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AM: The start, or the end?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:29 EDT

AM Update:

MARKET BEHAVIOR
Stocks continued sliding this morning, but found support just above 1600 in midday trade.

MARKET SENTIMENT
Is Chicken Little finally right?  Every other prediction of doom and gloom this year was met with a powerful rebound, will this time be any different?  This is the “overly-bullish” market everyone loves to hate; but if the crowd hates it, can it really be overly-bullish?

Weeks ago we identified the 1600-1700 trading range and so far this “plunge” is still within the expected range.  Everyone is tempted to sell the least surprising Fed statement that QE continues at full speed but tapering is in the future.  If that caught anyone by surprise, clearly they are not paying attention.  No doubt some of the disappointment stems from hope Bernanke would be more supportive of QE and dispel rumors of tapering later this year, but should a few months here or there radically change our investment thesis?  Some people seem to think so, but aren’t these the pessimists already out of the market and actively short it?  Should we really trust what they have to say?

We can safely ignore people promoting their existing biases because they already placed their trades and are simply along for the ride.  The only traders controlling the market are the ones changing their minds.  Maybe they are rationally evaluating new information and acting on it, or maybe they are impulsively reacting to market moves, but either way, only people actively buying and selling are driving prices.

Every dip this year ended in a bounce when we ran out of sellers.  When everyone expects a market top, they sell ahead of it, taking excess supply with them.  By the time the expected event rolls around, there is no one left to sell, keeping supply tight and we have nowhere to go but higher.  Will it be different this time?  The market obsessed over “tapering” for more than a month and the recent 5% slide flushed out many weak holders.  Given that setup, I have a hard time identifying where the next incremental seller comes from.  The only thing left is an irrational rush for the exits, but so far the majority of holders demonstrated a willingness to own stocks in the face of recent weakness.  There are no guarantees in the market, but calm and confident holders make the rebound far more likely than a collapse.

TRADING OPPORTUNITIES
Expected Outcome:
Everyone wants a strong market to pullback so they can buy more, but every time the market pulls back, they get scared and chicken out.  Anyone following our game-plan of taking profits early and often in this volatile trading range can use today’s dip as a great entry with a tight stop under support.  This will be a choppy summer and if we fail to capture profits when we have them, they will likely evaporate days later.

Alternate Outcome:
This market will breakdown at some point because every market does.  While markets rarely collapse when everyone expects it, we need to play defense so close to major support.  Everyone is watching 1600 and many have stop-losses under this key level.  Breaking it could trigger an avalanche of stop-loss orders sending us sharply lower.

GLD daily at 2:29 EDT

Trading Plan:
The dip is buyable until the market tells us otherwise.  A lot of selling happened over the last couple of days and weeks, meaning there are fewer nervous holders left to flood the market.  We might dip under 1600 in one last flush before bouncing back into the trading range, but the dip is buyable with a tight stop under 1595.  Only short the market if we accelerate through 1595 and no one is buying the dip.

INDIVIDUAL STOCKS
GLD  was hammered today.  The safety trade is leading the plunge and demonstrates why we don’t try to catch falling knives.  There are a lot of owners still hanging on and hoping for the bounce, meaning there are plenty of sellers left.

AAPL is down, but less than the broad market.  Failing to hold recent support is troubling and any disciplined long is already of out this stock.  If it bounces, we can easily jump back in, but there is no excuse to rid this stock lower.

Plan your trade; trade your plan

PM: Sell the hype?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks sold off on average volume and finished under 1630 following the Fed’s policy statement and Bernanke’s comments.

MARKET SENTIMENT
The Fed shocked everyone when it announced it would eventually unwind QE.  Okay, all sarcasm aside, the market was disappointed Ben didn’t do more to appease it by promising easy money as far as the eye could see.  The funny thing is many of the people who last year claimed another round of QE wouldn’t work because of diminishing returns and inflation are the same ones saying this market will implode as soon as the QE punch bowl is taken away.  Last year QE didn’t matter, now it is the only thing that matters.  Once a pessimist, always a pessimist.

As we discussed earlier, this gradual ramp of expectations into the inevitable tapering is good for market stability   All the talk of QE ending is already pricing it in and the actual event will be a non-issue, but that is then and this is now.  What should we expect in coming days and weeks?  Is the bubble finally deflating, or is this just another bump in the road?

Average volume showed not many were rushing for the exits.  Markets only move when people change their minds and trade their new outlook. If we expect a directional move here, we need to identify who is changing their mind.  Was the Fed’s policy statement and Bernanke’s comments so out of line from expectations that a large wave of traders are changing from bullish to bearish, or bearish to bullish?  That is a hard argument to make since the Fed’s statement was nearly a word-for-word carbon copy of past statements.  The only notable change is positive comments about the economy.   Talk about a bizarro world we live in when traders are afraid of good economic news.

If bulls and bears are not changing their minds on these headlines, today’s selloff was simply event traders pushing around the market.  Without follow-on selling from a larger pool of holders, look for the selloff to stall and bounce back into the trading range.

TRADING OPPORTUNITIES
Expected Outcome:
Volatility was expected and pulling back after recent gains shouldn’t surprise anyone.  We anticipated a summer trading range and so far this market is following the plan.  Look for it to bounce somewhere between here and support at 1600.  The more anxious the crowd gets over the selloff, the quicker it will end.

Alternate Outcome:
While a bounce seems likely since this news changes few minds, we must be prepared for the inevitable selloff.  At some point we will run out of buyers and without demand, nothing else matters.

Trading Plan:
We might see further downside, but look to buy the weakness with a tight stop under support.  We could temporarily dip under the 50dma and the rebound back above it is the buy signal.  Anyone short this market should cover and lock in gains.  Profits are fleeting for both bulls and bears in this sideways chop, so take them early and often before they evaporate.

AAPL daily at end of day

INDIVIDUAL STOCKS
AAPL broke recent support and anyone trading the bounce off the 50dma should be long gone by now.  The inability to stage a comeback after holding the 50dma for nearly two-months shows few are interested in buying the dip.  Further weakness will likely trigger more stop-loss selling and a test of support at $400 is the next stop.

GLD tanked on hints of the end of easy money.  Runaway inflation is a core tenet of the gold-bug’s investment thesis.  Without monetary instability  there are few reasons to own a useless metal brick.  Violating recent lows could trigger another wave of selling, but if the market fails to collapse after making new lows, it shows we are running out of sellers and the dip is buyable.  In this case, let the price action be our guide.

