Category Archives for "Free Content"

AM: Bouncing back

By Jani Ziedins | Intraday Analysis

AM Update

Stocks bounced back on positive data, but are still shy of all-time closing highs.  AAPL is resting, but this is supportive of the recent bounce.

MARKET BEHAVIOR

Stocks gapped higher at the open following encouraging data, but traded sideways around 1560 all morning.  The extents of the current trading range fall between 1538 and 1565.  Today’s strength brings us closer to the upper end of the range, but the market still struggles to find buyers willing to push it above all-time highs.

MARKET SENTIMENT

Given the rise in homebuilder stocks, strength in home prices shouldn’t surprise anyone and the market saw this coming for a while.  Same goes for gradually improving manufacturing data.  These do discredit bears’ claims the economy is slowing, but given the market’s strength the last few months, this negative opinion is increasingly in the minority.

Sideways trade here is constructive, but it will likely be a quiet week due to the holiday and quarter end.  Big money is largely positioned how they want to end the quarter (window dressing) and are just coasting this last week.  Next week is when they get back to business and look at the market with a clean slate.  Without pressure to chase, will they keep buying?  We’re days away from learning the answer.

If the market is running out of buyers, it should happen pretty quick.  Continued sideways trade shows buyers are stepping up and supporting prices.    1545 is the level to watch.  A dip under here is more worrisome for bulls than a pop above 1565 is for bears.  This far into the rally gains are harder and harder to come by and dips are increasingly more likely.  No one has a crystal ball, but we can trade probabilities.  History tells us we should expect multiple 5% pullbacks each year, each quarter often has a different personality, and every rally must end.  On the other side, it also tells us rallies often go far longer than anyone expects.

TRADING OPPORTUNITIES

Expected Outcome:
The challenge for a savvy trader is not selling too early, and at the same time not holding on too long.  We aim for the sweet spot between these two common made mistakes.  Hold when everyone is talking profits and sell when everyone is holding for larger gains.  This sweet spot is a region, not a point and we need to decide what is good enough.  We cannot sell the top, so either we are late or we are early.  Many retail investors try to sell late because the logic goes holding past the top lets a trader continue riding prolonged rallies higher.  And it makes a lot of sense, but I’ve never seen an interview with a successful trader who uses this strategy and almost all say they sell on the way up.  Do we want to model ourselves after the average retail investor, or the elite trader?

Either way, the market is looking for direction here.  We cannot trade between 1550 and 1560 indefinitely and a resolution is imminent.  The trend is higher and it is often smart to stick with what is working.  Of course every rally ends and this one has been around the block a few times, putting it closer to the eventual pullback.  If a trader doesn’t have conviction here, the best trade is no trade.  Simply sit this one out and wait for a better setup.

Alternate Outcome:
Everyone continues holding on for new highs.  This limits supply and is propping up the market.  As long as supply remains tight, the market can continue higher.  The bigger question is how much higher.  20-points on a 200-point rally is fairly trivial.  100-points is a major continuation.  Between the changing quarter and lack of short-squeezes, sentiment is changing.  Bearish expectations over the last three-months enabled this rally, but if people come into the second quarter with a different outlook and portfolio, should we still expect the market to keep acting the same way?  The alternate outcome is a continued rally, but it has to prove itself.  Making and holding all-time highs through next week will do a lot to prove the sustainability of this rally.

INDIVIDUAL STOCKS

AAPL is taking a break after a strong performance early Monday morning where the stock traded up to $470.  There was a lot of momentum and short-covering in that move, but that demand quickly evaporated and the stock retreated back to the low $460s.  Finding support at $460 suggests this near-term up-trend will likely continue for a little while longer.  $485 remains the level to watch, but the $500 is even more significant since that provided rock solid support for three-months.  The stronger a support level, the more challenging resistance it poses.  This is because many traders had the opportunity to “buy the dip” around $500 and most of these traders are simply looking to get out at break-even when the stock returns to their purchase price.  Traders selling to get their money back will keep a lid on prices once the stock challenges previous levels of congestion

Stay safe

PM: Running out of buyers

By Jani Ziedins | End of Day Analysis

PM Update

MARKET BEHAVIOR

Stocks ran up  at the open on encouraging developments out of Europe, rising to the increasingly important 1565, but quickly lost steam and slid nearly 20-points by late morning.  Volume was again below average and continues the recent pattern of restrained trade.

MARKET SENTIMENT

Today’s selloff was reminiscent of a market disappointed by bad news, not on the receiving end of good news.  We had a Cyprus resolution and over the weekend and many predicted all-time highs were a done deal.  After the first few minutes of trade, it looked like they were right, but then buying completely dried up and stocks tumbled.  The news will try to explain it as this or that, but the truth is we simply ran out of new buyers.

So far Cyprus is setting up a sell the news trade.  We didn’t get a short-squeeze or momentum buying on the heels of early strength and encouraging news.  The market simply stalled and rolled over.  This is a big flag for bulls.  The market bounced countless times over the last three-months, each rebound consuming a chunk of available buyers.  After a certain point, no matter how great the news, the market will top when it runs out of buyers  I can’t say for certain this is what happened, but it seems more likely than not.

TRADING OPPORTUNITIES

Expected Outcome:
There is a lot of risk in this market.  Without a doubt we could continue higher, but before placing a trade we have to understand the risk/reward.  The market might have another 25-points of upside here, clearing all-time highs at 1576, but we could also be on the verge of a very typical, normal, and healthy 5 to 10% dip.  Typically we will see three 5% dips and one 10% pullback in any given year.  (20% dips are less common, occurring once every 3.5 years on average)  Even if this is a garden variety 5% dip, that is 75-points.  Making trades with 75-point risk for 25-points profit will send a trader to the poor house pretty quick.

Alternate Outcome:
No matter what the signals say, we are still within 1% of the highs and the up-trend remains in tact.  Predicting anything but a continuation is going against the trend and is often the low-probability trade.  Picking tops is risky, and not many people do it well.  But there is a difference between picking a top and taking the chips off the table.  It is very aggressive to short this market, but taking profits after such a nice run is extremely conservative and is what successful traders do with worthwhile profits.  We are in this to make money and the only way we can do that is selling our winners.

Stay safe

 

AM: New highs, but……..

By Jani Ziedins | Intraday Analysis

AM Update

Stocks still struggle with all-time highs even on good news out of Europe.  AAPL is holing up as momentum traders buy the break above the 50dma.  How much further can this go?

MARKET BEHAVIOR

Stocks set a new high, but turned back just shy of 1565 and fell nearly 20-points from the high to the low.

MARKET SENTIMENT

So much for the pop and all-time highs on Cyprus.  It’s lunchtime and the market already moved on.  More interesting is the struggle with 1550.  The last few dips to this level have been buying opportunities, but are there enough buyers left to do it one more time?

Markets only move when people buy or sell.  Anyone already positioned for a move can do nothing but watch.  If everyone bought in  anticipation of a Cyprus resolution, when that resolution becomes reality, the market stalls because no one is left to buy the news.  The same goes for all-time highs.  If everyone bought early, anticipating an all-time high breakout, the market stalls because no one is buying the breakout.

The only thing that matters is what people think and how they are positioned.  Technicals, fundamentals, and news only play a supporting role in moving markets.  They only matter when they cause people to change their outlook and adjust their portfolio. If the greatest and most loved company in the world comes out with a cure for cancer, its price will surge when people buy more shares.  The problem arises when everyone loves it so much they already own all they can hold.  Then the life saving news goes unnoticed in the stock because it doesn’t trigger new buying.  This is why understanding how people are positioned is far more important than knowing what is in tomorrow’s newspaper.  We cannot predict the news, but we can predict people’s reaction to it.

TRADING OPPORTUNITIES

Expected Outcome:
This dip is a buying opportunity only if there are more buyers left to keep pushing prices higher.  This is what happened a couple of months ago.  The widespread cynicism provided plenty of fuel for a sustained move higher.  But here we are, another 100-points higher and it took a lot of buying to get here.  Do we still have gas in the tank, or are we running on fumes?

Today’s reversal from all-time highs is concerning.  There was zero short-squeeze from breakout buyers as we set new highs and cynical bears did not cover on a constructive news out of Europe.  The most likely explanation is people are no longer short this invincible market.  Bears and shorts are often the last on board the rally bandwagon, so we need to be extra careful here.  There will be more zigzagging as the fight between bulls and bears is evening up.  That in of itself is a warning sign as the formerly dominant bull is losing strength and the beaten down bear is fighting back.

I see nothing in today’s price action that is bullish and we could be on the verge of more selling if dip-buyers fail to show up in meaningful numbers.  While the market could continue higher, this is finally time to start thinking about shorting the market.

Alternate Outcome:
The bull isn’t dead yet and we are only a fraction off of 52-week and all-time highs.  .  If this market holds 1550 for a couple more days, it shows buyers are still willing to get in at these levels.  That bodes well for a continuation.  With today’s failure to break above 1565, that is quickly turning into a psychological barrier.  We need to close above it to put this whole all-time high thing behind us and start focusing on something else.

