Category Archives for "Free Content"

The breakout is dead, long live the breakout

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

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

MARKET BEHAVIOR

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

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

MARKET SENTIMENT

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

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

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

TRADING OPPORTUNITIES

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

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

Stay safe

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

Breaking the logjam

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

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

MARKET BEHAVIOR

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

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

MARKET SENTIMENT

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

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

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

TRADING OPPORTUNITIES

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

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

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

Stay safe

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

Remarkably stable trade

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

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

MARKET BEHAVIOR

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

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

MARKET SENTIMENT

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

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

TRADING OPPORTUNITIES

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

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

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

Stay safe

Half-empty or half-full

By Jani Ziedins | Intraday Analysis

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

MARKET BEHAVIOR

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

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

MARKET SENTIMENT

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

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

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

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

TRADING OPPORTUNITIES

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

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

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

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

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

Stay safe

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

Head fakes and sideways trade

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

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

MARKET BEHAVIOR

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

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

MARKET SENTIMENT

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

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

TRADING OPPORTUNITIES

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

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

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

Stay safe

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

Volatile, but indecisive

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

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

MARKET BEHAVIOR

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

MARKET SENTIMENT

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

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

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

TRADING OPPORTUNITIES

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

ET CETERA

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

Stay safe

Selling slows down

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

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

MARKET BEHAVIOR

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

MARKET SENTIMENT

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

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

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

TRADING OPPORTUNITIES

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

Stay safe

Hopeful bulls get kicked in the gut

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

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

MARKET BEHAVIOR

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

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

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

MARKET SENTIMENT

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

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

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

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

TRADING OPPORTUNITIES

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

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

Stay safe

Bottom pickers getting sucked in

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

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

MARKET BEHAVIOR

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

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

MARKET SENTIMENT

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

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

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

TRADING OPPORTUNITIES

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

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

Stay safe

Taking a breather

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR

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

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

MARKET SENTIMENT

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

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

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

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

TRADING OPPORTUNITIES

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

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

Short-squeeze continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

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

MARKET BEHAVIOR

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

MARKET SENTIMENT

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

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

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

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

TRADING OPPORTUNITIES

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

AAPL daily at end of day

INDIVIDUAL STOCKS

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

Stay safe

The Romney short-squeeze

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

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

MARKET BEHAVIOR

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

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

MARKET SENTIMENT

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

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

TRADING OPPORTUNITIES

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

Stay safe

50dma bounce

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

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

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

MARKET SENTIMENT

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

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

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

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

TRADING OPPORTUNITIES

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

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

Stay safe

Pause at 50dma giving false sense of support

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

The trend lower continues and we are now sitting on the 50dma.  But the selling isn’t done because we haven’t had the high volume down-day yet.  Complacent holders are still holding and we need to shake them out before the uptrend can resume.

MARKET BEHAVIOR

Bottom-pickers keep lifting the market at the open, but follow-on buying never materialized and prices declined through the day.  This is the 6th day in a row the markets finished near the bottom of the day’s range.  We are sitting on the 50dma and just under prior support at 1430.  So far this decline has not triggered an avalanche of automatic sell-orders, but that day is close if we fall much further.

There are clamors of double-top or double-bottom depending on who is speaking.  One will be right and one will be wrong.  Unless of course both are wrong.  Or both are right.  Funny how that works.  In the market timing is everything and in cases like this, both a bull and a bear can make money depending savvy entry and exit.  The short-term trend is lower and the intermediate and longer-term trends are higher.  If all three of these trends remain intact, we have a little left on the downside, but will resume the uptrend shortly.

MARKET SENTIMENT

Any bull should be hoping for a panic moment in the market that triggers a flurry of selling and shorting.  All that selling creates the fuel necessary for the next rally.   Without that frightful plunge forcing participants out of the market, there will be far fewer buyers available to push prices higher and most likely that weaker rally will fizzle, returning to these levels where it will finally plunge and create that fuel necessary for the real rebound.

No matter what anyone says, the markets operate strictly on supply and demand.  After a purge of sellers, the number of available sellers dries up and with and increased number of people out of the market, the quantity of available buyers goes up.  Low supply and high demand.  That is the recipe for increasing prices.

Of course this is just one possible outcome, but it plays out time and time again.   If you are bullish and want to see a sustainable rally, start rooting for confidence shattering down-day.

TRADING OPPORTUNITIES

Shorts should start to cover and longs should look for entry points.  But remember, buy late and sell early.  That is the key to making money in the markets and sleeping at nights.  Anyone who sold strength over the last couple weeks is confidently waiting for the next buying opportunity.  Anyone who held too long is nervous, wondering if the bounce will happen or if they should sell before all their profits disappear.  Do the smart thing and always take the easy way out for your sanity’s sake.   We’re in this to make money, not own stocks.

