edged sword for AAPL since it is seeking injunctions against Samsung for similar patent infringement.  While this veto is a win for consumers, it is largely a wash for AAPL.

BBRY daily at 2:43 EDT

Earlier we discussed holding the break of the 50dma and taking profits near the 200dma.  It’s been a nice run since earnings, but the only way to make money in this game is selling our winners.  Either we sell into strength or we raise our trailing stops to protect recent gains.  The previous high at $450 is a decent level to expect support.  A more conservative trader could use recent highs at $457 or $465.  The key is keeping our profits and not give them back in the next gyration lower.  The thing that scares me about AAPL’s new highs is the 92% bullish sentiment on StockTwits.  While momentum can carry us higher, that kind of sentiment skew is not sustainable over the medium-term and there will be a shock to the stock price to better balance sentiment.

BBRY surged higher without any clear catalyst, but it still remains under $10.  This is a clear lesson for both sides that stubbornly sticking to entrenched positions rarely works.  Bulls should have cut their losses after earnings and bears should have locked in profits after recent weakness.  Most likely this suge is fueled by short covering and will  fade quickly.  Some speculate there is an impending buyout offer, but it really seems like the BlackBerry franchise is yesterday’s news and between iOS, Android, and the Window’s phone, what does BBRY really have to offer anyone besides a rapidly shrinking user base and a portfolio of patents that recent White House moves diminishes the value of.  But that is over analyzing the situation.  This is a trading stock plain and simply; buy weakness, sell strength, and repeat.

Plan your trade; trade your plan

AM: Finding support at 1700

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:44 EDT

AM Update

MARKET BEHAVIOR
Stocks opened slightly lower on disappointing employment numbers, but reclaimed losses by midday.  The market tested 1700 early, but previous resistance provided support and we bounced nicely.

MARKET SENTIMENT
It is hard keeping track of the relationship between news and the market’s reaction.  Is bad still good?  Or is bad bad again?  Are we more worried about QE continuing or economic strength?  The headaches fundamental investors give themselves debating this is too much for me.  Rather than try to outsmart the market, I simply look at other traders to figure out where we are headed.  Markets are a collection of people, not an aggregation of data.  Understanding what they think and how they are positioned turns a previously irrational market into one that starts making sense.

What is too-high keeps going higher.  The consolidation under 1700 invited the paranoid to take profits and tempted the bearish to short.  Once this temporary wave of selling passed, the market rallied on tight supply.  As much attention as we give demand, supply is just as important.   Most sellers and shorts over the last 9-months came to regret that decision as the market relentlessly marched higher.  Get stung a few times and people change their behavior.  In this instance that means sitting through volatility.  While this cannot last forever, buying dips and holding weakness is the trade of the year.  This will change at some point, but until then resolve by holders keeps supply tight and props up prices.  No matter what the news or technicals say we should do, we continue rising on tight supply.

TRADING OPPORTUNITIES
Expected Outcome:
Keep doing what is working.  The early test of 1700 was encouraging, but even a dip into the 1690s is normal, expected, and constructive as long as the selling stalls and we bounce back.  Many shorts are still hanging on, hoping for the reversal they know in their heart is coming, but they will be forced to buy this market once the pain of losses gets too intense.  With all the doubters, profit-takers, and shorts, the pain trade remains to the upside.

Alternate Outcome:
Everyone’s been talking about this for months now, but every rally ends and so will this one.  While they are right, in the markets early is the same thing as wrong.  While we don’t want to jump in front of this market, the longer we go, the more careful we must be.  Stick with the trend, but as soon as this market stops acting like we expect, that will be our signal tides are changing.  Maybe this is the top, maybe we continue to 1750 before rolling over, maybe it is this Fall, or maybe it doesn’t happen until next year, but stay vigilant and don’t let recent profits make us complacent.

Trading Plan:
Keep holding with a stop under 1695.  Sideways consolidation clears the way for a sustainable move higher, but we could also see the market leap ahead in yet another short-squeeze.  Fifteen-points is normal, fifty over a couple of days is not.  Move our trailing stops higher as we climb and proactively lock in profits if the rate of gains accelerates unsustainably.  It is okay to doubt this rally and sit in cash, but don’t try picking tops.  Wait for an accelerating selloff through 1700 before going short.

LNKD daily at 2:44 EDT

INDIVIDUAL STOCKS
AAPL finally did it, it broke the nearly year-long streak of lower-highs as it eclipsed May’s $457 high.  Is this just the start of things to come, or strength to sell?  It won’t take long to see if momentum buying exhausts itself or if a wider pool of investors use this technical milestone to finally start buying this beaten down name.  Longs should move their stops up to recent support at $450 and expect the 200dma to act as resistance.  The smart trade since January is selling strength and buying weakness.  Bulls can use a trailing stop, but expect the sideways trade to continue until we reclaim previous support at $500.

FB is sticking around the $38 level.  The longer it holds here in the face of profit-taking and shorting, the more likely the continuation is.  While it would be perfectly reasonable to see it dip back to $32 as part of a consolidation before moving higher, holding $38 for another day or two means it wants to go higher in the near-term.  It is tough to hold a stock that came this far, but shorting it is just asking for trouble.