INDIVIDUAL STOCKS

AAPL is holding up nicely on a day when the market is in the red.  With the 50dma behind us, the biggest technical milestone is $485.  This will be a far larger hurdle to clear than the 50dma.  The moving average is simply a line on a chart that people follow.  Support and resistance are areas where people bought and sold stock and are far more meaningful for influencing individual investors.  These are levels that represent profits and losses.  This is where people can get their money back.  This is where people promised they would sell if the market would only give them a second chance.  That has real meaning and it will be a challenge to overcome.  Swing and momentum trading can get us to$485, but only follow on buying from a wider pool of investors can move us beyond it.  The nimble trader should consider locking in along side all the other short-term traders.

Stay safe

LA: New highs, or not

By Jani Ziedins | Intraday Analysis

Look Ahead

MARKET BEHAVIOR

Stocks dipped modestly last week as they struggle to capture those last few points needed to push through all-time highs.  Either this pause is building support for a sustained move higher, or it signals exhaustion just before the market rolls over.

MARKET SENTIMENT

A big part of why it is so difficult to predict the market is any setup ALWAYS gives contradictory signals.  If the answer was obvious, everyone would make the easy trade and this one-way buying/selling brings the market back into perfect contradiction.  Balance is the law of free markets and always makes sure both bull and bear views are equally represented.

To figure out where we are going, we need to search beyond widely followed technicals and fundamentals and uncover what the market is thinking and how it is positioned.  This gives us the best insight into what comes next.  Markets only move when people buy or sell, so obviously we need to figure out what will induce them to buy or sell.

In late-January/early-February we saw a similar consolidation and volatility around 1500, but the mood was completely different.  Traders were still afraid and the popular expectation was an imminent pullback from over-bought conditions.  That was six-weeks and 50-points ago.  Now we see the same technical setup, but sentiment changed.  Everyone feels good about the market’s strength and is looking forward to new all-time highs. This means most chasers are already in the market and few are left on the sidelines.  Value investors sold to these momentum traders as prices climbed, but after the chaser, it is hard to figure out who is the next in line to buy.

Obviously markets can coast higher on momentum alone, but just because there is more upside doesn’t make it a good trade.  This far into the rally there is limited profit potential and lots of downside risk, making a poor risk/reward.  Day-traders can grab those last few dollars, but overnight traders need to be more cautious.

TRADING OPPORTUNITIES

Expected Outcome:
There is little concern left in the market.  Cyprus dominated the headlines, but we are trading within 3-points of the pre-Cyprus close, demonstrating apathy from the market over these headlines.  But it shouldn’t surprise anyone when a market that didn’t flinch on a negative GDP report last month, effortlessly ignores the struggles of a tiny Mediterranean island.

This upcoming week will be a key one for the markets.  Holding level for a week is supportive, holding level for a few weeks becomes stalling and shows the market cannot get the job done.  This is also the last week of the quarter and most quarter-end buying is behind us.  For the time being, the chase is taking a break as money managers have a clean slate starting in April.  Chasing could continue, but managers feel far less pressure to buy reactively when the finish line is three-months away.

The market needs to continue higher after this pause to prove it still has an ample supply of buyers.  It doesn’t need to be a lot, but a healthy rally would finally reach 1565 and hold it this week.  If a modest gain is constructive, then anything else is destructive.  A dip under 1550 will likely continue because most of the dip-buyers came in last week and used up all their capital.  A strong surge higher signals a potential climax and exhaustion of remaining buyers.

As of this writing, there is some kind of resolution regarding Cyprus that avoids a disorganized bankruptcy.  This doesn’t do anything to save wealthy account holders, but it does protect the integrity of the banking system by upholding the guaranteed 100k safeguard.  The market could rally on this, but Cyprus never posed much of a risk to the wider banking sector and the market never sold off on the news, so any relief rally will be short-lived and this story forgotten before lunchtime.

Alternate Outcome:

This is the rally that just won’t quit.  When everything else is equal, stick with the rally because a rally can continue countless times, but it only reverses once.  Every call for a market top the last three months has been premature and I have no doubt I am early here too, the biggest question is if that is 10 or 100-points early.  Time will tell and we will continue watching the market for signs of strength and sustainability

Stay safe

WR: Stuck on 1550

By Jani Ziedins | Weekly Analysis

Weekly Review

Stocks are holding near recent highs, but how much buying is left in this rally?  AAPL’s selloff turned 6-months old this week.  Is it finally a buy again?

MARKET BEHAVIOR

Stocks dipped a modest quarter percent this week, but fell as far as 1538 following a three-day losing streak before recovering.  Volume was a tad below average and we closed the week 31-points above the 10wma, while the 40wma is 118-points behind. Both moving averages are headed higher and closing the gap as we consolidate recent gains.

MARKET SENTIMENT

The market is attracted to 1550 and recovered this level three-different times after dipping under it.  The big dip under 1540 triggered all the technical stop-losses in the area, relieving potential selling pressure on a subsequent dip.  Think of it like avalanche control.  This week’s dip set off a slide, making conditions less risky next week.  But this only protects us from selling and there is more than one way for a market to top.

Tops also occur from lack of buying.  No matter how confident holders are, they can do nothing to defend against an absence of demand. Traders most often fear a catastrophic headline that takes the legs out from under the market, but they also need to fear an overly bullish one too because that is the stealth top that sneaks up on us.  At least with horrible news, it is obvious and we are only left guessing how low will it go.  Bullish tops creep up on us because the outlook is great and everyone is confidently buying the dip.

Bullish tops are harder to trade because sentiment and demand are such squishy things.  Rallies typically go further than anyone expects, so holding longer than we are comfortable is usually the right trade.  But there also comes a point where holding is easy and we don’t want to sell because everyone knows the market is headed higher.  To me it feels like we are in the fuzzy area between these two.  I cannot say with any conviction the market already put in its top, but I can say its gone far enough for me and I’m ready for the next trade.

The thing about dip buyers is there is a fixed number of them and they will run out at some point.  We had a couple dips under 1550 this week and buyers came in and propped up the market, but how much new money is still out there if we dip under a 3rd time?  There is a reason double-bottoms are a popular reversal pattern, but tripple-bottoms not so much.  The third test of support is far less likely to bounce because dip buyers already spent most of their money on the first two dips.  Without dip buyers, who is left to prop up the market?  Value buyers eventually step in but they usually wait until prices are so attractive they cannot resist any longer.

Again, this is all just speculation on my part, but in spite of what all the gurus say about predicting the market, we are in the business of prediction.  Trading by its very nature is making predictions about future prices because lets be honest, there is no reason to buy most stocks unless we confidently predict they will be higher in the future.  At this juncture, I cannot predict the market going higher with any confidence, so I’ll wait this one out.  And more than wait it out, I’m looking to short this market because it just looks like its time.

TRADING OPPORTUNITIES

Expected Outcome:
We came a long way and there are only so many consolidations and dips that can occur before we come to the one that doesn’t bounce.  Holding on for more bounces here is getting a tad greedy.  I’m happy to sit on the sidelines, watching the market rally higher without me here because I know the odds are not in my favor.  One of the most difficult things for me to learn as a trader was being okay with leaving profits on the table.  It is never easy, but over the long-term it works out better this way.

Alternate Outcome:
Most of the time I get out too early.  I don’t mind missing another 20-ponts of upside, but I don’t want to miss the next 50 or 100-points, so I will continue watching for signs of sustainable strength.  Minor dips that find support and consolidate for 4+ days shows buying at those levels and signals a likely resumption of the rally.   We will keep looking for signs of strength and are always ready to jump back in.  The greatest advantage of the individual trader is the ease with which we can move around the market.  Of course this is a double-edged sword and many fall into the trap of over-trading every bump in the market.

INDIVIDUAL STOCKS

AAPL finally did it, it closed above the 50dma for the first time in over 5-months.  I actually find it surprising the selloff just celebrated its 6-month birthday this week.  AAPL’s weakness feels like a new thing, no doubt due to the fact no one realized it was a material selloff until several months into it.

The stock is almost 10% higher than the recent lows.  Is this enough to conclusively say the bottom is in?    Many bulls are hoping so, but the pervasive bullishness in AAPL gives the natural cynic in me something argue with.  No one is saying the stock is going to zero.  No is saying the company is failing.  No one says the products cannot compete.  Everyone believes it is a great company whose stock simply fell on tough times.  If it was a good buy at $700, then it is a steal at $450.

But what’s the other side of the argument?  What would the contrarian point out?  Some people say AAPL is a software company.  Well if that’t the case, it’s a pretty lousy software company.  The current user interface is identical to the iPhone1 that debuted five years ago.  When compared to the dynamic app icons and lock screen widgets on Android, iOS looks prehistoric.  As someone who checks my iPhone5 for stock quotes every 30 minutes, it sure would be nice if it wasn’t a six-step process.  (wake, swipe, lock-code, home button to exit last app, swipe to second icon page, click on stock app)  But since Steve Jobs didn’t check the stock market from his phone on a regular basis, AAPL sees no reason to make it easy for those of us that do.  That is the typical AAPL hubris.

Without a doubt AAPL has some of the sexiest and most desirable hardware out there, but they are miles behind the competition on the software side.  As an iPhone user, I only hope firing the head of iOS and promoting the guy in charge of hardware design means new things are coming down the pipe and we will finally have a modern OS to match our sleek hardware.

Stay safe

PM: Down-Up-Down-Up

By Jani Ziedins | End of Day Analysis

PM Update

Markets bounced back, but will it last?  AAPL finally broke above the 50dma for the first time in nearly 6-months, does this mean the worst is behind us?