Plan your trade; trade your plan

AM: How to trade the Fed

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:31 EDT

AM Update

MARKET BEHAVIOR
Stocks are doing a lot of nothing leading up to the Fed’s 2pm Eastern policy statement.  We are in the middle of the recent range between 1600 and 1690 and there is plenty of room for the market to react without leaving the trading range.

MARKET SENTIMENT
Will the market really be surprised by anything the Fed has to say?  The Fed will most likely continue QE for the time being, but is looking for opportunities to scale back the program when the time is right.  Everyone knows and expects that statement, but it will obsess over every noun, verb, adjective, and preposition in the statement trying to sniff out any kind of clue indicating the tapering will occur sooner than previously expected.

But lets not make the mistake of assuming news drives the market.  This headline is simply an excuse for people to trade their dispositions and outlook.  If they fear QE ending, they are already out.  If they are indifferent to QE ending, they are committed to holding in spite of what the Fed has to say.  Some news based traders will try to get ahead of the next big move and will push the market one way or the other, but invariably the market will snap back because everyone is already positioned for their current outlook.  Once the news driven guys blow their load, there will be little follow on buying/selling to continue that move and it will stall.  At least that is the way it played out every other time over the last six-months.

The one exception is if the Fed is more decisive this time, either committing to massive QE through 2014, or alternately signaling tapering before the year is up.  These unexpected revelations are more likely to generate a directional and sustained move because it will change traders’ outlook on the future, leading them to adjust their portfolio to match their new view of the future.

TRADING OPPORTUNITIES
Expected Outcome:
Expect volatility to continue.  I would be tempted to fade the market’s initial reaction to the Fed.  If it is spooked, look for a bounce off of the 50dma or 1600.  If we surge, look for stalling around 1690.

Alternate Outcome:
If the Fed rocks the boat and startles the market with an unexpectedly bold policy statement, look for a lot of buying or selling by those on the wrong side of the trade.  It seems unlikely the Fed will be so brash given how measured they have been in the past, but we must expect the unexpected.

Trading Plan:
If the market’s initial reaction is making a big deal over nuance, fade the move when it approaches support or resistance.  If everyone is floored by the Fed’s comments, trade the ensuing stampede where people are changing their portfolio to match their new outlook on the future.  Markets only make sustained moves when people change their mind, so only make a directional trade if the news is converting bears or bulls to the other side.

Plan your trade; trade your plan

PM: Why we keep going up

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks broke above recent resistance at 1649 on light volume.

MARKET SENTIMENT
Stocks move for one of four reasons, rush of buying, rush of selling, lack of buying, or lack of selling.  Today’s low volume rally was built on a lack of selling.  Holders are very comfortable holding and anyone who wanted to buy had to pay a premium to pry shares from the market.  There is a lot of noise surrounding the Fed meeting and Bernanke’s tenure, but the uncertainty doesn’t faze holders. No matter what anyone says about this rally and market, confident holders equals tight supply equals higher prices.

TRADING OPPORTUNITIES
Expected Outcome:
The market had the perfect invitation to selloff the last few weeks, but the rebound shows it isn’t ready for the widely expected correction.  No matter what our outlook is, we must respect the price-action.  While the rally might not continue at the previous rate, betting on a market crash is the wrong trade.  Expect the volatility to persist, but use it to buy weakness and sell strength.

Alternate Outcome:
One of these days bears will get it right, most likely after their accounts are dead and buried, but they will be right.  Predicting the markets is easy, getting the timing right is where all the money is made.  Keep watching for signs buying is drying up, but don’t short the market before then.

Trading Plan:
We are pushing into the upper half of the trading range and should move up our stops and look for strength to sell.  I have no idea if this rebound will stall at 1660, 1675, or 1700; the best we can do is figure out how much profit is enough and let someone else pick the top.  I still think there is a little more upside remaining, but move our trailing stop up to 1650 and be ready to sell when we are most reluctant to sell.

TSLA daily at end of day

INDIVIDUAL STOCKS
GLD had another bad day, but remains above support at $130.  Any knife catchers need to use a stop-loss to avoid being pulled down by another leg lower.  The market wants to test $130 and from there it could go either way.  Buy the bounce or short the breakdown, both with a tight stop near $130

TSLA is holding up and will likely put the hurt on bears yet again.  Climax tops collapse fairly quickly and holding near $100 for several weeks is anything but quick.  There is no reason to own this stock here, but it is suicidal to short it.  There is nothing wrong with shooting at a highflier, but recognize when the trade is not working and pull the plug.  Betting against a strong stock takes patience and discipline.  Note stubbornness is not on that list.

Plan your trade; trade your plan

AM: More pain for bears

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:18 EDT

AM Update

MARKET BEHAVIOR
Stocks surged in morning trade, but leveled off near 1650 by midday.

MARKET SENTIMENT
Bears are flabbergasted by recent strength. All their analysis and insights say this market is overly-bullish, extended, and ready to breakdown, but they need to ask themselves why it is not acting like it should.  The biggest mistake these investors make is assuming the market will behave like everyone expects.

Markets are the greatest discounting mechanism ever conceived.  Anything widely known and expected is already priced in.  All of the traders predicting a market implosion sold out long ago.  When too many people predict doom and gloom, they take all that supply out of the market in a “sell the rumor” phenomena.  By the time the expected event rolls around, there is no selling left and the widely expected collapse never happens simply because everyone sold ahead of time.

Then comes the “buy the news” phase where the actual event is less bad than feared.  Once the event happens, all risk and uncertainty evaporate, add to this the tight supply because all the selling occurred earlier, and that is the perfect recipe for a bounce.  The market is far less irrational when we understand what really makes it move.

TRADING OPPORTUNITIES
Expected Outcome:
The recent bounce diffused any and all downside momentum.  Selloffs happen quickly and this market had every opportunity to crack wide open, but it held firm instead.  That shows there are few left to sell weakness and most holders are in this for the long-term in spite of near-term volatility.

Alternate Outcome:
Buying the dip is a tired trade and what becomes too obvious stops working.  While we might not be there yet, the day is coming when dip won’t bounce.  Failing to hold support will be our signal the market’s personality is changing.

AAPL daily at 2:18 EDT

Trading Plan:
We are now in the middle of the recent trading range.  If we climb to 1660, move our trailing stops up to 1650 to ensure we keep recent gains.  When the market moves up to 1670-1680, start thinking about locking in profits ahead of the dip back into the heart of the trading range.  At this point move stops up to our buy point and don’t allow this winning trade to turn into a loss.

INDIVIDUAL STOCKS
AAPL is stuck just under the 50dma and not enjoying the broad market’s strength.  Most still believe in the earnings power and brand equity in this name, meaning the stock is fully valued and those waiting for a return to the easy buy-and-hold days will be frustrated by the anemic trade.  Clearly this stock does not want to go higher, the only question is if it is done selling off.  I still think a dip to $350 is required to finally flush out the hopeful still hanging on.