LNKD is crushing bears yet again as it surges 11%.  What is too high usually keeps going and that is clearly the case here.  We can debate the fundamentals up and down, but momentum is on the bull’s side and when we live and die by price alone, it is foolish to argue with the market.

Plan your trade; trade your plan

AM: How we got here

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:50 EDT

AM Update

MARKET BEHAVIOR
Stocks finally broke the 1700 barrier and continue trading between 1700 and 1705 through midday.

MARKET SENTIMENT
The media attributes today’s strength to data of some sort, but we know the truth, the market rallied because holders are not selling and supply remains extremely tight.  No matter how traders feel about these levels, it doesn’t take much demand to prop up prices when there is so little available to buy.  Some will ask how long this can last, well it’s been this way since the November lows three-quarters of a year ago.  People often discount the potency of low-volume moves, but as we’ve seen, low-volume rallies often go further and longer than anyone expects.  The whole “candle burns twice as bright” thing is what allows low-volume rallies to outlast the more coveted high-volume moves.

After crossing the psychological barrier at 1700, we need to see how the market responds.  Between the gap at the open and sideways trade since, many shorts are holding on and not covering.  They are hoping prices will retreat and their wishful thinking is blunting a more powerful short-squeeze. Real short squeezes are relentless climbs higher that punish bears and fill them with regret as they kick themselves for not selling earlier in the day.  A gap and sideways trade lets them take a wait and see approach.  Many with 1700 stop-losses bumped that up to 1705 this morning.  This means we still have fuel available to continue the move past 1700 as the market turns up the heat on these stubborn doubters.

TRADING OPPORTUNITY
Expected Outcome:
We are holding 1700 and there is no reason to fight what is working.  The market never makes things easy and technical levels are best drawn with dull crayons.  Dipping to 1695 and bouncing back qualifies as holding 1700, but makes placing stops more challenging.  We want to give the market enough breathing room so we don’t get shaken out, yet don’t leave too much profit at risk.

Alternate Outcome:
The lack of a strong short squeeze either means shorts are falling to a hope and pray strategy, or it means there is no one left to buy the breakout.  While we always give the benefit of doubt to the trend, we need to watch for a rollover.  The bullish thesis is nice gains on breakout buying and short-squeeze.  If we don’t get what we expect, we need to reevaluate our entire outlook.

Trading Plan:
Move our trailing stops to 1695, but be willing to buy back in if the market shakes us out with a swift dip and rebound.  One of the most important aspects of successful trading is recognizing quickly and decisively when we make a mistake.  Acting early is the best way to make ensure we don’t get stuck on the wrong side of a trade.  That goes for both holding positions and buying back in after selling.

We finally have the setup for a double-top, but bears shouldn’t pick a top here.  Wait for a swift break under 1700 that shows demand evaporated before challenging this Energizer rally.  Further, when we do short, take short profits early and often because the market will bounce without a fundamental catalyst that sends formerly resolute holders rushing for the exits.

Source: StockTwits 8/1/2013

INDIVIDUAL STOCKS
AAPL is trading sideways for a third day at the $455 level.  While this behavior was constructive for the broad market, sentiment between these two is 180 degrees.  The market is too-high while AAPL is a “generational buy”.  Will this lead to a different outcome following a tight consolidation?  We will soon have the answer.  No doubt much of the hope for a quick AAPL rebound evaporated months ago, but there are still more AAPL bulls than bears.  StockTwits reports 88% bulls to just 12% bears.  Compare this to early June where bears were in the majority, at what proved to be the move’s low.  The crowd got it wrong there and is likely getting it wrong here too.

Plan your trade; trade your plan

AM: Should we care about the Fed?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 3:19 EDT

AM Update

MARKET BEHAVIOR
Stocks are higher, but retreated from an early assault on 1700.

MARKET SENTIMENT
Stocks stalled short of 1700 as buyers were unwilling to chase prices to new highs.  Some might claim this is a double top, but to be a real double top we need to exceed the previous high of 1699.  This triggers the last wave of breakout buying and short covering before demand dries up and we roll over.  Anyone waiting for a double-top should expect higher prices in coming days and reversing soon after the breakout makes an excellent shorting opportunity, but that is then and this is now.  Currently the market is holding up nicely and higher prices are in our future.  Where we go after breaking 1700 is still up for debate, but the market is certainly acting like new highs are on the to-do list.

As overly-bullish as everyone claims the market is, ironically enough, that is the majority opinion.  The masses remain pessimistic and fearful of a pullback in spite of, or because of the all-time highs.  In a Yahoo Finance poll, only 27% think the economy is improving.  That hardly qualifies as widespread optimism and bullishness.  Traders are notoriously afraid of heights and new highs frequently make traders nervous.

When it comes to contrarian investing, the mistake most people make is confusing price-action with sentiment.  When we are at all-time highs, most assume the market must be wildly overly-bullish, but unfortunately for these confused ‘contrarians’, the market’s been overly-bullish for the last 250-points.  What is high often keeps going higher because the crowd remains skeptical and those doubters provide fuel for higher prices.