Stay safe

Hope is not a strategy

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

The bull’s feeble rally attempt failed as AAPL fell apart.  Expect the market to drift lower to until we have a huge purge that puts some fear back into traders.

MARKET BEHAVIOR

Markets popped at the open, but gave back most of those gains.  AAPL is having another tough day and raining on the bull’s rally attempt.  Low-volume continues as weak bulls are still hopeful and hanging on.  Most likely the market will run those guys off in a shakeout before resuming the uptrend.

Volatility is creeping back, but only modestly so.  For the first time in a while we are seeing material down days.  This demonstrates the balance of power is more even and bears finally have a fighting chance.  That doesn’t mean we are about to breakdown, just the easy ride higher has come to an end.

MARKET SENTIMENT

Today’s rally was bound to fail.  The mini-trend lower is driven by bull’s hopes of a rebound.  They are holding through the dip because every other time it bounced.  But hope is a horrible strategy and the market is taking aim at the hopeful and complacent crowd.  A high-volume break under 1425 and the 50dma is what the market is working toward.  The sooner the market purges, the sooner we can get back to notching a 52-week high.

Trading volume remains below average and shows weak hands are still hanging on.  Today’s relatively modest pop also shows bears are not over-committed to this market because it did not trigger a massive short-squeeze like we’ve seen so many other times.  Hope by bulls and bear’s fear of getting stung again on the short side indicates we probably have more downside left.

To bottom we need to scare bulls and bring out the arrogance in bears again.  People trade their outlook and when bulls have given up and bears have gotten aggressive will indicate the point where most of the selling has already occurred and a rebound is likely.  Until then we’ll drift lower.

But remember, these are mini-sentiment trends within a larger bull move.  The dip is just a dip and the market will resume higher after sowing some fear in the market.

TRADING OPPORTUNITIES

Too early to buy the dip and too late so short the market.  Unless you are a day-trader, it is best to sit tight and wait for the purge and rebound before buying back in.  If you have a healthy profit in a stock, you can consider waiting this out, but prepare to be scared and tempted to sell before the market recovers.  If the election becomes a turning point for the market, we have to endure a few more weeks of this.

AAPL daily at end of day

INDIVIDUAL STOCKS

Buying AAPL’s dip hasn’t worked out well and anyone who bought in the last two-months is underwater.   The obvious trade is obvious, and obviously not working now.  AAPL probably won’t make for a good buy until everyone is talking about how the run is over.  The last great catalyst for AAPL was Steve Job’s medical retirement and untimely death.  That put a lot of pessimism in the stock and cleared the way for a move higher.  Now there is too much optimism and everyone who wants a piece of AAPL already has one.  With no new buyers remaining, the selloff will continue.  Not a crash, just a glide lower.

Stay safe

Low volume selloff continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

Markets sagged for the 4th consecutive day.  We’re testing support at 1430 and pushing toward the 50dma.  We didn’t mark a new 52-week high like I expected, but AAPL started weighing on the markets before that could happen.  The S&P500 looks like normal profit-taking within a longer rally, but the NASDAQ is having a tougher time.  Interesting thing is while AAPL dragged us lower, it found support and finished positive for the day, but the wave of selling spread and even AAPL’s newfound resilience couldn’t prop up the market.

The market corrected more than 2% over the last 4-days, but volume each day was under average.  There are two ways to look at this.  First sellers are not rushing for the door and continuing to hold.  Prices are declining because buyers are not stepping up, preferring to wait and see.  This interpretation of low-volume is bullish because the market is not flooded with supply.  But on the other hand, the big red flag is we have not had a high-volume flush-out that clears the way for a move higher.  The low-volume selling means weak holders are still holding and chances are we need to see a high-volume capitulation point before we can turn around.  This could happen tomorrow as we penetrate the 50dma and fall under 1425 support.  Or complacency could let us drift lower for a longer period of time.  We’ll know the answer soon enough.

MARKET SENTIMENT

It feels like we are stuck in no man’s land.  There is a fair amount of pessimism in the headlines, yet there is complacency in the market as demonstrated by this low-volume selloff.  This could be a typical mid-rally consolidation that puts some fear back into complacent traders.  Most likely this slide will continue until we get that high-volume capitulation day.  That could happen tomorrow, or it could happen next week.  But we need renewed fear before the rally can continue.  The buy-the-dip trade has worked a bit too well and the market is setting up to zing those showing up late to the party.