Plan your trade; trade your plan

PM: Do we need the Fed?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks recovered Friday’s selloff and finished near recent resistance at 1640.  Volume was higher than Friday, but below average.  Technical support is back at the 50dma and 1600 while near-term overhead resistance is 1640 and 1649.

MARKET SENTIMENT
Everyone is waiting on the Fed.  Will Ben restate his unwavering commitment to easy money, or drop hints at the eventual unwinding of QE.  Personally I don’t think it matters.  Recent selloffs in our equities and bonds as well as the implosion going on in Japan shows central banks really don’t have as much control over the markets as people give them credit for.  The only reason Ben has been successful at keeping rates low and inflating equity prices is because investors are willing to go along.  An analogy would be a four-year-old walking a huge dog.  As long as the dog is listening to the little girl, everything works great, but as soon as that dog spots a rabbit, there is nothing the girl can do to stop him.

Now many will use this argument to say the markets will spiral out of control, but I’ll take the other side and say the markets are at these levels not because of the Fed, but because they want to be here.  Fed or no Fed, the market likes these levels.  This is even more true with the recent pricing in of the eventual end of QE.  Everyone who fears an imploding market upon the withdrawal of QE is already out.  Everyone left is far less worried about it simply by the fact they continued holding through recent volatility and uncertainty.

Without a doubt an unexpected and abrupt end to QE would shock the system and trigger a huge wave of panic selling, but Ben and the rest of the Fed members know this.  These subtle hints from the Fed are one way to help the markets begin the transition by letting us gradually price it in.

TRADING OPPORTUNITIES
Expected Outcome:
It would be surprising if Ben or the Fed came out with something that spooked the market.  Between the recent equity and bond selloff, they will be walking on eggshells because they don’t want to let a stray comment undo all the progress we made over the last year.  The Fed’s mandate is unemployment, but they understand the relationship between the markets and business leader’s confidence about the future.

Alternate Outcome:
The only reason stops exist is to protect us when we are wrong.  No matter what we think, we must have a good defense.  A swift selloff under the 50dma and 1600 moves us to a highly defensive posture.  No matter what happens, it is better to be out of the market wishing we were in, than in the market wishing we were out.  I don’t mind seeing the market bounce after a defensive sell because I fully appreciate all the times it saved me.

Trading Plan:
Expect volatility to continue, but most of the selling is already behind us.  The market remains holdable until we approach the upper end of the trading range.  Use the 50dma as a trailing stop.

Plan your trade; trade your plan

AM: Support continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:51 EDT

AM Update

MARKET BEHAVIOR
Stocks are up, recovering all of Friday’s losses and then some.  Support at the 50dma continues holding as the market put in a floor following May’s selloff.

MARKET SENTIMENT
A tough day for shorts as the obvious selloff fails to arrive on schedule.  The market bumped its head on 1649 last week and no doubt many shorts are using that prior peak as a stop-loss.  If we break above it, look for another wave of short-covering to fuel the next leg higher.

Trading against the trend is always a tough game and unfortunately many bears failed to lock-in profits when we pulled back to 1600.  The best trade of 2013 is assuming every dip will bounce and for anyone betting on the breakdown, its been a rough year.  When trading with the trend, we can let our bets ride, but we must be far more nimble when trading against it.

One of the most fascinating aspects of the market is both bull and bear can be right at the exact same moment as long as they both sell right.  In a volatile market like this, that means locking-in profits when we get them.  Of course the other edge to that sword is both can be wrong if they time their sales poorly by holding too long.  The best trade remains taking profits when we are most confident and initiating trades when we are most fearful.  It doesn’t always work, but it does well enough that the profits easily offset the losses.

The financial press claims this bounce is due to hope the Fed will reassure markets following recent uncertainty about the future of QE.  It is not a bad way to spin things, but the truth is those that feared QE ending abandoned ship over the last few weeks, selling to buyers far less concerned about it.  That self-selection left us with an ownership base less concerned with QE and is the real reason behind recent strength.  The market is not a unified entity, but a crowd that is constantly turning over.  If we flush out the fearful, then all we are left with is the confident.  Confident owners equal tight supply and tight supply equals higher prices.

TRADING OPPORTUNITIES
Expected Outcome:
There is little downside momentum left in the market as the recent tests of support failed to trigger wider selling.  Clearly holders are not afraid of a little weakness and their confidence keeps supply tight.  The pressure is on bears and look for the market to rally in the face of their pessimism.

Alternate Outcome:
This market will rollover when we least expect it and is why we must continue discussing the risks and not become complacent just because the market is moving our way.  Recent bounces off the 50dma and 1600 add weight to these levels.  If everyone is following these obvious levels, expect the crowd to rush for the exits on the same technical signals.

Trading Plan:
Continue betting on the bounce with a stop under the 50dma, but expect volatility to continue and take profits in the upper half of the 1600s.

NFLX daily at 1:51 EDT

INDIVIDUAL STOCKS
Yet another short-squeeze in NFLX as the stock gaps higher on content related news.  Finding support at the 50dma and bouncing in high volume creates a valid entry point with a stop under recent lows.  What cannot go any higher keeps going higher.

Not to be left out, AMZN is also challenging the upper end of a six-month consolidation.  A high-volume breakout is buyable, stalling makes an interesting swing trade back into the consolidation.

On the other side, the buy of the decade remains dead money as AAPL cannot breakaway from the 50dma, but following the massive selloff, we cannot complain about sideways.  Anyone betting on the stock’s recovery better be patient.

Plan your trade; trade your plan

PM: Holders keep holding

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
The volatile trade continues as the market gave up nearly half of Thursday’s gains.  Volume was extremely light as no one felt like trading ahead of next week’s Fed meeting.  The market remains above the 50dma and so far is respecting this widely followed technical level.

MARKET SENTIMENT
The market fell on a lack of demand, as indicated by the light trade, not a surge in selling.  This shows owners are content holding and those sitting out of the market are staying out.  Confident holders are bullish because they don’t sell modest weakness, keeping supply tight.  Those sitting out of the market will eventually come around because there are few things as persuasive as seeing other people make money.  The rally from the November lows made everyone forget about Obama’s reelection, the fiscal cliff, debt ceiling, sequester, and Europe.  In no time people will forget about the QE overhang too.