Source: Yahoo Finance 7/31/2013

Some claim one headline or another is responsible for a particular price move, but the reality is only buying and selling can do that.  Today we had a Fed statement promoting ‘modest growth’, a softening of their previous outlook.  These pieces of information only move markets if it causes people to change their mind, and as a result buy or sell stocks.  If it simply reinforces what people already believe, everyone keeps holding and the market continues doing what it was doing previously.  Today’s Fed statement isn’t going to change anyone’s mind and its impact will disappear as soon as news-driven traders take their lumps and move on.

TRADING OPPORTUNITIES
Expected Outcome:
Stick with what is working.  Most expect a pullback following the breathtaking rebound off June’s lows, but that expectation is what keeps us near all-time highs.  Those with a fear of heights locked-in profits weeks ago and most of that defensive selling is already behind us.  The current crop of holders are waiting for higher prices and their patience is keeping supply tight, making the path of least resistance higher.

The one head-fake to watch for is a quick whip under 1675, triggering a wave of stop-losses and sucking in short-sellers before bouncing back.  We must always sell when prices cross our stops, but that doesn’t prevent us from buying back in if the market rebounds.  Stay open-minded and trade the market without consideration to what we did or thought last week, yesterday, or this morning.

Alternate Outcome:
Traders remain cautious and wary, making a continuation more likely, but anything can take out the market’s legs at any time.  Many expect a pullback after too-far, too-fast, but this market clearly doesn’t care about gravity.  We will top, but it will not be because of something everyone is expecting and positioned for.  There is a hidden landmine lurking out there and it will catch us off guard.  That will finally be the catalyst that sends us lower.  Currently we are rallying as an overly bearish market warms to a gradually improving world, but inevitably we will be surprised by unexpected bad news.

Trading Plan:
Continue holding with a stop under 1675 and wait to see how the market responds to the breakout above 1700.  Quickly retreating under 1700 shows buying exhaustion and is shortable.  If previous resistance turns to support, we move up our stops and wait to see how much further this rally goes.  Obviously if we expect higher prices, this is a poor place to be short and it is best to admit defeat and take a small loss.

We remain in the summer chop.  The average trader can sit out this volatility and wait for a better risk/reward, likely coming this fall.

TSLA daily at 3:20 EDT

INDIVIDUAL STOCKS
AAPL is maintaining recent gains and is holdable as long as we stay above the 50dma.  There is not a fundamental catalyst justifying recent strength, but sentiment might have changed enough to finally put in a bottom.  If we break and hold $460, the next bogie is the 200dma and would be a nice place to take profits.

FB broke $38 and made headlines after finally regaining its IPO price.  Some consolidation here is normal and expected, but look for strength to continue as last year’s favorite became this year’s dog.  Prices move when people change their mind, with so much negative sentiment, there is still lots of upside left, but expect a bumpy ride as we struggle with resistance at $38.

TSLA is the momentum flavor of the month, yet bears continue standing in the way of this steamroller.  What goes higher often keeps going higher until everyone gives up fighting it.  I have no idea if that is $140, $160, or $180, but anyone holding out for $300 is getting greedy.  All the recent sellers and shorts following the GS downgrade need to buy and that is providing lift up to $140.

Plan your trade; trade your plan

AM: No news is good news

By Jani Ziedins | Intraday Analysis

S&P500 daily at 3:25 EDT

AM Update

MARKET BEHAVIOR
The sideways meandering continues as we started higher, fell under breakeven by midday, and regained positive territory by late trade.

MARKET SENTIMENT
After early volatility, the Summer Doldrums are finally here.  Big money decision makers are on vacation, meaning we are not seeing any material buying or selling.  The market largely came to terms with all the negative headlines from Obamacare to Tapering and we are in a holding pattern waiting for what comes next.

The last couple of weeks had multiple false selloffs that quickly bounced back.  This cathartic process is purging weak hands and tempting aggressive bears to short.  The thing these pessimists need to be wary of is how easy and obvious the bear trade is given “too-far, too-fast”.  The big red flag is the easy trade hasn’t happened after multiple opportunities.  When the market has a perfect invitation to break wide open, yet bounces instead, that is a cheap warning the bearish thesis is flawed.  Fortunately for bulls, most traders are stubborn and hold their position well beyond the obvious exit.  With each passing day, bear’s confidence grows and they are building short positions because this is finally their moment to shine.  Unfortunately for them, while the previous 130-point move exhausted demand, this sideways trade is setting the stage for the next round of short squeezes.  There is nothing wrong making a bearish bet after such a strong move, but when a trade fails to work as expected, that is the time to get out, long before mounting losses force us out.

TRADING OPPORTUNITIES
Expected Outcome:
The longer we hold these levels, the more likely a continuation becomes.  Unsustainable buying climaxes within days.  Support here shows buyers keep holding and the path of least resistance is always higher when supply is tight.