MARKET BEHAVIOR

Stocks bounced back on Friday, completing a four-day pattern of down-up-down-up.  We finished nearly where we started and this volatility did nothing but humiliate bulls and bears who reacted to these gyrations.  Volume was the lightest in over a month and 17% below normal.

MARKET SENTIMENT

The market is within ten-points of all-time closing highs and many pundits predict a Cyprus resolution will finally push us over the top.  They will only be right if that is the unexpected outcome.  If it is widely expected, it is already be priced in and the market will quickly move on to the next obsession.

The frustrating thing about meeting expectations is it doesn’t move the market.  People position their portfolio based on their expectations of the future.  If everyone expected Cyprus will be a non-issue, they already looked past Cyprus when positioning their portfolio this week.  When the Cyprus issue is resolved, since it was widely expected, no one will adjust their holdings based on this news, and without new buying and selling, the market will not react.  This single concept is the bane of fundamental and news traders because they expect news or data will cause the market to move one direction, but it often moves another simply because that news and data was already priced in.

If we take Cyprus out of the picture, what are we left with?  A fairly bullish market.  No one is talking about Sequester, Debt Ceiling, or slowing growth anymore.  Even these Euro fears are isolated to an island of 800,000 people and the PIIGS hardly get a mention (Portugal, Ireland, Italy  Greece, and Spain).  If you followed the news the last few weeks, you wouldn’t even know Asia exists because they don’t get any coverage.  Where did all the worrywarts go?  If everyone is positive, should the contrarian be worried?

TRADING OPPORTUNITIES

Expected Outcome
I have a hard time coming up with a good reason to own this market other than momentum.  Without a doubt trends are more likely to continue than reverse, but at the same time, every rally must top.  I embrace cynicism with open arms and have been bullish this entire rally from the November lows.  Here is a quote from my November 15th post, the last down-day before the market bounced for good:

“The selloff has coiled the spring for an upside move pretty darn tight and the smallest bit of good news is bound to set of a gigantic bear trap.  On the other side, a huge number of skittish sellers have already sold, meaning the  potential supply is dwindling by the day.  This is setting up for a fairly asymmetrical trade where the upside potential is larger than the downside risk.  There is no reason to jump out in front of this meat grinder, but wait patiently for the right opportunity to snap up heavily discounted shares from emotional sellers and their pain will be your gain.”

I am not a bear, I am not a bull, I’m an opportunist.  I am not perfect, but I am pretty good at this stuff, and right now I am nervous.  That doesn’t mean this market cannot go higher, and in fact my I was fairly constructive of the market on November 14th, just before we had one last selloff, but hopefully no one is going to nit-pick missing the bottom by a couple of days.

I don’t have a crystal ball and many of my earlier calls have been aided by a healthy dose of luck, but this market just makes me nervous.  Maybe I am early here, but I’m okay with that.  I would rather be out of the market wishing I was in, than in the market wishing I was out.

Alternate Outcome:
The conservative trade is always to get out early and that is what I did.  I pulled the plug over a week ago at 1555 and the market rallied higher after I sold, but I also missed out on the last week of volatile swings and have been looking for my next trade ever since.  My goal is to get out early and I clearly did that here, the question is just how early.  Did we already put in the top on the 14th?  Will we set a new all-time closing high?  How about the all-time intraday high?  What about 1600?  All of those are possible and I sacrificed profit by selling too early, but it is impossible to get the top, so either we sell too early or we sell too late.  I like selling too early because I am in a better position to identify the next high-probability trade when I am sitting on cash instead of worrying if I should sell or hold weakness.  Obviously the alternate outcome is a continuation from here and I am watching closely for signals that I should get back in.

INDIVIDUAL STOCK

AAPL finally did it, it traded above the 50dam for the first time since October 5th.  For such a momentous occasion, volume was suspiciously light.  Without a doubt low-volume could be a positive signal because it shows a huge pool of cynical buyers waiting in the wings to buy this stock.  But that ignores the fact it is downright difficult to find an AAPL bear among the throngs of AAPL defenders.  If I am reading sentiment correctly, the bullish attitude in the stock indicates the low-volume breakout is already running short of buyers before it even makes its first breakout.  Clearly I am biased here, but I have serious doubts about the sustainability of the rebound and view the next $20 as an opportunity to sell strength.

How to trade this, the momentum is clearly higher and a nimble speculator could ride this higher for another $20.  But if buying is coming from short-term traders buying the breakout, expect the move to be short-term as they quickly lock in profits.   A bigger concern is failing to hold the 50dma shows a lack of follow on buying and likely means we are headed lower.

Stay safe

AM: Tug-of-war

By Jani Ziedins | Intraday Analysis

AM Update

Markets are higher as the back and forth continues.  AAPL is challenging the 50dma and is presenting a trading opportunity.

MARKET BEHAVIOR

Stocks are higher as the tug-of-war continues.

MARKET SENTIMENT

The battle between bears and bulls is heating up.  We saw a similar back-and-forth in early February.  That time the bulls prevailed, can the pull off another victory here too?

Complacency is the norm as every dip is just another buying opportunity.  All the fear from early in the year is long forgotten.  If the market will continue higher, who will be next buyer?  That is a tough question.  Shorts are avoiding this market, making it unlikely a short-squeeze will propel us higher.  If shorts are away, it probably also signals many former cynics have changed sides and joined the bandwagon.  There is money flowing out of bonds and into equities, but this is just a trickle and not enough to affect short-term volatility.  With the quarter end just days away, most money managers have already adjusted their portfolios and are ready to start fresh in April.

The news is obsessing over Cyprus, but it is an isolated event unless you live on the island or are a crooked Russian hiding your money there.  Other than those two groups, there is little exposure for the rest of the world and the risk of contagion is nil.  The worst is it could highlight weakness in the European banking system, but someone had to be living under a rock the last three-years if this is news to them.  The market is trading near pre-Cyprus levels, meaning little risk premium has been priced in, thus there will be little bounce when the crisis is resolved.

Right now we still don’t know who will buy the market going into the second quarter and that is why I remain wary of the market.  Without a doubt momentum could carry us another 10 or 20-points higher, but the next 50-point move is lower, not higher.

TRADING OPPORTUNITIES

Expected Outcome:
When everyone is buying the dip, we should sell the strength.  Contrarian investing works because when everyone is bullish and owns stock, there is no one left to buy and keep pushing prices higher.  It has nothing to do with fundamentals and everything to do with supply and demand.  Without demand, prices cannot continue higher no matter how good the news.

I am really tempted to short today’s strength.  Three is often the magic number in the markets.  The first peak usually bounces back because everyone is still excited by the rally.  The second peak also bounces, but less enthusiastically.  By the time we get around to the third dip, most of the buyers bought the first two dips and there is little left to prop up this dip.  Over a very short time-frame, we have that with last Thursday’s peak, this Wednesday’s rebound, and now today’s strength.  If we cannot hold these levels, there are few buyers left to buy the dip and the slide will start shaking free previously confident holders.

Alternate Outcome:
We continued past February’s volatility and there is no reason we can’t do it again.  But just because something is possible doesn’t make it a good trade.  Success in this game comes from understanding probabilities.   Of course we could continue higher, but given how far we’ve come and all the other warning signs, we should be more fearful of this market than enthusiastic.  Most of my bearish thesis rests on weakness after the first quarter chase ends.  If the market holds up and builds constructive support in April, that signals the rally is still on.  These things always come to an end at some point, but they often surprise us by lasting longer than we ever imagined.  I expect near-term weakness, but am open-minded to a continuation.

INDIVIDUAL STOCKS

AAPL is up to the 50dma.  Reclaiming this moving average is significant because it hasn’t been above it since early October.  The biggest question is if people are buying in anticipation of this event and that leave few buyers to buy the actual breakout.  We often see this with expected news events and is where the axiom “Buy the rumor, sell the news” comes from.

AAPL remains one of the most followed and loved stocks in the market.  This technical milestone will be shouted from the hilltops everyone will know about it.   It will be interesting to see how traders respond.  Anyone out of the stock could use this signal to buy the dip.  But how far will this dip-buying carry the stock without a fundamental catalyst to bring in a wider pool of buyers?

The easy trade here is buying the break above the 50dma and using a stop $5 under the MA.  If the stock doesn’t explode to the upside, then most of the buying happened ahead of time and there will be little new demand, making this a sell-the-news trade.  If the stock cannot hold the 50dma and crashes back through, it will likely continue sliding to new lows.  If a trader’s thesis is to profit on the strength from a 50dma breakout, if that surge doesn’t happen, they need to sell ASAP because their original analysis is flawed and invalid.  Long-term success in the markets is all about defense, not offense.

Stay safe

PM: Can we still make all-time highs?

By Jani Ziedins | End of Day Analysis

PM Update

Stocks couldn’t hold yesterday’s gains and closed under 1550 and the struggle to break all-time highs continues.  AAPL saw midday strength fade into the close as the stock is still looking for the incremental buyer.

MARKET BEHAVIOR

Stocks dipped and ended near 1545.  The all-time closing high is proving more difficult than anyone expected when we finished just two-points shy of that historic mark last week.  Volume was below average today and continues the trend of apathetic trade.

MARKET SENTIMENT

It’s not often we see the market dip nearly a percent on light volume.  There is something quite unusual about the lack of selling by holders as we break key technical support at 1550.  Are they are asleep at the wheel?