We don’t trade fundamentals or technical, we trade other traders.  When everyone fears something, they trade it, diffusing the situation by pricing it in the market ahead of time.  All this chatter over QE ending is good because those that fear it are already out of the market.  Anyone left isn’t worried about it and won’t panic when it happens.  In fact the market will probably rally on the end of QE simply because after everyone sells, supply dries up, and there is nowhere to go but higher.  But I’m getting ahead of myself, tapering many months away and the Fed will likely continue buying bonds for at least another year.

TRADING OPPORTUNITIES
Expected Outcome:
As long as the market continues holding support we have the green light to buy dips.  The market is entering a volatile summer consolidation, so take long and short profits quickly because they will likely evaporate days later.

Alternate Outcome:
Keep an eye on support and move to a defensive stance if the market retests those levels next week.  Eventually this market will run out of buyers and we will get the correction everyone’s been waiting for, but it will come long after everyone gave up waiting for it.

Trading Plan:
It is okay to hold here, but keep stops just under the 50dma or 1600 level.  We have no idea if the market will survive another test of these levels, so the most conservative thing is stepping aside.  It is better to be out of the market wishing we in than in the market wishing we were out.  Don’t short the market until we break support and hold longs until we get close to 1670.

LNDK daily at end of day

INDIVIDUAL STOCKS
AAPL closed under the 50dma on extremely light volume.  The half-full side shows holders are not rushing for the exits and comfortable holding a little technical weakness.  Selling often begets more selling, so seeing calm and restraint here is positive.  The half-empty side shows dip-buyers are no longer defending this level.  While holders are calm following a modest dip, if the slide continues, expect anxiety to pick up again.  Anyone long this name with a stop under the 50dma should either be out, or on their way out if they gave themselves a little extra cushion.  There is no reason to hold this stock for another leg lower.  The first loss is always the smallest.  If the stock reclaims the 50dma, it is easy enough to buy back in.

LNKD reclaimed the 50dma on huge volume.  This is a valid entry if someone was looking for an excuse to buy.  Put a stop near or under the recent consolidation.  If someone is short, this is your warning to cover.

Plan your trade; trade your plan

AM: Seesaw continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:48 EDT

AM Update

MARKET BEHAVIOR
Stocks gave up half of Thursday’s gains by midday as the volatile trade continues.  While this is the third down-day out of the last four, surprisingly we are still in the middle of the selling range because of Thursday’s powerful gains.

MARKET SENTIMENT
As bad as it feels, very little real damage occurred.  While everyone is freaked out about Japan and the Fed, we are only 3.5% from all-time highs.  There is a lot more bark to this selloff than bite.  This further reinforces the notion there are few potential sellers left in the market.  Everyone holding stock is in it for the long haul and not worried about near-term volatility or weakness.  This keeps supply tight and prices strong.  As much noise as bears are making, the price action simply doesn’t support their investment thesis.

TRADING OPPORTUNITIES
Expected Outcome:
Volatility is just a way of life this summer.  Bulls and bears betting on the breakout/breakdown will be chasing their tail all summer.  The obvious selloff resulted in an obvious rebound, which was followed by today’s decline.  In environments like this buy weakness, sell strength.  Don’t chase moves and lock in profits when we get them because they won’t last long.

Alternate Outcome:
We still need to keep a way eye on the 50dma and 1600.  The longer we hold near these levels, the larger the pile of stop-losses under this level becomes.  Obvious support is trouble for markets because it leads to everyone running for the exits at the same time and that surge of supply crushes prices, triggering even more selling.

Trading Plan:
Yesterday’s bounce shows supply is tight and it is okay to hold this market, but expect volatility to persist.  Take profits early and often because no one knows where the next zig or zag will happen.  A swing-trader with a slightly longer view can hold into the upper half of the 1600/1700 range before locking in profits.  Any violation of the 50dma will force us to get defensive and evaluate the potential for more weakness.

GOOG daily at 1:48 EDT

INDIVIDUAL STOCKS
AAPL cannot breakaway from the 50dma.  There is plenty of support for AAPL here as income investors buy up the recently increased dividend, but these buyers are extremely price sensitive and demand dries up quickly any time the stock ventures too high above current levels.  With this week’s developer conference, another bullish catalyst came and went without reinvigorating investors.  Like any other popular trade before it, favorite stocks come and go.  GOOG is the new cool kid on the block and has the best shot at break the quadruple-digit ceiling that everyone was predicting for AAPL last summer.  Success in the markets is about identifying the next winner, not stubbornly holding on to yesterday’s.

Plan your trade; trade your plan

PM: Another short-squeeze

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks staged an impressive rebound off the 50dma on restrained volume.  This was the second test of this widely followed moving average in the last couple weeks, but so far support is holding up.

MARKET SENTIMENT
Today’s gains caught shorts off guard as the obvious breakdown failed to breakdown.  When the market doesn’t act as expected, we must reconsider our entire investment thesis.  Bears are convinced this market is overly-bullish, but the contrarian trade isn’t about what we think, it’s about what other people think.  Bears made the mistake of assuming strong prices means everyone is bullish, but what they really need to do is stop talking about how overly-bullish this market is and start listening to what everyone else is saying.  When everyone says the market is overly-bullish, the exact opposite is true.  People still want to debate me on this, but the inability for this correction to maintain downside momentum is a clear testament to just how bearish this market already is.  The crowd was bearish, expected further weakness, sold ahead of it, there is no one left to sell, and we bounce on tight supply.  Pretty textbook contrarian trade.

TRADING OPPORTUNITIES
Expected Outcome:
Any weakness fizzles at support showing there are few holders willing to sell.  This keeps supply tight and prices strong.  Expect shorts to keep getting squeezed over coming days, but don’t get greedy and take profits in the upper half of the 1600s.  The market is likely entering a trading range between 1600 and 1700.  Buy weakness, sell strength.

Alternate Outcome:
Watch for a failure to hold support because this means we ran out of buyers.  This market will top like every one before it, so we must be prepared.

Trading Plan:
Holding above support gives us the green light to own this market, but only for a swing trade up to 1675.  If this market fails to hold 1600, that will finally be a valid short entry with a tight stop above 1600.

Plan your trade; trade your plan

AM: Choppiness continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:57 EDT

AM Update

MARKET BEHAVIOR
Stocks dipped to 1608 at the open, but rallied through mid-day.

MARKET SENTIMENT
Japanese markets are imploding, but not weighing on our markets too much.  Anyone afraid of QE ending and the Nikki meltdown is already out of the market.  After everyone jumps out the window, markets stop falling because there is no one left to sell.  Understanding the relationship between supply and demand is far more helpful when trading than anticipating market moves based on fundamentals.  Many claim the market is irrational when it doesn’t behave as expected, but the truth is markets are extremely logical when we understand what really drives price.