Alternate Outcome:
Three-months ago the market went too-far, too-fast, yet here we stand at all-time highs.  The more people fight something, the longer these things go, but no matter what, this rally’s days are numbered.  It isn’t that the pessimists are wrong, just early.  At some point buying will exhaust itself and we will collapse into a correction when everyone least expect it.  The best sign will be stalling after an obvious bullish catalyst.  If this rally fizzles after breaking 1700, that is a great invitation to short.  There will be a lot of money made shorting this market, but the bull thesis needs to fail first.

FB daily at 3:25 EDT

INDIVIDUAL STOCKS
AAPL is just shy of making its first higher high in nearly a year.  Clearly shorts are providing a lot of this fuel, making a great short-term buying opportunity, but the bigger question is if this rebound is sustainable or just another bull-trap.  Swing-traders should move up their trailing stop and longer viewed traders can continue holding with a stop under the 50dma.  It is hard to imagine AAPL regaining its former glory since so many were burned by the recent selloff, but there is a lot of money to be made buying weakness and selling strength.

FB is making a push for its IPO price.  This has been a perfect sentiment trade.  Everyone loved it when it IPOed, meaning it had nowhere to go but down.  Then it dragged along for over a year and became the butt of jokes, which was the best time to buy it.  There are a lot of people short this name and this rally is not done yet.  Much like how NFLX was reborn, FB is following the same game plan.  Many are hoping AAPL will do the same, but the difference is revenue is growing strongly at NFLX and FB, where it is peaking at AAPL.  Similar technical setup, but the underlying stories are day-and-night.

Plan your trade; trade your plan

AM: Sideways is good

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:38 EDT

AM Update

MARKET BEHAVIOR
Stocks are down in early trade, continuing last week’s pattern of tight consolidation under 1700.

MARKET SENTIMENT
Traders are notoriously afraid of heights and hesitant to buy after a strong run.  Ten-percent in a month certainly qualifies as a strong run, but often what appears too-high keeps going.

There is a lot of crowd psychology behind the scenes that gives us insight into what comes next.  Stocks came a long way by steamrolling shorts and seducing momentum chasers.  This surge provided the powerful lift off of June’s lows, but the rebound stalled shy of 1700 a couple of weeks ago.  While short covering and momentum chasing are powerful forces, they don’t have staying power and quickly run out of gas.  This is exactly where we find ourselves and we must look for clues from other groups of holders and buyers for hints of what comes next.

Unsustainable buying often peaks and reverses quickly, but we have not seen that behavior in the recent consolidation.  This means while buying slowed down, we maintained current levels because existing holders are not interested in selling, keeping supply tight.  Traders often think of demand, but supply is equally important in determining price moves.  When the market hit recent highs, many short-sellers and profit takers sold shares, but this is a temporary weight on prices.  Once that selling abates, in combination with confident holders, the most likely outcome is a continuation higher.

TRADING OPPORTUNITIES
Expected Outcome:
The longer we hold these levels, the higher the probability this rally will continue.  Proactive sellers had their chance to sell and the market swallowed that supply without flinching.  I have no idea how much further this can go, but recent sideways trade indicates the next move is higher.

Alternate Outcome:
While every dip bounced, there comes a point when we run out of dip buyers and there is nothing to stop the next move lower.  Every selloff starts when traders are most confident and without a doubt recent strength is calming nerves, proving the doubters wrong, and encouraging buyers.  While the next move is likely higher, there are no guarantees in this game.  Even something with an 80% probability  of success should fail one out of five times.  No matter how sound and confident our analysis, we always need to look at the other side, and when all else fails, let our stops pull us out.

Trading Opportunities:
Recent stability suggests the next move is higher.  Shorts should reconsider, or at the very least use tight stops.  Aggressive swing-traders can hold with a stop under 1675.  Everyone else sitting on recent profits should wait for a better risk/reward, likely coming once the summer doldrums pass.  Expect volatility to continue and take profits early and often, especially on the short side.

AAPL daily at 2:38 EDT

INDIVIDUAL STOCKS
Deja Vu all over again.  AAPL retook the 50dma on better than expected iPhone sales and continues holding those gains.  Less-bad is rarely cause for exuberant celebration, but it was enough to give the stock some breathing room.  Recent speculation swirls around the iPhone5c, the colorful and cheap alternative to the more expensive flagship model.  Given the success of outdated iPhone 4 and 4s sales, any investor needs to come to terms with a material percentage of 5s cannibalization by the 5c.  Most people don’t need the power of  the latest and greatest and will be happily settle for the stylish younger sibling.  The bigger question for investors is if the hit to the flagship lineup will be offset by reclaiming market share losses to Android.  Technically speaking, all of AAPL’s previous bounces failed to make new highs and we need to trade above $460 to break the bearish trend of lower highs.

TSLA is burning the cynics yet again.  The stock was pounded a couple of weeks ago on an analyst downgrade, but those sellers are suffering regret as we make new all-time highs merely days later.  Stocks like this are not for the faint of heart a violent ride is par for the course.  Ignore the talking-head chatter, but fear signs the company is not living up to wildly optimistic expectations.  Maybe it is a PR snafu like NFLX’s bone-headed attempt to spit the DVD and streaming business, or tapering growth that took down the mighty AAPL.  Enjoy the ride up, but don’t get greedy and stay vigilant.