Looking at the calendar, I think we could see the weakness and/or indecision continue into the election.  And then just for fun, the market will rally after an Obama win.  The market doesn’t like to be predictable and a rally into the end of the year will be the least expected thing to do.  Flipping buy-the-rumor, sell-the-news on its head, we should sell-the-rumor of an Obama win, and buy-the-news.  So far the market is setting up that trade.

But what I am talking about is a few percent move one-way or the other.  Sentiment is not skewed enough for a major jump either direction.  We are at similar price levels as this spring, but there was a huge level of complacency after the best Q1 rally in 20+ years.  That complacency is what enabled the big selloff.  But we are also not at the same level of pessimism we saw this summer, which fueled the 3rd quarter rally.   We’re stuck in the middle and as such we should expect a middling move from here.

TRADING OPPORTUNITIES

Buy weakness, sell strength.  The market is a pendulum swinging back and forth as market participants waver between emotional extremes.  We are on the downtake here, but wait for the capitulation point before buying the dip.  A high volume pop on surprising news could also be buyable, but the rebound will have a more solid foundation if we shake out the complacent holders first.

The market is not rife with optimism and complacency; so don’t anticipate the market breaking down.  The uptrend remains intact until further notice and shorting a bull market is a great way to lose money.  If you are short, don’t get greedy and consider taking quick profits on a break under support.

AAPL daily at end of day

INDIVIDUAL STOCKS

Sorry to keep talking about AAPL, but it is one of the most owned stocks and it represents an oversized portion of the indexes.  I’ve seen too many buy-the-dip articles concerning AAPL and that continued bullishness makes it seem like there is more downside left in the stock.  But unlike a bubble stock that crashes and burns, AAPL is the bluest of the blue-chip stocks and people will be buying every dip.  Stocks like that don’t crash, they glide lower.

I’m not saying this is what is happening with AAPL, but just be aware that AAPL won’t crash, it will drift lower.  Let that be a warning for both bulls and bears.  For bears, don’t expect huge drops, take your profits early and re-short the bounce.   For bulls, don’t let the gentle decline and repeated bounces give you a false sense of security.  In my honest opinion, there are a lot better trades in the market than buying or shorting AAPL.

Stay safe

Live by AAPL, die by AAPL

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR

Markets are churning about the 1450 level again.  Last few days were above, today we are back under.  The elephant in the room in AAPL and it is crushing the NASDAQ, pushing it under the 50dma for the first time since July.  Live by AAPL, die by AAPL.  The tech-heavy and smaller-cap focused NASDAQ is showing clear signs of breaking down, falling under previous support and moving averages, but the far more diversified S&P500 is still well above support and moving averages.

The divergence in the indexes is making it harder to identify the next move.  Is the NASDAQ’s weakness a single-stock or a tech-sector issue?  Or is it broader?  Is AAPL the canary in the coalmine foretelling future problems, or is it simply an issue of a momentum stock running out of new buyers?  Or is AAPL just resting before leading the markets to new highs?

So far every dip in the market and AAPL has been a buying opportunity.  Is that still the case, or is the buy the dip patter too easy and the market wants to throw in a bigger dip or correction to keep traders honest?

MARKET SENTIMENT

Four weeks until the election.  A lot can happen in the markets over 20 trading days.  Will we correct between now and then and rally afterward?  Will we rally into the election and correct after?  Or will it not matter at all?

In spite of all the debate, headlines, and talk show chatter, Obama is the clear favorite and it would be a monumental upset if Romney took the election.  The markets are always looking at the future and no doubt an Obama reelection is expected and priced in.  If Obama does win, the market could shrug because it predicted the outcome months ago.  Or even more off the wall, the market could rally after an Obama win just to humiliate everyone who insists Obama is bad for the stock market.  The stock market doesn’t do what it is supposed to do, and rallying after an Obama win would fit the bill.

But what happens if Romney wins?  That would shock the market because it is not priced in.  No doubt the initial reaction would be a surge higher, but sticking with the unpredictability theme, a Romney win could lead to a sell off.

No doubt it is contrarian to think the market will rally under an ‘anti-business’ president and sell-off under a ‘pro-business’ president.  But that is most likely what will happen.  Obama is the status quo, Romney is change.  If there is one thing the market hates, it is change and the uncertain outcome associated with change.  We know what the rules will be under Obama and we’ll get more of the same.  Romney is promising ‘repeal and replace’.  What does that mean?  What are we going to replace Obamacare and financial regulation with?  Contrary to conventional wisdom, the market will rally under Obama’s stability and it will sell off under Romney’s restructuring.