TRADING OPPORTUNITIES
Expected Outcome:
Expect the choppiness to continue while prospective buyers remain gun-shy and downside moves fizzle when they fail to shake existing holders out.  Market plunges are emotional and quick.  Holding 1600 for a couple of weeks broke any downside momentum and deflated much of the fear-based hype bears built up.  Look for the market to trade sideways for the remainder of the summer.  Currently we are at the lower end of that range and the market remains buyable.  But as we’ve seen over recent weeks, we need to capture profits early and often because they will likely evaporate days later.

Alternate Outcome:
Recent support at 1600 could be nothing more than a bull-trap.  Selling begets selling, so any major violation of support could shake the resolve of previously confident holders.  The best way to avoid all the emotional selling is using stops to get us out.  Continued trade near 1600 means we must remain defensive.

Trading Plan:
We continue holding support and are at the lower end of the range, making the market buyable.  Given this market’s propensity to bounce, shorting it before it breaks support cost late bears a lot of money.  Short the bounce or violation of support, but don’t short tests of support.    And like always, often the best trade is sitting this choppiness out.  There are better things to do than chase our tails all summer.

NFLX daily at 1:56 EDT

INDIVIDUAL STOCKS
AAPL closed under the 50dma for the first time in a few weeks.  So far it has not set off a cascade of stop-loss selling, which is encouraging, but it is also discouraging the stock cannot leverage this stability to entice dip buyers back into the stock.  At this point the best trade is buying the breakout or shorting the breakdown   Right now it is just dead money.

GLD remains between $130 and $140 following the recent plunge.  Just like AAPL, we are better off trading a breakout or breakdown.  Once the market gets past this uneasy period between QE and Japan, look for more selling in gold as the willingness to pay a safety premium dwindles.

NFLX is finding support at the 50dma, but for it to flash a legitimate buy signal, we need to see strong volume on the bounce, something absent today.

Plan your trade; trade your plan

PM: Weakness persists

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks gave up early gains and slipped to the 50dma on below average volume.

MARKET SENTIMENT
Holders were not rushing to sell as indicated by the low volume, meaning weakness was driven by lethargic demand.  Either we ran out of new buyers because everyone is fully invested, or prospective buyers are reluctant to buy this environment.  The 90-point slide from previous highs mitigated much of the over-bought conditions, making it unlikely the crowd is overly bullish and fully invested.  More likely this market suffers from reluctant demand due to pervasive expectation of further declines.

The biggest takeaway of the light volume is holders remain committed to this market and are not rushing for the exists at the first sign of trouble.  Crashes are driven by irrational panic and so far this selling is orderly and restrained.

TRADING OPPORTUNITIES
Expected Outcome:
We are still holding support and every dip remains buyable until we violate these key levels.  Orderly selling is a normal and healthy part of every rally.  Do not fear periodic weakness because it is how markets heads higher.  Traders remain on edge, but the longer we hold these levels, the more comfortable they will become, eventually leading to new buying.

Alternate Outcome:
I am just a few points away from being wrong.  While I still believe in this market, I must respect the price action.  We can easily break support and trigger an avalanche of stop-loss selling, sending us dramatically lower.  While still expect a bounce, I must honor my stops.  It is okay to be wrong, it is fatal to stay wrong.

Trading Plan:
We are at the lower end of the trading range making the market buyable with a tight stop under support.  A short should wait for the selloff to begin before picking a fight with this resilient bull.  And of course there is no reason to force a trade in this choppy market.  Often the best trade is cash.

Plan your trade; trade your plan

AM: Weakness persists

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:51 EDT

AM Update

MARKET BEHAVIOR
Stocks struggled for a second day.  We opened higher, but slipped under 1620 by midday.  Failing support set off a brief wave of stop-loss selling, but the market quickly regained its footing at 1615.

MARKET SENTIMENT
Stocks had another invitation to breakdown as we dipped under previous support, but arresting the slide so quickly shows there is not a lot of sellers with tight stops at levels.  We are always looking for clues to what the market thinks and how it is positioned.  Bouncing at 1597 last week, 1622 yesterday, and 1615 today shows there is little excess fuel to propel a major breakdown.  Obviously any bull would like to see the market climb instead of consolidate, but recognizing the environment we are in makes it easier for us to identify the next high-probability trade.

An analogy is a prairie in the middle of fire season.  Sometimes the fire danger is extreme, other times low, it all depends on the environment.  At 1687 the fire danger was high because there were so many new buyers with weak resolve.  The resulting 90-point selloff swept through the market and burned most of the excess brush.  The ground is still smoking and we have dips like yesterday and today, but the fire danger is actually quite low simply because there is so little fuel left since most of it was consumed in the previous fire.  Today’s and yesterday’s flare ups didn’t go anywhere because there was nothing left to burn.

Obviously the market is more opaque than a prairie, so we are only guessing on how much fuel is remaining, but seeing perfect selling opportunities stall shows there is not a lot left to catch fire.  This doesn’t mean the risk is zero and we must always defend ourselves, but success in the markets comes from trading probabilities and right now a bounce is more likely than a continued selloff.

TRADING OPPORTUNITIES
Expected Outcome:
The rebound is struggling, but is not surprising given how nervous buyers are.  The encouraging thing is holders continue holding these dips under support and shows they are committed to their positions.  Continued selling seems unlikely and this is the safest place to own the market in over a month.  Keep buying dips and selling rips.

Alternate Outcome:
No matter how resolute a trader appears, everyone has their breaking point and nothing crushes a holder’s will like seeing the price move against him.  While current holders are comfortable with a 10 or 20-point selloff, anything bigger could unleash a new wave of selling.  As long as we stick to our stops we will avoid getting caught up in the ensuing panic.

Trading Plan:
There is no reason to sit through this summer’s chop, but if someone is compelled to trade, the better position is long this market.  The new low to watch is 1615 and major support is at 1600 and the 50dma.  We need to be increasingly defensive under 1620, but at this point the risk reward does not work for shorting.  Failure to hold support changes things and we will evaluate that situation if we get there.

Plan your trade; trade your plan

PM: Down one percent

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
The S&P500 ended down 1%, giving back Friday’s gains in average volume.  The market is still holding above minor support at 1620 and major support at 1600 and the 50dma.

MARKET SENTIMENT
While it felt dramatic, today’s dip did not do any major technical damage to the rebound.  Markets remain uncertain and that leads to volatility.  Yen and Nikki swings are putting the squeeze on major banks and hedge funds and that anxiety is rippling into our market.  It is unlikely turmoil in Japan will directly affect our economy, but it could influence where liquidity ends up.  Contrary to today’s move, instability over there can create renewed demand for US stocks and bonds as traders flee to our relative safety and stability.