Sorry for missing a couple posts last week, but something came up that kept me away from my computer. Things are back to normal and look for the daily analysis to resume this week.

Plan your trade; trade your plan

PM: Time to run for cover?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks had their worst day in nearly a month, but all that highlights is what a benign ride its been.  Volume was below average, but the highest in recent days.

MARKET SENTIMENT
Rather than fear a 0.4% dip, we should embrace it.  Everyone knows we cannot go up every day, yet the first day we see any weakness and all of a sudden the sky is falling.  No doubt this could be the start of something larger and why it is always prudent to take profits after nice runs, but we are still well above support and claiming this is anything more than a normal down-day is trying to pick a top.

After such a strong rebound, we need selling to put fear back into the market and keep everyone honest.  The market doesn’t like being easy or predictable, so it throws in head-fakes along the way.  Of course it is up to individual interpretation to decide if the recent rebound or today’s weakness is the real head-fake.  There are always two sides to every market and only time will tell who is right.

TRADING OPPORTUNITIES
Expected Outcome:
As long as the market remains above support, we must assume the rebound is alive and well.  Countless bears have been carried out in body bags trying to pick a top and there is no reason to add to the body count here.  Recent support is 1675 and we only need to be concerned if we fall to hold that level.

Alternate Outcome:
I’d prefer seeing the market stall after breaking 1700 before placing a short.  A notable absence of buyers in a spot where buyers should pour in makes an easy short.  Stalling prior to 1700 is far less convincing and this could simply be a pause before attempting new highs.  This rally will eventually end like every other one before.  While it doesn’t feel like we are at the top yet, we must remain vigilant.  Slicing through 1675 is clearly bearish and likely means we will retest the 50dma.

Trading Plan:
Everyone wants a rally to pullback so they can buy more, but every time it pulls back, those same traders are too afraid to buy.

Holders can keep holding as long as the market remains above their stops.  Anyone with nice profits can lock them in and wait for the next trade.  Bears can short a violation of support and bulls can buy a bounce off it.  Chances are the summer volatility will continue, so take profits early and often because they will likely evaporate days later.

AAPL daily at end of day

INDIVIDUAL STOCKS
Following last night’s earnings release, AAPL is higher in what could best be described as a relief rally.  Profits, selling prices, and margins were all down, but the damage was less bad than feared and the stock rallied.  The silver lining was higher than expected “old” generation iPhone sales, but is this really a good thing?  If new customers think old phones are good enough, is that an early indication the previously dependable 2-year upgrade cycle is coming to an end?  If current generation phones are good enough, does that mean we are moving to a 4 to 5 year upgrade cycle typically seen with PCs?  It will be interesting to see how bulls fit this earnings report into their return to dominance thesis.

People often forget how Steve Jobs turned AAPL around.  In the ’90s AAPL was a bloated, do everything for everyone company.  It gave customers what they asked for and the income statement bled for it.  When Steve Jobs returned, he showed up with a machete and cut to the bone, eliminating all but four computers, a pro desktop, a pro laptop, a consumer desktop, and a consumer laptop.  Less is more was always Jobs’ driving vision, but it seems the new AAPL is drifting away from that strategy.

The original iPhone was launched with one carrier, in one color and the only choice customers had was 4, 8, or 16GB of storage.  It stayed that way for the next three iPhone releases before AAPL finally relented and started making a CDMA iPhone  4 for Verizon.  The next year brought white phone, Sprint, T-Mobile, and finally an unlocked phone.  Currently AAPL stocks 30 iPhones 5s to cover all these customer options and people wonder why margins are falling.  Yet investors are clamoring for big phones, cheap phones, and more colors, and if you believe the leaks, they are coming.  Peak margins came when AAPL gave customers 3 choices, but for comparison, lets see how many phones AAPL will need to stock if it adds a cheap phone, a big screen, and three colors.

5 colors * 5 wireless carriers * 3 models * 3 storage sizes = 225 varieties!!!

They might sell more phones, but at what cost?  Everything for everyone rarely works and it looks like AAPL is going to learn that lesson all over again.  The company thrived under Steve Jobs because it did not listen to customers and investors.  Only time will tell what happens next, but it doesn’t look good.

Plan your trade; trade your plan

AM: Holding short of 1700

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:48 EDT

AM Update

MARKET BEHAVIOR
Stocks trade sideways, just shy of the 1700 milestone.

MARKET SENTIMENT
All is good with the world.  Tapering is a distant memory and earnings are decent enough to keep us at all-time highs.  Summer volume is traditionally light while many of the big money managers are on vacation.  Low volume can exacerbate volatility when smaller positions start moving markets, but the last couple of weeks was relatively calm.  Holders keep holding and the resulting tight supply is propping up prices.  No one is excited to buy all-time highs, but they have no choice when few are willing to sell.

1700 is a psychological level and will likely lead to a short-squeeze and breakout buying when we push through it.  After that it is anyone’s guess how far we go.  Slow and steady is sustainable, a rapid surge higher is not.