Light-volume means different things at different stages in the market cycle.  Low-volume dips always signal holders are resisting the temptation to sell into weakness.  As the rally is bouncing off previous lows, the market is primarily made up of value investors who trust their analysis and are less concerned with daily fluctuations.  This is why they willingly hold through volatility early in the rally.  Later on these value investors are replaced by momentum chasers as the rally continues breeding complacency the higher it goes.  But the key difference is on the buying side.  Early in a rally, cynicism rampant and these traders resist the young rally, meaning there is still ample supply of buyers available to push the market higher.   Late in the rally, most of the cynics have changed sides and jumped on the bandwagon, meaning there are few buyers left.  More simply, markets rally in the face of fear and decline on the back of complacency.

TRADING OPPORTUNITIES

Expected Outcome:
It is increasingly likely we won’t set new highs.  The market was rebuffed two-times after closing above 1560.  Friday might be the last shot we have at this historic level, but even then that milestone is a better short entry than breakout buy.

Alternate Outcome:
1550 is providing a sticky level and the market has bounced back from several dips below it already.  Part of the reason volume was so light today when we dipped through 1550 is Tuesday’s violation of this technical level already triggered most of the stop-losses, meaning there was less selling this time.  To continue higher, the market needs to prove it can break and then hold 1565.  The trend is still higher, but this late in the game it needs to show me it still has legs.

INDIVIDUAL STOCKS

AAPL’s midday strength faded into the close.  I’ve stopped paying attention to rumors so I really don’t know what caused the midday surge.  It seems the market is also increasingly cynical of these big intraday moves since this one didn’t even hold through the close.  Rumors of new products or cash distributions are the boy who cried wolf.  One of these days it will be true, but by that point the market will have stopped listening.

The 50dma is still the technical level to follow and breaking above this will trigger a wave of momentum, swing, and dip buying.   Ride the trade higher, but take profits early because these short-term traders will sell after a $40 move up to technical resistance.  On the other hand, failing to reclaim the 50dma shows no one is interested in buying the stock and it will breakdown to new lows, most likely $400.

Stay safe

AM: Where are we going?

By Jani Ziedins | Intraday Analysis

AM Update

Stock are down and retesting 1550 after yesterday’s rebound.  AAPL is oblivious to market weakness and higher on hopes of a rebound.

MARKET BEHAVIOR

Stocks opened lower and are retesting support at 1550.  The market is on track for four out of five down days, but even with all the selling, the market has not lost much ground.  Either this is supportive of a continuation, or the ground eroding under our feet.  Our job is figuring out which and how to trade it.

MARKET BEHAVIOR

The market is doing its best to abuse both bulls and bears with these head fakes and it is doing a good job.  We make new highs, then break down, only to rebound again.  A trader reacting to these moves is getting killed because this whipsaw volatility leads to buying and selling at the wrong times.

Tops and bottoms are some of the most erratic periods because this is where bulls and bears are on equal footing.  The dominant side is losing its grip and the underdog is coming on strong.   While the top will be identified as a single day, the process takes months to complete.  If this is a top, it started last month with the drop to the 50dma.  Most rallies do not end on their first dip and that was the case here as the market rebounded decisively to new highs.  But as this process continues, each rebound is less and less powerful, eventually ending on the dip that doesn’t bounce.

Currently we are building and testing support at 1550, just a few ponts shy of all-time highs.  Everyone expects us to take out these highs and that is why we struggle to get there.  Traders who normally wait the breakout bought early in anticipation.   Bears are not shorting because they are waiting for new highs first. Everyone is mostly just waiting around and that is why we are not moving and volume is so light.

To figure out where the market is going we need to understand what other people are thinking and how they are positioned.  If most bulls are in ahead of the expected breakout, the actual breakout will not trigger a wave of buying because everyone is already in.   If shorts are holding back until we make these new highs, a breakout will actually be greeted by a wave of shorting and profit taking.

I’ve been waiting for a high-volume surge to signal an exhaustion top, but the way the market is set up here, I don’t know if we will get there.  Rather than end with a bang, this rally leg could exit on a whimper.    The bang ending requires a pool of reluctant buyers chasing in the final moments, but it feels like many of them are already in the market and there is no one left to power the chase higher.

INVESTING OPPORTUNITIES

Expected Outcome:
There is little reason to own this market.  Most of the upside has already been realized and a lot downside is underneath us.  The trend remains higher, so it is a risky short the market, but that does look to be the next high-probability, high-profit trade.

Alternate Outcome:
This will be the third year in a row the markets top in the April.  I like the precedent, but I worry about the predictability.  The market hates being predictable and is this too much?  I would be more worried if talking heads were making a big deal out of it, but so far it is not getting much coverage.  People are talking about pullbacks, but each bounce back quiets the pessimistic commentary.   I have no idea what will happen next, but I do see the odds stacked against a continuation. But even if the chances for a pullback are 80%, that means one time out of five this rally will continue higher.  Low-probability or not, we need to watch for the continuation and buy it when it invalidates our previous analysis.

INDIVIDUAL STOCKS

What do you know, AAPL is up when the market is down.  This stock is operating in a world of its own and AAPL traders have such intense tunnel vision they don’t see, nor care about what is going on around them.  The benefit for the bull is even if the broad market sells off, AAPL could surge higher on a break of the 50dma as traders chase the rebound.  But if people are buying the stock strictly for technical reasons, expect them to sell for technical reasons too, likely running into resistance near $485/$500.  Enter and exit a technical trade on technical levels.  Enter and exit a fundamental trade on fundamental data.  This story is still missing the fundamental catalyst necessary to reclaim much higher levels, so don’t let a technical bounce convince us to hold for larger gains when this will most likely be a temporary bounce.

Stay safe

PM: Rally on

By Jani Ziedins | End of Day Analysis

PM Update

Markets shook off previous worries and have their sights set on all-time highs again.  AAPL could not hang with the market and continues struggling with the 50dma.

MARKET BEHAVIOR

Markets bounced back from Cyprus induced weakness and closed less than 10-points from the all-time closing record.  Volume was lighter than yesterday’s selloff and continues the trend of below average trade.

MARKET SENTIMENT

This market is persistent.  No matter what headline is thrown at it, it bounces back hardly missing a beat.  Of all the bad news this rally shrugged off, it was unlikely it would be taken down by banking problems in a tiny island most didn’t even know was part of the Euro Zone.  Today’s rebound confirms most traders either don’t care or assume it will be resolved without wider implications.  Right or wrong, we trade the market and this is what it thinks about Cyprus.

Resilience in the face of countless negative headlines shows just how committed holders have become.  They are stubbornly holding for more gains no matter what they say on CNBC or write in the WSJ.  Their holding is the source of the light volume, if holders are not selling, there is nothing to trade.

Today’s flat trade after the opening gap is also telling.  It shows shorts were not driven from this market in the typical relentlessly climbing short-squeeze.  Either shorts are confidently holding on, or they just aren’t there.  Given the lack of recent short-squeezes triggered by new highs and unexpectedly bullish employment news indicates most bears have either changed sides and joined the bull bandwagon or given up and gone home.   Either way this is a significant shift in sentiment and trader positioning.

Bouncing back from Cyprus is just one more reason for bulls to relax and enjoy the ride.  This market is gaining wide recognition as the rally that just won’t quit and no one needs to worry about anything because everything is under control.  And that is exactly what I am afraid of.

TRADING OPPORTUNITIES

Expected Outcome:
The rally remains intact.  I can’t tell you if we will see 5, 10, 25 or 50 points of upside from here, but I suspect it will be on the lower end of the range.  This market has become too easy for bulls and obvious for the casual observer.  It has also beat bears into submission to the point where they are not even trying anymore.  At this point it is hard to imagine people becoming even more bullish on this market and the last of the buyers are finally streaming in.

1565 and 1576 are the levels everyone is watching and I actually wonder if we will see a wave of selling hit the markets at those levels since there are so few left to buy the breakout.  It will be interesting to watch how the market responds to these levels, assuming we get there.

The high-probability trade remains sitting this one out and waiting for the next trade, likely shorting the completion of this head-and-shoulders pattern.  I wonder if sell in May comes early this year and if we fall to 1400, we could actually see a Summer rally this year.

Alternate Outcome:
This market could continue higher if the new-high headlines hit Main Street and triggers an influx of new investment from the general public.  While this will happen over time, it won’t occur at a rate high enough to affect the near-term trade.  The great rotation out of bonds and other secure investments into equities will take many years and will drive a secular bull market, but it will not be enough to avert the normal dips, pullbacks, and corrections every market experiences.

While I am out of the market waiting to get short, I will watch for strength carrying over into the second quarter.  I will consider going long again if it looks like there is more sustainable support and strength left in this market, but it will have to prove it to me first.

INDIVIDUAL STOCKS

AAPL didn’t share in the markets good day, but that’s nothing new since AAPL disconnected from the market months ago.  Without a doubt this stock will find a bottom.  Have we already passed that point, or are we standing on another trapdoor?  We can actually start thinking about Q1 earnings because that is the next major catalyst guaranteed to happen.  Dividend/buyback/product launch might or might not happen and we can’t plan on these events.  It seems Q1 and Q2 expectations have been ratcheted down a fair bit, but that is likely offset by the high level of optimism remaining in the stock.