TRADING OPPORTUNITIES

The markets could go either way here and there is more risk to owning stocks than there has been in some time.  The safer trade is to wait for higher probability opportunities.  There is enough caution and pessimism in the markets to fuel additional upside.  We are still a long way from the complacency last April that lead to the big correction, so I don’t see a similar material selloff in our near future.   But we could see buying dry up and prices decline as buyers take a wait and see approach.  This is exactly what happened today as the markets sold off on average volume.  Seller was at normal volumes, but the buyers didn’t show up.  That is why the markets declined on average volume.  Will buyers come in when prices are attractive enough?  Or is there enough uncertainty that they will wait for another few percent decline before taking the bait?

The great thing about selling strength is you are not faced with these decisions.  Take your money and start looking for the next high probability trade.  Only the greedy wait for top dollar.

INDIVIDUAL STOCKS

Hard not to talk about AAPL.  It broke under the 50dma on Monday and the selloff continued Tuesday.  But the stock reversed in late morning and recovered most of today’s losses.  Was this the bounce smart money was buying, or is it simply dumb money rushing in to buy the dip?  AAPL is a great company and a great stock.  But with nearly 5,000 institutional investors owning the company, who doesn’t already have as much AAPL as they want?  Where is the next incremental buyer who pushes the stock higher going to come from?  Of course I made this same argument at $500 and was wrong.  Time will tell.

Stay safe

Jobs report gives, AAPL takes away

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

Markets popped at the open on the monthly employment report.  It’s not worth debating the nuances of the report, the market liked it and that’s what matters.  The S&P500 rose to 1470, but faded into the close.  The culprit was a stumbling AAPL.  The NASDAQ fared even worse since AAPL represents a supersized position in that index.  Live by AAPL, die by AAPL.

It is unusual for a single, volatile stock makes up such a large portion the indexes and because of that, we can’t overlook the price action of AAPL when talking about the market.  AAPL closed under the 50dma on large volume, a clear sign of distribution.  If AAPL continues breaking down, it will take the S&P500 and NASDAQ with it.

On the flip side, the S&P500 is still within 1% of a 52-week high.  Market makers make money from trading activity and no doubt they’ll do their best to push us to new highs to trigger a short squeeze and bring in all the breakout buyers.  The bigger question remains if a new high will be part of a double top, or a continuation pattern.  The market covered a lot of ground in the last 6 weeks and it wouldn’t be unusual to see it pullback and form a handle before pushing through 1475.  I’d say a new high is a done deal except the weakness we’re seeing AAPL makes things a lot cloudier.

MARKET SENTIMENT

There are still a lot of cynics who are increasingly frustrated with the market’s strength in spite of all the reason it should go down.  But I sense they are transitioning from arrogance to dejection.  Self-doubt is creeping into their psyche after getting beat-up time and time again by the market.  This is part of the slow grind turning bears into bulls.  Reluctant investors wading deeper into the market and bears buying back shorts are the new buyers pushing this market higher.  The market is ruled by supply and demand, not fundamentals and technicals.  Investors buy and sell based on their perception of fundamental and technical analysis, but it is the actual buying and selling that moves market prices, not the fundamentals and technicals.  This is a critical distinction most traders overlook and often turns into an expensive omission for many.  We are not trading stocks, we are trading other traders.

TRADING OPPORTUNITIES

The market still wants to go higher but each gain becomes harder than the one before.  We are further along into this and getting close to the end of the run before the market needs to rest and consolidate.  Keep an eye out of an opportunity to lock profits in and get ready for the next high probability trade.  We should be looking at getting out, not in at these levels.  Resist the temptation to chase.

AAPL daily at end of day

INDIVIDUAL STOCKS

Can’t ignore the negative price action in AAPL today.  Reports of a supplier strike affecting iPhone 5 production is making headlines.   IPhone buyers are a loyal group and I doubt after waited this long for their phone, a few more weeks will make them jump into Samsung’s arms.

The bigger issue facing Apple is iPhone fatigue.  From my casual observations, the iPhone is no longer the cool phone with young people and they are excited about the Samsung Galaxy S III.  Steve Jobs revolutionized the smart phone market, but the competition is catching up, and in many ways exceeding them.  Phones are becoming an extension of a person and many don’t want the same phone everyone else has (or worse their parents have!).  But this is a first world story, AAPL still has huge growth opportunities throughout the world that will easily make up for the declining market share in the developed world.  The question is if that will be enough to keep up the huge growth rates we’ve seen to this point.

Stay safe

Markets on track for new highs

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 3:22 EDT

MARKET BEHAVIOR

Markets continued yesterday’s rally and are trading around the 1460 level.  The recent high of 1474 is easily within reach and the market feels like is being drawn back up to that level.  But the bigger question remains, will this new high will be a breakout or a double-top?