TRADING OPPORTUNITIES
Expected Outcome:
Keep doing what is working.  Holding the 1680 level for nearly two-weeks is supportive of a continuation.  Unsustainable buying typically exhausts itself within days.  Maintaining all-time highs this long shows few holders are cashing in and their confidence keeps supply tight.

Alternate Outcome:
Every rally ends and even as invincible as this one is, its day is coming.  We are more than eight-months into this rebound off the November lows and most of the cynics have grown tired of the humiliation from incorrectly calling a top, but when they are giving up is when we need to be most vigilant.  I’m still waiting for an all new headline that is not priced in.  It probably won’t come for another month or two, but that will finally be the thing that lets air out of this rally.

Trading Plan:
Own this market with a stop under 1670 or 1685 depending on your risk tolerance and outlook. Look for a pop as it crosses 1700, but if the breakout fizzles and retreats instead, buying is drying up and it is time to lock-in profits.  It might even be time to go short with a stop above 1700.  Stay nimble and always be prepared to take profits when the market doesn’t act as expected.

INDIVIDUAL STOCKS
AAPL is reporting after the close.  The bar is dramatically lower and we wait to see if the lower expectations are justified.  This earnings report is one of the last fundamental catalysts left to justify the bull case.  Anything short of shockingly good numbers will likely leave the stock stuck in the lower $400s.   Investor infatuation with AAPL came and went and there is little the company can do short of a revolutionary new product to become a market darling again.  If AAPL’s earnings disappoint, expect the last of the hope to deflate and the stock to tumble into the $300s.

TSLA daily at 1:49 EDT

NFLX stumbled following earnings, but given how far this stock came this year and the sheer number of traders gunning for it, down 3% is pretty much a win.  Sideways trade that allows the 50dma to catch up is supportive of a continuation.  It doesn’t matter how overpriced this stock is, it still wants to go higher.

TSLA recovered most of last week’s downgrade.  As we discussed at the time, analyst ratings are just opinion and have nothing to do with the fundamentals.  While this accusation might be unfair, most analysts are analysts because they cannot trade.  Upgrades and downgrades create near-term waves, but their impact quickly fades.  Far more concerning is a wave of highly optimistic analyst upgrades.  AAPL didn’t peak when analysts downgraded the stock, it peaked when many upgraded their price targets to $1,000 and beyond.

Plan your trade; trade your plan

AM: How did we get here?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:37 EDT

AM Update

MARKET BEHAVIOR
Stocks coast higher and are within a few points of 1700.

MARKET SENTIMENT
The market is up 16 of the last 19 sessions as it defies all reason and logic.  Is it irrational?  Optimistically naive?  Or simply responding the only way possible given how traders are positioned?

Doubting this rally is the most crowded trade of the year, yet here we stand, 250-points higher and setting all-time highs.  Contrary to popular opinion, fundamentals and technicals don’t move markets, only buying and selling does that.  When too many people share the same outlook, they skew the market.  Traders doubting a move sell, some even go short.  This selling naturally purges cynics and replaces them with believers.  Believers who are willing to hold in the face of weakness and uncertainty.  That resolve keeps supply tight and leaves little room for the market to do anything but go but higher.  To this point patience and faith has been rewarded while those trying to outsmart the market footed the bill.

This rally soundly defeated every worry and concern cynics threw at it.  When is the last time anyone heard Fiscal Cliff, Sequester, or Cyprus?  Even Tapering is already falling off the front page. Ignoring what everyone is obsessing over is the single most difficult part of contrarian investing, but that has been the only trade to make this year.  If markets climb a wall of worry, we need something to worry about to keep propelling this rally.  The only thing I see is stubborn bears clinging to their negative outlook and this will likely let this market coast a bit higher.  After that, there is little worry left since the market already conquered everything else.  If fear fuels rallies, we need to be concerned if the tank is getting low and is something to keep an eye on.

TRADING OPPORTUNITIES
Expected Outcome:
The wind remains at the market’s back as it overcomes people’s fear of heights, but we are approaching the end of this move.  I have no idea if we will coast up to 1750 or higher in coming weeks, but it feels like the market is setting up for a Fall correction.  Nimble traders can stay long with trailing stops, but don’t get lulled into complacency by the benign headlines.

Alternate Outcome:
The most defiant rally in recent memory keeps going.  As investors sour on bonds and foreign equities, those fund flows can continue propping up US equities for months, even years to come.

Trading Plan:
Stay long this market with a trailing stop under 1680.  While of no technical significance, traders think in round numbers and 1700 is a major psychological milestone.  It could act as resistance, but look for a pop once we break through due to short-covering and breakout buying.

This market could be setting up a double-top, but let the momentum carry it a bit higher before attempting a short.  The top will only come after people stop talking about it.  Watch the headlines for the next big fear that is not priced in and be ready to ride that wave lower.  Don’t jump the gun and be prepared to wait a couple of months for the right opportunity.

And as always, after a nice run like, there is nothing wrong with taking profits and waiting for the next high-probability trade.