For a trade, if the stock cannot reclaim the 50dma, there is little support for a continuation and expect lower prices.  If the stock breaks above the 50dma, it will be a major milestone and look for swing, momentum, and dip buyers to flood the stock trying to make a quick buck.  But these traders are not loyal to the company and will bail after a $20-$40 move.  We should do the same because there is a monumental supply of regretful owners that are praying to get out at break-even and this will slow any potential rebound.

Stay safe

AM: Cyprus who?

By Jani Ziedins | Intraday Analysis

AM Update

Stocks recover from Cyprus fears, but is the coast clear?  AAPL is struggling with the 50dma and is building a trade one way or the other.

MARKET BEHAVIOR

Stocks bounced back from Cyprus weakness and are solidly above 1550 this morning.

MARKET SENTIMENT

Europe is a three-year old story and if it hasn’t crashed the global economy yet, it probably won’t.  Our historic 2008 financial implosion occurred over a period of months and if Europe has limped this far, they will likely pull out of it.  This Cyprus stuff is largely noise.  We survived Greece which is 10x the size, so Cyprus is simply a bump in the road.  The biggest concern isn’t the size of the bailout, but the precedent a savings account tax sets.  There is a bit of hubris at the ECB and the biggest problem is the way they presented this bailout.  Instead of calling it a tax, the should have approached Cyprus depositors and said “Your bank is about to go bankrupt and you will lose everything.  The ECB will step in and bailout out your bank if you are willing to pay 10% fee.  If you chose not to pay the fee, you will likely lose everything.”  Phrased that way it is hard to argue with them and most would be grateful the ECB ‘saved’ them instead of the outrage we are currently seeing.  Presentation and perception is everything.

The rebound from Cyprus selling shows the market is less worried about a domino effect and fear based selling has largely dried up.  We can now add Cyprus to the long list of bad news the market shrugged off.  This teflon rally is immune to headlines and it is unlikely one will take down this market.  Instead we need to watch for a diminishing supply of available buyers.

Markets top for one of two reasons, a wave of selling or an absence of buying.  Holders have repeatedly  proven how comfortable they are at holding through weakness and this prevented negative headlines from crashing the market.  Today’s rebound further reinforces this stubborn holding behavior.  The next question becomes how much buying is left because that is what will finally kill this rally.

Shorts are largely absent as demonstrated by the lack of meaningful short-squeezes on good news, new highs, and reversals.  If shorts are absent and bears less vocal, this is a major shift in sentiment and likely shows many cynics have joined the rally bandwagon.  As a contrarian there is nothing as unnerving watching the critics disappear.

TRADING OPPORTUNITIES

Expected Outcome:
The market is within 10-points of all-time closing highs and it seems likely the relief rally will push us through this level.  But rather than be a bullish breakout, this minor double-top could very well be the end of the rally.  Everyone knows rallies cannot last forever, meaning one of these upcoming dips is not going to bounce.  The impending rollover to the second quarter will give institutional investors a clean slate and often they approach the next quarter with a different strategy than the one that just closed.

The conservative trade remains sitting out this volatility.  At this point there is limited upside and a lot of downside, so the only real trade is waiting for a good short entry.

Alternate Outcome:
This might simply be another dip on the way higher.  Holding for more gains is getting a tad greedy, but further upside is something we still need to watch for.  Continued strength into the 2nd quarter invalidates a large portion of my bearish thesis and will be a signal to reevaluate the current market for more upside.  The current trading range is somewhere between 1550 and 1576.  If we hold this level for a while, time instead of pulling back will refresh the market and set the groundwork for a continuation.

INDIVIDUAL STOCKS

AAPL is not sharing in the markets good day.  The 50dma is providing significant resistance and it is not surprising since the stock was $650 the last time it traded above the 50.  But this can cut either way.  Rebuffed at the 50 likely means we will see new lows in the near-future.  Break the 50 and it will trigger a large wave of short covering and momentum buying.  Remember, even if the stock breaks out, this is just a trade and lock-in profits in the upper $400s because $500 will provide a significant level of overhead resistance as underwater traders try to get their money back.

Stay safe

PM: Three days in a row

By Jani Ziedins | End of Day Analysis

PM Update

Stocks weakness continues.  Is this the end of the run?  AAPL is trading well for a change, what should we expect?

MARKET BEHAVIOR

Stocks closed under 1550 for the first time in nearly two-weeks and extended the losing streak to three-days.  The market finished down a modest quarter-percent, but that overlooks the wide intraday range that briefly dipped to 1538.  It will be interesting to watch 1550 in coming days to see if previous support turns into overhead resistance. Today’s selling finally registered above average volume, only the second day in over a week to trade elevated levels, but 5% above average is hardly panic levels.

MARKET SENTIMENT

This is the first time the market traded down three-days in a row this year and signals a potential shift in personality.  Previous dips rebounded with an exclamation point, yet it seems this selloff is picking up speed.  While the rally is not dead, a change in behavior is noteworthy.

We’ve been watching a potential head-and-shoulder top develop over the last few weeks.  A retreat under 1500 could bounce and form the right shoulder before continuing lower.  If, and this is a big if, we are in a H&S top, expect the market to slide as far as the 200dma and a return to 1400 would be a fairly typical 10% pullback.  I have no idea if the market will reach these levels, but it is certainly worth knowing what the downside risks are.

Recent volume is telling as both rallies and dips have been on unusually light volume.  The restrained trade shows holders continue holding no matter what direction we go.  This scarce supply is driving prices higher instead of the more typical strong demand.  Selloffs have also been limited because few holders are dumping shares in market weakness.  Holding through every dip this year has been rewarded with new highs and traders have been conditioned to wait for inevitable rebound.

TRADING OPPORTUNITIES

Expected Outcome:
1550 is the key level to watch.  Closing above this levels likely means we will finally takeout all time highs at 1565, but that is not a sign of strength, simply delaying the inevitable.  A lot of traders are comfortable with this rally, as seen by the lack of elevated selling into recent weakness.  Many have been lulled into complacency because every other dip bounced back, but there is always that final dip that doesn’t bounce and we are closer than ever to it.

The conservative trade remains sitting in cash. It’s been a great few months and the only way to win this game is locking in worth-while profits.  The aggressive trader is looking for a short entry.  A short here with a stop around 1555 sets up an attractive risk/reward.  Seven points of risk to at least 50-points of profit.  This trade has both high-probability and favorable risk/reward on its side.   Nothing is guaranteed in the markets, but it is hard to beat this setup.  If we are early, take our 7-point loss and keep looking for the next opportunity.

Alternate Outcome:
Without a doubt this market will top at some point.  There are many indications this is the top, but often markets continue longer than anyone expects.  Clearly that happened as we already far exceeded calls for a pullback going all the way back to January 3rd.  There is no reason this cannot be another head fake designed to fool bears and shakeout weak traders before resuming the uptrend.

The easiest way to identify an uptrend is by obviously watching it climb higher.  Rallying to and holding 1565 shows support for this market and continued strength into the 2nd quarter will invalidate many of my justifications for selling here.  The single greatest strength we have as individual investor is our ability to jump in and out of the market as conditions warrant.   If we sit through dips we give up the only advantage we have in this game.

INDIVIDUAL STOCKS

AAPL hit its head on the 50dma, but managed to contain losses to just a quarter-percent.  Not a bad day given the size of losses we’ve seen in recent history.  Greg pointed out an interesting observation in the comments from this morning’s post that all of AAPL’s weekly closes have been at the extremes of the market’s range.  The “pain trade” as he insightfully pointed out.  We have to go back two-months before finding a week where we closed in the middle of the range.  There is no telling how far this pattern will continue, but it could provide interesting insight into trading weekly moves.  This week is shaping up as another rally week and a break above the 50dma make for an interesting swing-trade, but if we see a breakdown, look for the stock to test and even exceed the weekly low.

AMZN is trading poorly.  There are only so many times a stock can test the 50dma before breaking it.   The next stop is the 200dma.    The last time the stock broke under the 200dma, it took 5-months to recover it on stronger than expected earnings.  But even in the face of this weakness, I still don’t think the stock is breaking down because there are still far too many cynics and shorts.  I don’t think it makes a good trade but it is interesting to watch and talk about.

Stay safe

AM: Cannot hold 1550

By Jani Ziedins | Intraday Analysis

AM Update

Selling continues for a second day as the market fails to hold support.  AAPL hit its head on the 50dma and is down with the rest of the market.

MARKET BEHAVIOR

Stocks are struggling with support at 1550.  This is a key level that provided support the last couple weeks and failing to hold it has the sharks circling.

MARKET SENTIMENT

Today’s dip under 1550 triggered a swift wave of stop-loss selling and invited shorts to pile on.  The question is if this selling will achieve critical mass and continue lower, or bottom and rebound yet again.  Either scenario entirely plausible.   It wouldn’t be a surprise to see early bears get rebuffed for the umpteenth time as we finally take out the all-time high, but this would be the last gasp of a dying rally, not signs of unbreakable strength.   Alternately stalling 2-points shy of the record last week could easily be the top of this rally leg.  Either way we have far more down ahead of us than up.

I’m not promoting a collapse and remain constructive on the economic recovery, but markets move in a zig-zag pattern and after every period of zigging, is normal and healthy to zag.  We came a long way and this is a reasonable place to take profits and wait for the next trade.    Even the most bullish years see dips of 5 and 10% and we should expect something similar here.