TRADING OPPORTUNITIES
Expected Outcome:
Selling today is not a surprise.  The market is entering a consolidation phase following sizable gains and choppiness is part of that cathartic process.  Support and a bounce off 1620 on Wednesday is bullish.

Alternate Outcome:
Failing to hold 1620 and testing 1600 so soon after finding support is troubling and forces us to take a more defensive stance.

Trading Plan:
A bounce on Wednesday is buyable and a breakdown is a warning flag.  Stick to our stop-losses and don’t let recent profits turn into losses.  While the more adventurous can trade these swings, a more conservative trader can sit on recent profits and wait for a higher probability trade.  Making money in the markets is easy, the hard part is keeping it.  The best way to avoid giving back profits is to avoid forcing a trade where there is none.

AAPL daily at end of day

INDIVIDUAL STOCKS
AAPL‘s developer presentation on Monday failed to impress the market and the stock remains stuck at the 50dma.  Another catalyst came and went without reviving excitement in the company and its products.  Holding support this long is encouraging, but also sets the stage for an avalanche of stop-loss selling if we break through it.  Quick profits can be made here buying the breakout or shorting the breakdown.  Wait for the market to make its move and jump onboard with tight stop-losses.  But don’t hang on too long and take quick profits after a few days.  Since January AAPL’s been a trading stock and buying dips and selling strength is still the best way to play this name.

Plan your trade; trade your plan

AM: Dragged down by Japan

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:56 EDT

AM Update

MARKET BEHAVIOR
Stocks opened weak following turmoil in Japanese markets, but US markets brushed off those worries and reclaimed a chunk of the early losses.

MARKET SENTIMENT
There are plenty of issues in Japan, but current volatility is largely driven by an over-crowded hedge fund trade going long the Nikki and short the Yen.  It was guaranteed easy money until it started falling apart a couple of weeks ago, no doubt execrated by margin calls on over-leveraged hedge funds.  But that is there and this is here.  We live in an interconnected world and some of that spills over, but remember the US markets are leaders, not followers.  Bearish traders trying to get a jump on the expected breakdown in our markets shorted US stock futures overnight, but much to their dismay, the US market bucked the trend bounced just minutes after the open.

From a supply and demand point of view, much of the selling in US markets took place last week, meaning there was little supply left to continue a breakdown.  Fundamentals or not, the market bounced because there was no one left to sell.

TRADING OPPORTUNITY
Expected Outcome:
Everyone wants a strong market to pullback so they can get in at lower prices, but every time they get what they asked for, they become paranoid and are afraid to buy the dip.  Last week’s selloff gave people a chance to get in at 1600, those that missed Friday’s strength had another chance this morning.  The market is entering a volatile range as we consolidate recent gains.  Don’t get greedy and lock in long and short profits early and often.  We can trade the breakout when it happens, but as long as we remain inside 1600-1700, swing-trade it.

Alternate Outcome:
Today’s weakness shows some buying restraint by those watching the bounce from the outside, but we are still well above the 50dma and 1600.  Falling back to this level so soon after testing them shows buyers are scarce and the breakdown is finally here.

Trading Plan:
Shorts that failed to cover last week can use this weakness to take profits.  Staying above 1622  means the bounce is still intact and buyable.  Falling under 1622 over the next couple days is a red flag and demonstrates lack of demand.  Outside of that, look for the market to trade up to 1670ish over the next couple weeks where we will take profits and short weakness.

Plan your trade; trade your plan

PM: Constructive trade

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks traded flat on low volume, following last week’s decisive rebound from 1600 and the 50dma.

MARKET SENTIMENT
Following all the selling and subsequent rebound last week, everyone is standing around wondering what comes next.  Volume was light as few chose to trade, preferring to see what happens next, but this is bullish.  It shows holders are comfortable holding and no one is rushing to lock in profits or sell the bounce.  We have rallied the last six-months on tight supply and can continue doing it here.

The obvious top seems less obvious today.  We broke through key support at 1600 and the 50dma, but it failed to trigger a wider wave of selling.  We didn’t bounce because traders were complacent and rushed to buy the dip.  No it was quite the opposite, everyone expected the plunge as we were in the mist of the long-awaited correction.  Complacency and dip buying didn’t prevent the selloff; fear, panic, and a huge wave of selling ended it.  Once the pessimists and fearful were out or short, there was no one left to sell, supply dried up, and we popped.  Supply and demand at its most simple.

TRADING OPPORTUNITIES
Expected Outcome:
If this bounce is built on unsustainable dip-buying, it will fizzle Tuesday.  Anything that lasts at least four-days has wider buying behind it and is safer to own.  Last week squeezed many of the late shorts, but there is still an army of shorts holding on from higher up and hoping this bounce is a bull-trap.  Unfortunately for bears, they had the perfect setup to break this market last week and could not get the job done.  If a bear did not heed the warnings last week, there is still time.  It is okay to be wrong, it is fatal to stay wrong.

Alternate Outcome:
If the rebound collapses on Tuesday, it means this bounce was built on a foundation of sand and the selling is not done yet.  No matter what we think, we use stops to get us out of bad situations.  Failing to hold the 50dma or 1600 so soon after bouncing is not encouraging and shows bears gained the upper hand.

INDIVIDUAL STOCKS
AAPL’s early gains fizzled following their developers conference.  We have OS X 10.10, a fairly modest upgrade, but for me personally, the redesigned dual-monitor support is huge.  Apple barely supported dual-monitors since Snow Leopard and upset many of their professional users that carried the company in the pre-iPod days.  The new Mac Pro was also a nod to power users since many assumed the line was being discounted in favor of consumer grade computers.  The downside for investors is these power users don’t even add up to rounding errors on the income statement.

P at end of day

The big deal for average users is the completely redesigned iOS7 that finally moves the iPhone out of 2005.  It is still playing catchup to Android, but at least it isn’t as far behind.  But for AAPL investors, icon designs don’t drive phone sales, features do and expect AAPL to continue losing market share to cheaper and larger phones.  AAPL has a lock on expensive 4″ phones but that is because they are the only one selling $600 small screen phones.

iRadio is a joke, they even joked on stage that it was just like Pandora.  P spiked on the news of how little attention iRadio was getting and it seems more a novelty than anything that will drive sales or revenue.  At best it will drive a few iTunes sales, but they didn’t give any reason for people to change from Pandora or Spotify.

Plan your trade; trade your plan

AM: No profit taking yet

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:49 EDT

AM Update

MARKET BEHAVIOR
The market is holding current levels following last week’s bounce off the 50dma.