MSFT daily at 2:37 EDT

INDIVIDUAL STOCKS
Everyone is piling on the hate for MSFT and they deserve it after a lousy quarter, but it is foolish to assume tablets will replace computers.  We don’t need to look any further than our own driveways to see the logic people use when making purchases.  I’m making up numbers here, but something like 95% of all car trips are with a single occupant, yet  most cars have four seats.  What’s up with that?  One-seat cars would be faster, more fuel-efficient, better for the environment, and significantly less expensive.   How come no one buys them?  We don’t buy things that work most of the time, but ones that fit all our needs.  We buy cars for the  handful of trips a where we need all the seats and the same will happen with PCs and tablets.

Tablets are great, but can they replace computers?  Certainly not in their current incarnation where the most useful applications are nothing more than simple calendars and to-do lists.  People love their tablets, but I have yet to meet anyone who gave away their computer and moved exclusively to a tablet.  Tablets are an add-on, not a replacement to the utility of a PC.  In fact, I think Windows is the biggest threat to GOOG‘s Android and AAPL‘s iOS.  These are mobile operating systems designed specifically for low-power tablets, but in the very near future we will have full-power tablets capable of running Windows well.  When most of the cost of a tablet is in the screen, case, and battery, stepping up to a full power processor will be a minor upgrade and a far simpler solution than the PC/tablet combo people currently use.  Give me the portability of a tablet and the power of a desktop, I’m sold.  In a world where tablets are PC’s, is anyone going to buy GOOG’s and AAPL’s one seat-car when they could step up to MSFT’s four-seat model that covers all their needs?  Looking forward five-years, most likely our phone will be our primary computer.  Tablets and desktops will simply be docking stations for our full-powered phones.  In a world of no compromises, MSFT is still the king of productivity and dedicated mobile operating systems will soon be as obsolete as the 8-track.

The key to making money in the markets is seeing what comes next.  If we want to trade the future, who is best positioned to exploit full-powered tablets?  While the Surface is rough around the edges, that is clearly the direction tablets are going.

Plan your trade; trade your plan

AM: The tapering rally

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
We surged to all-time, intraday highs in early trade.

MARKET SENTIMENT
There is what the market should do and what the market will do.  Too often traders get the two mixed up.

Another rough day for bears as they scramble for cover.  Somewhere along the way the widely expected Tapering collapse turned into the Tapering rally.  Who would have guessed, but that’s what we get for thinking too much about what the market should do instead of focusing on how other people trade it.  The market is nothing more than a crowd of people trading their opinions and biases.  When all the nervous sell and pessimists short, we run out of sellers and rally on tight supply.  There is no magic to this, it is simply Supply and Demand 101.

We started the year with a laundry list of items justifying a market selloff.  Obama’s reelection, Fiscal Cliff, Sequester, Debt Ceiling, negative GDP, Europe/Cyprus, and countless others.  Tapering was the latest worry and the market was bent out of shape over it for a few days.  But since it was such a widely expected event, we knew it was mostly emotional selling and it would exhaust itself quickly, which is exactly what happened.

While not completely past Tapering fears, new all-time highs are quickly eliminating most anxiety.  After traversing all those dark clouds the first six months of the year, it finally feels like we are getting to a place where the sun is shining.  After we Tapering, I cannot think of anything the crowd is obsessed with and that makes me nervous.  While we can safely ignore what everyone is talking about, we should fear what no one sees.  I don’t know what it is and when it will happen, but there is trapdoor out there somewhere and it will catch us by surprise.

TRADING OPPORTUNITIES
Expected Outcome:
Little doubt this early strength was driven by short-covering.  This leads to a flurry of buying, but expect the rate of gains to taper because most traders have a natural fear of heights and are reluctant to buy all-time highs.

Alternate Outcome:
Markets climb a wall of worry and if we are running out of things to worry about, then the rally will run out of fuel.  We are not there yet because plenty of recent sellers will chase the market higher, but once they buy-in, demand will taper off.

Trading Plan:
Move our trailing stops up and see where this will go.

Plan your trade; trade your plan

AM: The Tapering rally

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR
Stocks rallied following yesterday’s dip, the first red-day in nearly two-weeks.

MARKET SENTIMENT
Bernanke told Congress Tapering will begin before the end of the year and the market rallied on the news.  No doubt this positive reaction is leaving many dumbfounded because June’s plunge was predicated on fears of Tapering.  Just a few weeks ago the world was ending because of Tapering, but now it’s a good thing?

Hopefully this reaction doesn’t come as a surprise to regular readers of this blog.  Anyone afraid of Tapering sold in last month’s emotional selloff, meaning those still holding this market are not worried about tapering.  When Bernanke didn’t just hint or suggest, but full on said Tapering will happen by the end of the year, it was met with a yawn by the markets.  All the Tapering selling happened weeks ago, meaning there was little selling left for today’s announcement.  As people trade their biases and outlook, they price in those expectations.  This is the exact reason markets “sell the rumor and buy the news”.

The market only appears irrational when we don’t understand how it works.