There is one more piece I can add to the contrarian puzzle.  Two-weeks ago I was still behind the rally and receiving a lot of positive feedback from readers.  But since I grew more cautious and bearish, its gotten quiet around here.  I’m not doing this to be popular and am comfortable going against the current, I only point this out as yet another sign of how popular this rally has become.

TRADING OPPORTUNITIES

Expected Outcome:
One of the upcoming dips is not going to bounce, is this it or will it be the next one?  This is not an exact science and no one knows for certain where and when a market will top.  The best we can do is get close enough and call it a day.  Everything I see says this is close enough.  New highs are still on the table because market tops are often volatile and one of these swings could easily take us to new highs, but that doesn’t constitute a high-probability trade.  I’m in this to make money, not pick tops, so I’m quite pleased with how far we came and am happy to cash in here.

The aggressive trader can start looking for a good short entry, but use prudent stops and don’t stubbornly argue with the market if it moves against us.

Alternate Outcome:
Markets are never easy and it takes more luck than skill to spot a top.  Without a doubt I could be 50 or 100-points premature in selling this rally.  But just because I sold doesn’t mean I have to sit out remaining upside.  I am still looking for signs of continued strength and am more than willing to admit I pulled out too early.  The great thing about sustainable rallies is they give plenty of opportunities to get back in.  Long-term success in the markets is less about offense and comes down entirely to great defense.  The only way to make money in this game is selling winners.

INDIVIDUAL STOCKS

AAPL bumped its head on the 50dma and is selling off with the rest of the market.  Talking about AAPL is like discussing politics and religion with family, it just cannot be done without upsetting someone.  This shows just how emotionally charged this trade remains.  Neither bulls nor bears care about anything other than the data that supports their emotionally held position.  Fundamentals just don’t matter in this stock like this and it continues trading on sentiment.  It will surge on any new product rumor or cash distribution scheme and fall when follow-on buying fails to materialize.  AAPL is setting up for a great sentiment driven swing-trade, but it will be a while before this stock is investment grade again.

 

For a swing-trade, jump on a break of the 50dma and get out around $485.  AAPL has quickly gone from a Return ON Investment to a Return OF investment stock.   Most people no longer dreaming of huge profits and simply want to get out at break-even   This selling will put a lot of pressure on any rally.

Stay safe

PM: Where’s the volume?

By Jani Ziedins | End of Day Analysis

PM Update

Stocks bounced back from early weakness, but volume was noticeably absent.  What does this say about the market and where it is headed?  AAPL’s strength is impressive, but is it sustainable?

MARKET BEHAVIOR

Stocks sank at the open, the biggest drop since February 25th’s massive reversal.  As volatile as the day was, volume ended surprisingly light, 12% under average.  In spite of all the headline drama, not many people were adjusting their portfolios on the heels of Cyprus news or the market’s weakness.

MARKET BEHAVIOR

Cyprus gave the financial shows a lot to talk about, but the intraday strength and low-volume shows not many traders are worried about it.  There was an initial surge of selling, but that worked through the system in a matter of minutes, allowing the market to rally near break-even by midday.  Stocks could not hold the rebound and closed in the middle of the day’s range, but not a bad day given how much hype there was over the Cyprus deposit tax.

What does this price action tell us?  Holders are still willing to hold through both negative headlines and weakness.  At times this is a virtue and others it will get us into trouble.  Over the last few months holding volatility has been rewarded as each dip bounced back to new highs.  The difference is many of those dips were on elevated volume as traders bailed en masse, fearing it was the start of another market collapse.  This time volume is below average showing traders are no longer afraid of dips.

The market is weak and traders are indifferent, does this present a contrarian trading opportunity?  By itself that doesn’t mean much, but taken with all the other signals we received lately, it sure feels like this market is living on borrowed time.  New highs and unexpected employment strength is no longer triggering short squeezes, showing shorts are finally giving up.  The rally is four-months old and covered a respectable 16%.  We are coming up on a new quarter and potential shift in market personality.  Plus a few others we’ve covered in recent posts.  Is it different this time?  It sure feels like it.

TRADING OPPORTUNITIES

Expected Outcome:
I’ve been extremely bullish on this market from the lows in November, but there comes a time in every rally when we need to get off.  We are in this to make money and can only do that by selling our winners.  This is not trying to pick a top, but saying its been a good ride and it is time to look for the next trade.  The market could very well continue a few percent higher, but the risk/reward has changed and staying in this market no longer puts the odds in our favor.  We will continue watching the market for consolidation, signaling this market has refreshed itself and will gladly buy back in if the conditions warrant.

The aggressive trader needs to be looking for a valid short entry.  Stocks can only bounce so many times before their luck runs out and this market is pushing it.  Holders willingness to hold means when the market finally starts sliding on seemingly benign news, we have finally run out of buyers and no matter how resolute holders are, without demand prices will continue declining.

Alternate Outcome:
Each dip refreshes the market because it flushes out weak holders and creates a new pool of potential buyers.  February’s dip to the 50dma was highly productive and could be a mid-rally dip on our way to much higher highs.  But rather than blindly holding on here, we need the market to prove itself.  Recovering 1560 and holding it for a couple more days supports a continuation to all-time highs.  How much more upside is left will be determined by watching how the market’s response to the new highs.  Obviously selling off is not helpful to the continuation, but so is surging higher on large volume.  Both these scenarios show we are running out of buyers.  The most sustainable trade will be sideways consolidation while holding support.

Again the risk/reward is not in our favor here, but we need to keep an open mind that February’s dip was just the midpoint in a larger rally.  Continued strength into next quarter will be a strong indication that this rally has legs.

INDIVIDUAL STOCKS

AAPL came back to life on speculation of a dividend increase.  We heard this before, but much like a broken clock, if we wait long enough, eventually it will be right.  Tomorrow is the one-year anniversary of AAPL’s dividend and bulls are hoping it would be an ideal time to announce an increase.  Maybe it will finally happen, or maybe it is just another rumor put out by stock manipulators and embraced by desperate holders.

Does increasing the dividend address the reasons the stock is 35% off the highs?  Steve Jobs was notorious for his disdain for shareholders and the stock rallied strongly in spite of his lousy capital allocation strategy.  The real reason the stock peaked in September because it ran out of buyers.  Everyone who wanted AAPL already had as much as they could hold and there was no one left to buy.  Only after the stock started selling off did people mentioned concern over iPhone5 sales and increased competition.  These were just excuses used to justify the selloff, not the other way around.

To reverse the slide, AAPL needs to fix what lead to the selloff.  It needs is to find buyers.  As long as everyone continues defending AAPL, it means everyone still believes in the story and these people already own all AAPL they can hold.  The question any AAPL bull needs to answer is who is the next buyer?

The stock has a date with the 50dma in coming days and breaking through this technical level could lead to a wave of momentum buying, but these are traders not investors.  Expect these buyers to jump out for a quick buck when the stock comes against resistance between $485 and $500.  At best this stock ended the selloff and is entering a trading range, meaning the best trade is buying the dips and selling the rallies, but I still don’t buy it.  AAPL bulls outnumber bears by a large margin and this skewed sentiment means lower-lows are still likely.

Stay safe

AM: Fear Cyprus?

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR

Stocks gapped lower at the open on renewed Euro fears, but recovered a chunk of those losses by mid-morning.  We bounced off 1545 and are back above 1555.

MARKET SENTIMENT

The financial world is holding its breath over a savings account tax in a country smaller than many mid-western cities.  The rebound from opening lows shows many investors think the fear is overblown and the anxiety induced selling is reversing.  Europe has been a concern for three years and so far they managed to muddle through it without collapsing the global financial system, chances are this is just another bump on that road.  The biggest fear is Cyprus sets a wider precedent and opens the door to similar moves in Greece, Spain, and Italy.  It will be interesting to see how this story plays out over coming days and if European officials relent on their pressure for such a tax seeing how it could shatter confidence in Eurozone bank deposits.

As we discussed here many times, markets move on supply and demand, not news.  News can affect traders expectations of the future and make them change their positions, but it is this buying and selling that changes prices, not the news itself.  Why this matters is if news simply reinforces existing sentiment, it won’t move markets because no one adjusts their portfolio.  This is why markets often shrug off good or bad news to the frustration of fundamental and news based traders.

Up to this point the market ignored headlines of negative GDP, ‘socialists’ taking over in Italy, and the Sequester.  Will Cyprus really be the thing that finally upsets this teflon market?  Market participants are already doubting the significance of Cyprus and using this dip as a buying opportunity.   Buying weakness worked every other time this year, so that makes it a perfectly safe buy here, right?

TRADING OPPORTUNITIES

Expected Outcome:
While I’m not worried about Cyprus, the market is more vulnerable than it has been in months because the extended rally and assumption by many traders every dip is buyable.  By mid-day it looks like the market is finding support and this dip has not triggered a wider avalanche of selling.  This support in the face of seemingly dire headlines shows we are still in position to take out the all-time highs, but I’m not sure how much is left in the tank beyond that.  It will be interesting to watch how the day closes.  If the rebound continues and we close near flat, that will signal all clear and will make traders even more complacent about the next dip.  On the other hand, afternoon weakness will put more pressure on the markets and could signal the start of something bigger.  It’s not that Cyprus is a big deal, but it could be the final straw that breaks the camels back.