MARKET SENTIMENT
Traders are not selling the rebound, showing renewed support following a nerve-wracking 5% pullback.  Most unsustainable bounces fail within a couple of days as the dip-buying dries up.  Trading flat is encouraging and holding here through Tuesday shows the runaway selling is over.

Much of the selloff was driven by predictions and anticipation of the widely expected selloff.  This flushed out many momentum based bulls, but after a certain point we run out of people willing to sell and that point was last Thursday.  If recent dip-buyers are optimistic, they will continue holding for higher gains instead of quickly flipping the stock and locking in profits.  Keeping supply tight is what will keep the rebound going.

TRADING OPPORTUNITY
Expected Outcome:
Holding these levels through Tuesday means anyone betting on a market crash is going to be disappointed.  We shouldn’t expect the rally to continue racing ahead and sideways consolidation is normal.  Buy weakness and sell strength.

Alternate Outcome:
Buying the dip is the most predictable and tired trade of the last six months.  One of these days it won’t work and the masses jumping in will get run over.  While the trend is our friend and we need to assume every dip is buyable until they are not, we cannot be nieve about it.  Be deliberate with our entry points and always use stops to protect us from the inevitable time when we get it wrong.

Trading Opportunities:
It is a little late to buy the dip, but continued support gives us the green light to continue holding.  We are likely falling into a range between 1600 and 1700, but trading it is far easier said than done.  At any point within this range the market can bounce or breakdown, making timing entries and exits difficult.  In situations like this buy weakness and sell strength, taking profits when we have them and look for the next entry.  Getting greedy and holding too long will likely lead to those profits evaporating.  An alternative for more sophisticated traders is selling time premium in the option market.

For the near-term we likely have more upside left in the bounce, but keep a hard stop-loss under 1600.  Failing to hold this level so soon after testing it means more selling is in store.  If we break 1650, that is a good place to move up a trailing stop.  If someone likes the gains they made over the last couple days, there is nothing wrong with cashing those in too.

INDIVIDUAL STOCKS
This is AAPL‘s big developer conference key-note.  While the stock started higher, it’s been flat to slightly lower once it started, but channeling Job’s ghost, expect Cook to save the good stuff for the end.  Right now investors are looking for another home run and will likely leave disappointed with a base hit.  A music service is a sideshow, the real meat will be hints on a large screen phone and a cheap phone, two markets AAPL is currently giving away to Android.

Plan your trade; trade your plan

AM: Bounce continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:12 EDT

AM Update

MARKET BEHAVIOR
The bounce continues for a second day as the market pushes back into the middle of the 1600/1700 range.

MARKET SENTIMENT
The headline event was the monthly employment report.  175k new jobs appears just right, not too hot to threaten QE and not too cool to signal economic weakness, or at least that is how the talking heads are spinning it.  Truth is we are up again because we ran out of sellers yesterday.  The market moves on nothing more than supply and demand.  Tight supply equals higher prices.

It is another painful day for aggressive and greedy shorts who failed to lock-in profits.  Many of the late shorts are forced to cover at a loss and their buying is a big part of today’s lift.  The flashing neon warning sign for bears was bouncing after breaking 1600 yesterday.  When the violation of support failed to trigger an avalanche of stop-loss selling, that was our signal we were running out of sellers.  If a bear’s investment thesis predicted a swift drop after breaking support, not seeing that move was a sign something was wrong and it was time to lock-in profits.

But that was then and this is now.  Where are the markets headed?  Is today’s bounce a bull-trap or a buying opportunity?  All the anxiety surrounding recent weakness flushed nervous holders out, replacing them with confident traders willing to buy the fear.  As anxious and paranoid as traders feel in the aftermath, a 5% pullback is very therapeutic and often all the market needs to refresh itself.

Source: Yahoo Finance 6/7/2013

The crowd remains bearish here, meaning the contrarian trade is still believing in this market.  This morning there was a Yahoo Finance poll prior to the jobs numbers showing only 24% believe the economy is getting better.  It shouldn’t surprise anyone the market bounced again.  When everyone is constantly talking about how “overly bullish” the market is, the crowd is bearish, not bullish, and the contrarian trade is sticking with the trend.

TRADING OPPORTUNITIES
Expected Outcome:
The market can do one of three things; up, down, or sideways.  The pervasive bearishness and recent flush exhausted the supply of sellers and the bounce killed any downside momentum, meaning a crash is unlikely.  The market had a huge run in the first five months of this year and continuing that rate of gains seems unlikely.  The only thing left is trading sideways.  Recent trade likely set boundaries for the range between 1600 and 1700.  Sell strength and buy weakness.  Let profits grow to a worthwhile amount but don’t wait too long because they will likely disappear a few days later.

Alternate Outcome:
If we expect a trading range, the alternate is a directional move.  The outside limits of this range appear to be 1598 and 1687, but for simplicity’s sake lets call it 1600 to 1700.  The biggest threat is a near-term pullback to 1600 and likely means the rally is in trouble.  Breaking out to the upside means the rally is not done, but up-legs are slower and more deliberate than selloffs so we have plenty of time to jump on the rally bandwagon if that is the direction it goes.

Trading Plan:
Stay long until we get to the upper half of the trading range and then follow with a trailing stop.  Shorts should lock in any profits if they have some left.  Buy weakness and sell strength until we break out of the 1600/1700 range.  Swing trading a range is hard because we don’t know exactly what strength and weakness is.  Rather than get greedy trying to capture all of a move, build up some profits over a couple of days, lock them in, and look for the next trade.  More experienced investors can short or sell options.

TSLA daily at 2:14 EDT

INDIVIDUAL STOCKS
In addition to the exciting new square icons for iOS7, we can look forward to iRadio.  Lets hope it will drive new phone sales like Ping, iCloud, and Apple Maps.  No doubt iRadio will add some incremental revenue from existing users, but AAPL doesn’t have a revenue problem, they have a market share problem.   Without some new, must have feature, they will continue losing market share to Android.  People already have a Pandora account and all their friends are on Spotify, so I don’t see where iRadio fits in and it is nothing more than a late, platform dependent, me-too product.  I’m sure most don’t even remember Ping, but that was Apple’s attempt at a social network built into iTunes.  It was a gigantic flop because it was late and didn’t provide anything new for users.  Unless iRado offers something that blows away Pandora and Spotify users, expect another iFizzle.

GLD is down again as the volatility continues.  There is no reason to hold gold here until it breaks and holds $140.  It no longer provides safety and stability for a portfolio and the widely expected hyper-inflation just isn’t happening.