TRADING OPPORTUNITIES
Expected Outcome:
While the market briefly violated 1675, it held support in principle.  The market is too sloppy to draw technical lines with a straight edge.  Crayons are better tools because technical levels are regions, not lines.  This makes things a little more difficult for a trader because our stops are  specific points and we are forced to pick an exact level to get out.  This is why it is usually prudent to give ourselves a little cushion under support when picking our stops.  We expose ourselves to a little more downside risk, but we reduce the chances of getting shaken out prematurely.

What is encouraging is the market briefly violated a widely watched level, but reclaimed it by the close.    The weakness invited holders to bailout, but they hold strong instead.  This strength suggests all-time highs and 1700 are easily within reach.  How much further is anyone’s guess and we need to be careful because the risk/reward changes with every point higher.

Alternate Outcome:
As tapering fears disappear, that makes me nervous.  I largely ignore the crowd’s worries because they represent buying opportunities, but as we keep eliminating one worry after another, I get nervous.  By its nature the market is a paranoid beast and it cannot go long without fixating on the next impending catastrophe.  Since the market moved past Fiscal Cliff, Sequester, Cyprus, and now Tapering, it is ready for a new obsession, one that is not priced in and will take the market by surprise.  The trend is higher in the immediate future, but keep an eye out for the real selloff everyone’s long been waiting for, but more recently started forgetting about.  It is coming.

Trading Plan:
We can own the market with a stop at 1675 and look for a move above 1700 but how much further is anyone’s guess.  The risk/reward is not very favorable, so we must be careful.  For those that locked in nice gains recently, there is no reason to force a trade.  Remember, it is easy to make money in the markets, the hard part is keeping it.

Plan your trade; trade your plan

AM: On the ninth day we rested

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:02 EDT

AM Update

MARKET BEHAVIOR
Stocks are lower, flirting with near-term support at 1675.

MARKET SENTIMENT
We know the market cannot go up every day and a few down days here and there is a healthy part of continuing higher.  The question for traders is if this is simply a test of support, or the start of another swing to the lower end of the trading range.

Today’s weakness is an invitation for swing-traders to short the market and pressure the few remaining paranoid holders that haven’t locked-in profits.  If this selling cannot build momentum to the downside, it shows bulls still have the upper hand and most of the proactive profit-taking and short-selling is already behind us, clearing the way for a continuation higher.  On the other hand, if this rally is built on a weak foundation of little more than short-covering, we could see the rebound collapse past 1650 and challenge the 50dma at 1635.

Four-days is the magic number for holding a big advance.  The first three-days is propped up by short-covering and breakout buying.  While this group of speculators is small, they heavily influence near-term moves when they plunge in and out of the market simultaneously.  Once that tsunami of short-term trading comes and goes, we see how the longer-viewed investors trade the market.  These are the big-money guys with deep pockets and they steer the larger trends.  Failing to hold 1675 today shows larger investors are not supporting this advance and we will likely drift lower until we reach a level they are willing to buy.  Maintaining 1675 shows the big guys are believers.

TRADING OPPORTUNITIES
Expected Outcome:
The next few days will tell us a lot about the sustainability of this rebound.  Finding support in the face of early weakness suggests new highs and 1700.  Failing 1675 and closing materially under it shows big money is not a believer in these levels.  Right here the market is largely in no-man’s land and could break either way.  The best way to trade situations like this is wait for the market to make its move.  Continued weakness is an invitation to short, recovering gives the green light to buy.

Personally I’m a big fan of selling into strength because it gives me the mental clarity to evaluate situations like this without the emotional baggage of fear and greed.  No one can consistently top-tic the market, so traders must decide between selling early or selling late.  I’m an early kind of guy, but there is no wrong answer and it largely depends on a trader’s personality and trading plan.  As long as we stick to our plan, both strategies work well.

Alternate Outcome:
While we sit here waiting for the market to show its hand, we must prepare for the inevitable head fake.  Often the market will crash through support and trigger a wave of stop-loss selling before exhausting supply and bouncing.  That is the biggest problem with trading the obvious technical levels everyone else is watching.  Tight stops are the best way to deal with head fakes and if we get caught in one, be flexible enough to do a 180 and go the other way if the market clearly refutes our initial expectation.  When the market has a perfect setup to do what we think it should do, but it goes the other way, that is a powerful trading signal and we need to exploit it.  The 1560 bounce in June is a perfect example of this type of counter intuitive reversal.

Trading Plan:
Wait for the market’s next move.  Holding 1675 is bullish.  Stalling and closing materially under it means we ran out of buyers.  The market remains volatile and is still in the trading range, so keep harvesting worthwhile profits early and often because they will likely be gone days later.

TSLA daily at 2:01 EDT

INDIVIDUAL STOCKS
A wild and crazy ride in TSLA, down nearly 20% since yesterday morning, but that is par for the course in these hugely speculative names.  A downgrade by GS is the excuse for this selloff, but obviously the stock was frothy and needed to blow off steam.  For the TSLA bull, analysts ratings are nothing but personal opinion and rarely have a sustainable impact on stock prices.  This stock will tumble like every other high-flyer before it, but it will happen on a major sentiment shift driven by changing fundamentals in the company, most often a deceleration in sales and earnings.

Plan your trade; trade your plan