Alternate Outcome:
The market ignored far more meaningful economic news on its way to these highs, so why are we afraid some tiny island taking down the rest of the world?  If we are weighing the significance of recent developments, negative GDP headlines, arbitrary Sequester cuts, and anti-austerity leadership in Italy are far more meaningful than some Mediterranean island.  No matter what the market does from here, it won’t be because of Cyprus.  Today could easily be the start of something bigger, but we’ve laid the groundwork for a pullback it would happen with or without this nudge from Europe.   This mornings bounce shows the market is still resilient and new highs are easily within reach, depending on how we respond to those, this rally could continue to 1600 and beyond.

Stay safe

LA: Time to cash in?

By Jani Ziedins | Weekly Analysis

Look Ahead

MARKET BEHAVIOR

Stocks are on the hunt for all-time highs resting just a few points away.  The market is up an impressive 14 out of the last 17-weeks, covering nearly 220 points since the November lows.  It’s been a good run, but how much longer can this last?

MARKET SENTIMENT

16% in four-months is quite remarkable and holding for more is getting a tad greedy.  Markets made bigger moves in the past, but those were during periods of emotional extremes, either crushing depths of despair or widespread euphoria infecting the general public.  It’s hard to compare current market sentiment to either the 2009 lows or the internet bubble, so chances are this is a normal rally and will behave more traditionally.    Can we continue 1, 2, 3, 0r 4%?  Of course, but we are much closer to the end of this rally than the start.

The challenge is knowing when to hold ’em and when to fold ’em.  Often traders fold ’em too quickly when rallies are just getting started because they are still in shock from the previous correction.  Later in the rally they continue holding ’em too long because time and distance makes them forget about pullbacks.  As contrarians, we go the other way.  We continue holding when everyone doubts the sustainability of the rally and we jump out early when everyone is finally feeling comfortable.

So far the market has a decent left-shoulder and left-side of a head in a H&S pattern or alternately the second high in a double-top.  It’s always easy to spot these patterns months after the fact, but it is far more useful to see these formations develop in real-time.  There is no guarantee we are building either of these topping patterns, but there is enough to warrant caution.

Patterns are more than just lines on a chart, they show up time and time again because the consistency of human nature and herd psychology.  Markets rarely breakdown on the first attempt because too many people are still on the lookout for the correction.  They are skeptical and cynical, claiming the bounce has gone too-far, too-fast and are waiting for the previous selloff to continue.  At this stage many traders are still on the sidelines and the aggressive outright short the market, but the first dip rebounds quickly because so many people are already out of the market that there are few left to sell the weakness.  The selling quickly dries up on lack of supply.  Do this a couple of times and the cynical convert into believers.  But by the time most of the former cynics join the rally bandwagon, demand is drying up and we finally top on a lack of buying.

One of the easy rules of thumb I use is “make the hard trade”.  Most of us are normal, well-adjusted human beings, whatever that means, but more importantly what we feel is similar to other traders.  If we are reluctant to buy the market, many others feel the same way.  This means few are in the market and there is a large pool of buyers watching from the outside.  When we are reluctant to sell, it reveals others are also holding on for more gains.  If most people feel comfortable with the market, they are already invested and supply of new buyers is running out.  This isn’t perfect, but more often than not the right trade is the hard trade.

TRADING OPPORTUNITIES

Expected Outcome:
It is impossible to know exactly when a market will top, but we can get a sense of when one is more likely to top.  Obviously every rally must come to an end at some point and usually it goes further and longer than most expect, but it also tops while everyone is still holding out for higher prices. Somewhere in-between these extremes is the tipping point.  Are we there yet?  It sure feels like it.  No doubt we can continue for a few percent higher, but is another 20-points of upside worth 100-points of risk?

The market closed above 1560 Thursday and Friday.  Two more closes above 1560 shows support and the next move is likely a continuation for at least a few more points.  Failing to hold 1560 and things get more interesting.  1550 is the next level of support and no doubt a large number of stop-losses lie under this level, expect selling to pick up and challenge 1525/1530.  A lot of traders will be buying the dip because that has been the easy trade for the last several months, but in the markets things work until they don’t.  Is buying the dip obvious to everyone?  If so, expect the rebound to fail and form the right shoulder.

Alternate Outcome:
Everyone who called for a pullback the last few months has been humbled by the market’s resilience.  No doubt it could run me over too and that is why this is a good time to lock-in profits, but it is premature to sell short into strength.  Markets love to shred top-pickers, so we shouldn’t play that game.  But if the market starts showing cracks, jump on it with both hands and go for the kill.

As for a continuation, if the market dips to 1550, yet holds support, that is building a solid base to launch an assault on 1575 and possibly even 1600.  I don’t have a crystal ball and if someone is looking for definitive answers, there are plenty of snake-oil salesmen that will tell them what they want to hear.  But if someone is looking to trade more intelligently, I think we laid out a decent plan.

-Take worthwhile profits
-Look for support between 1550 and 1560 to signal a continuation
-Short a break of 1550 with a stop at 1555

Stay safe

WR: How safe is this market?

By Jani Ziedins | Weekly Analysis

Weekly Review

A modest up week in the markets as we continue flirting with all-time highs.

MARKET BEHAVIOR

Stocks added a modest 0.6% this week and closed just above 1560.  The market is 45-points above the 10wma and 127-points over the 40wma.  Weekly volume was average as the range narrowed to 16-points.  Everyone is watching the headline levels 1565 and 1576, the all-time closing-high and all-time intraday-high.

MARKET SENTIMENT

Tight trade following the previous week’s large gains is either consolidation pointing toward higher prices, or the market running out of steam after an extended four-month run.

No matter what is going on in the market, there are always two valid points of view; half the money thinks prices represent a bargain and half thinks they are overpriced.  The market price is the exact balance point between these two views.  If expectations change, traders buy or sell until the price moves enough to reestablish the perfect 50/50 balance.

Here we have half the market expecting the rally to continue and half thinking we are running out of buyers.  Both sides have smart, intelligent  and thoughtful proponents, the challenge for us is figuring out which side is more likely to be right.

Further complicating the analysis is both sides could be right.  We could rally a bit more before finally running out of buyers.  This is why trading is one of the hardest ways to consistently make money.  Not only does our analysis have to be right, but we also must get the timing right.  In most industries the harder you work, the more successful you’ll be, but not in the markets.  It doesn’t care how hard we work or how smart we are.  The only thing that matters is if we buy lower than we sell.  In fact it’s been shown a lucky monkey with darts outperforms many of the smartest minds on Wall Street.  If that isn’t humbling, I don’t know what it.

Anyway, I’m getting sidetracked.  The market is either peaking here, or continuing.  If we use history as a guide, uninterrupted six- or eight-month rallies are unusual and betting on a continuation is a lower-probability trade.  Further, the rate of gains tends to slow the further along it is in the rally.  Not only are the odds of a continuation diminishing, so is the potential reward.  If we were to design our ideal trade, would we seek out low-probability, low-reward opportunities?  Hopefully not.  Without a doubt this market can continue higher, but that doesn’t make it a wise trade.

TRADING OPPORTUNITIES

Expected Outcome:
We need to be increasingly wary of this market.  It could easily take out record highs at 1565 and 1576, but what happens after that?  The older this rally becomes, the more comfortable people are with it.  At the start of the year everyone was terrified of Fiscal Cliffs, Euro Contagion,  Sequester, Debt Ceilings, and all that other stuff.  Now the market doesn’t care about negative GDP and Sequester mandated spending cuts.

Given how far we’ve come, we should be looking for ways to get out of this market, not jump in.  Use this strength to lock-in profits or use a trailing stop near 1550 to protect recent gains.

Alternate Outcome:
The global economy is clearly on the rebound and  all the prognostications of doom and gloom failed to materialize.  In fact, I count myself as staunch bull and predict the next 10-years will produce phenomenal returns.    But I still expect intermediate and near-term volatility throughout the secular bull market.  Even though I am optimistic about the future, I expect a pullback is around the corner because the market goes two-steps forward, one-step back.

INDIVIDUAL STOCKS

AAPL is up $11 for the week and this 2.8% gain has many bulls excited this is finally the widely expected rebound.  I get a lot of negative feedback over my critical analysis of AAPL, but rather than persuade me to the bull camp, the sheer amount of cheerleading further convinces me there is still too much optimism in the stock.  Anyone who believes in AAPL already owns all the stock they can handle and there is no one left to buy.  We will see some tradable opportunities as the stock rocks back and forth within a trading range, but strength should be sold, not bought.

Stay safe

PM: Embrace or shun this market?

By Jani Ziedins | End of Day Analysis

PM Update

Markets closed modestly lower, is this a healthy pause or the start of the end?  AAPL took off today, but does this move have legs?

MARKET BEHAVIOR

The market gave back some of Thursday’s breakout and failed to set a new all-time closing high on Friday.  Instead of just 2-points away, we are now 4-points from the record.  Volume was off the chart, largely because of futures and option expiration (quadruple witching).

MARKET SENTIMENT

Friday’s gigantic volume showed a fundamental shift in many traders’ risk profiles as both speculative and hedging options expired and future contracts were settled.  Many traders who were previously indifferent to downside volatility because they had put protection are now flying without a safety net.  This fact alone will add volatility to the market because these traders are now more sensitive to weakness.