TSLA is sending shorts running for cover…again.  Shorting this stock is a suicidal game, but if someone can’t help themselves, at least take profits quickly because invariably it will bounce.   This is a nice swing-trading stock for nimble, fast, and courageous day-traders, but everyone else should watch with fascination from the sidelines.

Plan your trade; trade your plan

PM: What comes next?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Dramatic turn of events as the market briefly penetrated 1600 following a sharp, midday slide, but rebounded decisively and finished up  0.9% for the day.  Volume was average, but slightly less than the recent down days.

MARKET SENTIMENT
With the expected bounce is behind us, we need to figure out if this is simply a temporary reprieve before further selling, or just another bear-trap on the way higher.   The problem for us is it easily could be either.

The selloff was becoming obvious, a little too obvious, as both holders and shorters anticipated a larger correction and sold preemptively into the weakness.  This proactive selling took much of the supply out of the market and made this bounce inevitable as selling exhausted itself.

We violated widely followed support, but failed to trigger an avalanche of selling.  That is an extremely revealing piece of information when it comes to evaluating how other traders are positioned and what they think.  Breaking the 50dma and 1600 was the point where everyone should have rushed for the exit at the same time, yet they stayed in their seats, leading to the bounce higher.  This shows most holders are not spooked by the dip and their resolve (or stubbornness) caused today’s bounce.

The interesting thing about this bounce is blunted all the momentum bears built up over the last two weeks and now puts bears on the defensive.  As far as sentiment goes, this is potentially a game changer.  It brings confidence back to nervous bulls and makes bears doubt themselves.

Friday we have the monthly employment report that will be good for some early volatility, but after a couple of hours it will be long forgotten and we will resume trading the supply and demand skew that lead to the recent selloff and today’s rebound.

TRADING OPPORTUNITIES
Expected Outcome:
The ball is in the bull’s court following today’s bounce.  Expect the rebound to continue for a couple more days as we squeeze shorts that overstayed their welcome.  From there it will be a a coin-toss if we continue to the upper end of the range or retest the lows.  Either way we are likely heading into a range bound market for the remainder of the summer and the best trade is buying weakness and selling strength.

Alternate Outcome:
Once the short-squeeze runs its course, the market could collapse due to a lack of demand if buyers continue avoiding this market.  It makes no difference what the fundamentals or technicals say, if we cannot find new buyers, the market falls under its own weight.

Trading Plan:
Buy the bounce with a stop under today’s low.  Shorts should lock-in profits before they evaporate.  We are moving into a choppy market and if we don’t capture profits early and often, they will likely disappear.  1600 is still the line in the sand.  Retreating under it over the next couple days shows buyers cannot support this market and we are likely headed lower.  But if we hold 1600, look for a move to the upper end of the range.  Until this market breaks-out/breaks-down, buy weakness and sell strength.

Plan your trade; trade your plan

AM: Bounce or false bottom?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:44 EDT

AM Update

MARKET BEHAVIOR
Stocks slipped again in early trade, challenging 1600 and the 50dma.

MARKET SENTIMENT
The market clearly wants to test these widely followed technical levels, but the real question is how much stop-loss selling is left to trigger.  If we saw a large amount of preemptive selling on the way down, there are fewer traders left to dump this violation of support.  Under this scenario we will see an initial surge of selling when we break support, but since so much defensive selling happened early, it quickly exhausts itself and bounces in decisive a capitulation bottom.  This is the exact behavior we saw on April 18th when the market rebounded strongly after testing the 50dma.

The alternative is many traders are anticipating the inevitable bounce and have all their stops clustered under 1600.  A modest dip will set off a furious tidal wave of selling that doesn’t stop until we plunge at least 20 points.  At this point either outcome seems likely and the most conservative trade is to watch from the sideline.  It is an ego boost and gives us bragging rights to challenge the market and win, but allowing our ego trade is a good way to go broke.  Let the market show its hand and jump on the subsequent move.

TRADING OPPORTUNITIES
Expected Outcome:
The market briefly dipped under 1600 as I wrote this and all we can do is wait and see what happens.  Was this the capitulation bottom, or the prelude to a major QE selloff?  I wish I had the answer, but like everyone else I’m simply a spectator.  1600 is an important level because so many people are watching it and basing their near-term outlook on how we respond. Over the next couple days we will know a lot more about the what the market thinks and how people are positioned.  A bounce is buyable for a trade, but resist adding new shorts if we keep selling off.  Bull or bear, expect a short-squeeze/bull-trap bounce in the next couple days.

Alternate Outcome:
Trading would be so much easier if the market actually did what it is supposed to do.  The problem is it has a nasty habit of convincing us we are wrong just before proving us right, or convincing us we are right just before proving us wrong.

Bears are looking for a collapse, bulls a bounce.  Obviously one is right and the other wrong, but if only the market’s price-action was so clearcut.  A likely outcome is fake out with a false move before reversing and revealing its true intentions.   A bounce before a plunge, or a plunge before a bounce.  Just because the market is doing what we expect doesn’t mean we can let our guard down.  Prepare for, even expect it to snap back in our face.  In uncertain and volatile periods like this, take profits early and often because they will likely be gone in a couple of days.

Trading Plan:
Let the market do its thing.  I still expect a near-term bounce because everyone is on the selloff bandwagon, but the momentum is clearly on the bear’s side.  A bounce is buyable with a stop under recent lows.  It is late in the game to be adding new shorts and existing shorts should look to take profits.  The goal isn’t to make all the money and hold for top dollar is a sure way to give back all your hard-earned profits.

GLD daily at 1:44 EDT

INDIVIDUAL STOCKS
AAPL challenged its 50dma this morning, but is holding it at the moment.  It is hard to be excited about this company given the complete lack of meaningful innovation over the last couple years.   Rumor is AAPL will release new default icons for iOS next week.  Without a doubt they need to get rid of the cheesy glare and  gimmicky graphics on the in-house icons, but hopefully there is something bigger than that.  Of course at the same time we also don’t want another half-baked iMaps episode either.  If the market is not wowed next week, expect traders to continue souring on AAPL’s and actually start to question the company’s long-term prospects.  It’s up to Apple to prove it is not the next Palm Pilot or BlackBerry and the way it is bleeding market share is not a good start.

GLD reclaimed some of its luster in the face of today’s selloff.  Thank a plunging dollar for the lift.  Gold could continue higher on Dollar weakness, but if we are making a currency trade, trade currencies, not gold.  Fundamental reasons to own gold continue eroding along with people’s trust.  Maybe gold will come back some, but it will be a long while before it reclaims its economic fear driven heights.

Plan your trade; trade your plan