MARKET SENTIMENT

Employment numbers come out Friday and that will nudge the markets a percent or two one-way or the other.  The over the 4-month uptrend, the markets shook off any and all disappointing news.   Up until now the employment report has been win/win for the markets, high number shows economic growth, low number means more easy money from the Fed.  Will that trend continue tomorrow since we already had the QE-finity pop?

While the market could go either way, the key will be watching how other traders react to the news and the market’s price move.  Is everyone excited and relieved?  Are they all running around talking about an economic crash?   Will they say buy the dip?  Or sell the pop?

The contrarian trade is to sell confidence and complacency and buy fear and despair.  Because of the pullback last week, I don’t expect an excess of downside potential remains in the markets.  The weak holders were shaken out and there is far less selling potential left.

The most bullish outcome will be a pop above 1475 and at the same time everyone is doubtful and suspicious of the rally, claiming the market is overvalued.  The pop in price combined with the reluctance to buy means there is a lot of power behind the market and all those reluctant buyers are the fuel to drive prices higher.

The most bearish outcome would be if the report is good, but prices sell0ff and all the pundits are saying this is a great buying opportunity.    That means most are invested in the market, yet it can’t hold up and all those owners are potential sellers.

TRADING OPPORTUNITIES

Unless the employment report crashes the market, I expect we’ll set a new 52-week high in the S&P500 index fairly soon.  Even if the initial reaction to the employment report is disappointing and the markets selloff, that will represent a buying opportunity as the market regains its footing and resumes its quest for marking that new high.

The guide going forward will be responding to sentiment after the new high.  I expect a fair level of cynicism will remain and that will fuel the rally for a bit longer.  But if we see all the bears giving up and going long, then we need to take profits and wait for the market to correct.

Stay safe

Back above 1450

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

A modest 0.3% rally in the S&P500, but closing above 1450 again shows this market is not on the verge of breaking down and the bulls bucked the best the bears could throw at it last week.  Markets crash dramatically and we’ve moved beyond that risk of imploding.

MARKET BEHAVIOR

Stocks are still finding support at these levels in spite of the dramatic slide last week.  Up to this point smart money has been buying weakness and selling strength.  Selling/shorting weakness or buying strength has been a recipe for disaster.   But that is the contrarian way, go against the crowd.  But please note the important distinction, contrarian is going against the crowd, not the price.  Short when everyone is confident and complacent, not simply when the price seems too high.   Our current rally demonstrates this phenomenon where high prices have lead to even higher prices because most investors have been fearful of the market, not confident and complacent.   Buy fear, sell complacency.

MARKET SENTIMENT

For all the fear and risk in the markets, the uptrend is holding its ground.  The problem most bears are running into is all their reasons for a correction are widely talked about, and thus priced in the market.  In most instances we can safely ignore what everyone is talking about.  Only fear the risks everyone is ignoring.

For three years everyone has been talking about slow economic growth, unemployment, European contagion, money printing, and a slowing China. There is nothing new about any of these ideas and the financial press is simply recycling old headlines.

If we look back at the last major market crash in 2008, how many people knew what mortgage-backed securities, credit default swaps, and financial contagion were prior to the crash?  Where were all the gurus and pundits talking about how dangerous the market was?  We were in the middle of an election cycle and headlines focused on the two parties arguing about how bad or good the economy was.  It wasn’t until after big banks started imploding that we finally realized the severity of the situation.  That single reason is why 2012 will not turn out like 2008.

When amateur investors are talking about these risks fluently, we know we can safely ignore them.  Supply and demand dynamics in the markets makes it so all the people fearing those events have already sold, meaning there is far less downside left in the markets.  But on the flip side, the market tends to over-estimate the worst and in most instances the actual result is not nearly that bad.  When events finally play out better than feared, the markets launch ahead with all that pent-up demand rushing back into the markets.  Now this isn’t a race with a starter pistol and an official calling false starts, in this race we can jump out of the blocks early and get a head start.  And in fact this is exactly what happens most of the time as the market rallies in anticipation of a resolution and if you wait for the actual news, you are too late.

TRADING OPPORTUNITIES

Stay long, but keep looking for opportunities to lock in gains.  Technically there is another 125 S&P points of upside before we run into the 2007 highs.  I’m not sure we’ll make it all the way up there before running into an intermediate correction, but it is on the radar and not out of the realm of possibility.  The market is holding up well and refusing to crack after last weeks test, so the high probability trade continues to be on the upside.  There needs to be a bit more optimism and complacency in the markets before we see a more meaningful pullback.  But that day is getting closer.

Stay safe