Maybe it is a coincidence, but the last time we saw this level of turnover was Sept 14th, the market’s exact top-tic before the Fall selloff. Taken by itself, this is a trivial piece of information, but combining it with other factors sets off all kinds of warning flags.  This this rally is 4-months old.  We are approaching the end of the quarter. We have the left shoulder and head of a H&S pattern.  People are afraid to short this market as seen in the lack of short-squeezes on blowout employment and new highs.  All the experts are predicting another 25 to 50-points in this rally before pulling back.  Volume is tapering off because holders are holding for larger gains (greed) and buying is drying up (running out of buyers).  The market shrugs off bad news (sequester and negative GDP).  And half a dozen other reasons I can’t remember right now.

As comfortable as people feel, this is the riskiest the market has been since the November lows.  The paradox of the market is people are most afraid during the safest period following a dip and aggressive in the riskiest period following a large run-up.   I have no idea what the market will do next week, but I fear this market more than I have in many months.  My paranoia might be premature, but I’m okay with that.

TRADING OPPORTUNITIES

Expected Outcome:
It is hard to be constructive on this market.  Today was the second close above 1560 and another couple closes above this level on Monday and Tuesday means we are likely to make a run at all time highs above 1575.  But as traders we have to ask ourselves if 15-points of upside is worth 100-points of risk.  As far as we’ve come, there are two people in the market right now.  The greedy holding out for more and the late buying just before the top.  Is that the company we want to keep?  Or should we be looking for an exit?

As individual investors we only have one advantage in this game.  Big money has the resources, experience, and inside contacts we cannot compete with.  The one thing these guys cannot touch is the nimbleness of our size.  We are  in and out of trades in seconds where it takes big money weeks to build and exit positions.  The best use of our size advantage is pulling out when the clouds are building and the odds are against us.  If we sit through market turmoil, we give up the only advantage we have in this game.

Alternate Outcome:
The dip to the 50dma last month flushed out many weak holders, clearing the way a continuation higher.  There  easily could be another 100-points of upside left in this rally.  No one knows what the market will do and all we can do is trade probabilities.  Given all the clues we have, is the market more likely to top in the near future or continue higher?  Obviously I think the high probability outcome is topping, but because of our nimbleness we are not committed to one trade.  We can easily change our minds when new information invalidates our previous thesis.  The safest trade here is to lock in profits, but for those that want to see if there is more left in this rally, move your trailing stop-up to 1545/1550.

INDIVIDUAL STOCKS

AAPL had a phenomenal day and regained levels we haven’t seen in since February.  But one day doesn’t make a trend and we need to see AAPL continue proving itself before it becomes a worthy buy candidate.  The first minor technical level to reclaim is $455, a minor peak last month on the way lower.  This would be a modest victory as the stock notches its first higher-high since the selloff began, but the real level to watch is $485.

Without a fundamental catalyst reigniting AAPL’s growth, it is unlikely the stock will trade above $485.  Dividend and buyback are nice, but they don’t change the growth story, only blowout earnings or a revolutionary new product will do that.  Can AAPL reinvent its product line again, or is it just another Sony, AOL, PALM, NOK, or BBRY? (all the most innovative companies of their day)

Stay safe

AM: Where are the buyers

By Jani Ziedins | Intraday Analysis

AM Update

Stocks are trading flat, just under record highs and AAPL is taking flight.

MARKET BEHAVIOR

Stocks sold off modestly in early trade, but found a bottom and recovered to break-even by late-morning.

MARKET SENTIMENT

At the open the market exhibited restraint from buyers and profit-taking by holders, but this was a brief episode as it quickly found a floor and dip-buyers prevented early weakness from cascading into something more.

Everyone is still waiting for higher prices and a climax surge to finish this rally off.  Until then they are buying dips, anticipating new-highs are a foregone conclusion.  Bears are becoming an endangered species and even they are afraid to short this market.  When everyone thinks the market will go one direction, it often heads the other.

If traders are expecting higher prices, they are already in the market waiting for those gains.  But if everyone is already in, who is left to buy?  The amazingly low volume earlier week shows a lack of both buying and selling;  holders are holding for higher prices and buyers are running low.  At least that is one possible, and bearish, interpretation of recent events.  For the bulls, they need to explain where new money is going to come from.  Some will claim the great rotation out of bonds, and while I agree, this is a multi-year process and not enough to prop up this market over coming weeks.     Money cleaving bonds will sustain a 10-year secular bull market, but it will not prevent intermediate corrections along the way.

TRADING OPPORTUNITIES

Expected Outcome:
The rally remains intact until proven otherwise.  That doesn’t mean we have to buy or own it at these levels, but it does mean we shouldn’t short this market simply because its gone too high and needs to pullback.  Wait for real signs of exhaustion or breaking down before betting on the reversal

Alternate Outcome:
There could easily be another 50-points left in this rally, but just because something can happen doesn’t mean it is likely to happen. If this rally is to continue, it needs to do it sustainably.  Today’s flat trade is a good start, but we still need to answer the question of where are the incremental buyers going to come from.

INDIVIDUAL STOCKS

AAPL is on fire today, likely because Samsung’s Galaxy S4 is largely similar to the S3 and didn’t leave the iPhone5 in the dust.  This is more relief than a fundamental reason to buy AAPL, but sometimes no bad news is good news.  But here’s the thing, if the S4 is mostly like the S3 and the iPhone5 is mostly like the iPhone4S, what does that say about the industry?

A lot of AAPL’s sales came from customers upgrading every two-years, but what happens when the difference between model years is not even large enough to justify paying the subsidized price?  I enjoy my iPhone5, but when neighbors ask if they should get the iPhone5 for $200 or the iPhone4S for free, the free one is clearly the better choice.  There is nothing special enough about the 5 to justify paying the premium.

The risk to both Apple and Samsung is their current products are so good that the upgrade cycle is going to stretch from 2-years to 4-years. Going forward customers’ existing phones will provide more competition to sales than the rivalry between Apple and Samsung.

Stay safe

PM: Two-points shy

By Jani Ziedins | End of Day Analysis

PM Update

Another new high as the market moves beyond support at 1550.  How much longer can we keep this up?

MARKET BEHAVIOR

Stocks had another strong day, closing within 2-points of the all-time closing high.  Volume was a little below average, but made a comeback from the previous three-sessions of extremely light volume.

MARKET SENTIMENT

This is getting interesting.  The after four-days of support at 1550, the market broke through 1560.  As we discussed, markets reverse fairly quickly, so four-days at this level made a continuation more likely than a selloff.  The question is where do we go from here?  Breaking 1565 is all but a given, what’s next?

It seems like everyone is expecting the rally to continue a bit further before rolling over.  Some predict 1575, others 1600, and even a few think 1625.  The one estimate I have yet to hear is imploding tomorrow.

We could hit 1575 on Friday easily with a short-squeeze and surge of breakout buying.  1600 is more of a stretch and I doubt we could keep this string of up-days going for another 40-points, thus it will take a couple of weeks and one dip to reach 1600.  1625 is even further and would take a month and a couple of convincing false selloffs along the way.  On the other side, we could drop to 1500 by next week and 1450 the week after since markets selloff far faster than they rally.

From here the market can go up, down, or sideways.  A sharp selloff likely means the rally is dead.  The market can only bounce so many times and we used more than our fair share getting to this point.  A dip under 1550 and finishing at the day’s lows is an interesting short entry with a stop above 1555.  A surge through 1565 and past 1575 tomorrow on huge volume signals the last buyers are chasing the rally.  This is a great time to lock-in profits and consider shorting when the market starts imploding.  Lastly, the only way we reach 1600 and beyond is if the market continues consolidating and grinding higher at a sustainable rate.

TRADING OPPORTUNITIES

Expected Outcome:
Anyone who missed this rally should not rush in since this is the riskiest the market’s been since the November lows.  If you waited this long, keep waiting for the next high-probability trade, most likely a short when this rally finally rolls over.  Anyone still in the market needs an exit plan.  Take profits early or use a trailing-stop to protect hard-earned gains.  From here 1545 is a decent a trailing-stop.

Given the above analysis, a decent trading plan is:
-Sell a strong move higher and look to short the subsequent breakdown
-Short a dip under 1550 with a stop above 1555
-Set a trailing-stop at 1545 and move it up as the market grinds higher
-If the above is too much, lock-in profits and wait for the next trade, likely shorting the breakdown

 

Alternate Outcome:
Many traders expect this market will rally another 25 to 50-points before rolling over.  If we want to be contrarian, we are left with two options, an imminent breakdown or marching ahead without a selloff.  Both are viable outcomes.  If everyone is looking for a top on a surge higher, it won’t happen because no one will chase it.  This could explain the modest breakouts seen the last couple weeks.  If no one chases, the market will run out of buyers without the obvious surge higher.

At the other extreme if these are too many reluctant buyers willing to buy every dip in an effort to catch this market, they will  keep pushing us higher far longer than anyone expects.  Using the above plan will help us trade anything the market throws at us.   There are no guarantees of in the market, but a sound plan moves the odds in our favor.

INDIVIDUAL STOCKS

AAPL continues trading between $425 and $435.  Churning at these levels for an extended period of time is one way to clear dead wood, potentially taking the place of another leg lower.  If we hold these levels and start rallying in the second quarter, AAPL might actually be buyable, especially if it does this in the face of a declining broad market.  Those are some big ifs, but it is possible.  Don’t rush out and buy the AAPL here because lower is still the high-probability trade, but failing to selloff would give this alternate outcome credibility.  But even if AAPL does rally, this is a trade and expect resistance at $485, especially if the rebound moves fast.

Stay safe