Category Archives for "Weekly Analysis"

Sep 11

The breakdown that wasn’t

By Jani Ziedins | Weekly Analysis

Free End of Week Analysis: 

The S&P 500 started the holiday-shortened week the same way it ended the previous week, deep in the red. That said, Tuesday’s lows were about as bad as it got. The market attempted a rebound Wednesday. Thursday it gave back those gains. And Friday finished flat.

It’s hard to call this week good, but six days into a selloff and it definitely feels like the tidal wave of selling lost a lot of its early momentum.

While the market remains 7% under last week’s highs and bears are the most confident they’ve been in months, their inability to extend the selloff on Friday is definitely noteworthy. We undercut the weekly lows and instead of triggering another avalanche of defensive selling, supply dried up and prices bounce back to breakeven. If this market really was fragile and vulnerable, these little cracks spiral into gaping holes, they don’t bounce back within hours.

If we focus on the last few days, it seems like the market is settling into a stalemate. While this could still break either way, I give the edge to the bulls. Everyone knows market crashes are breathtakingly quick. Sell first and ask questions later is the name of the game. On the other hand, holding steady for three days gives nervous owners time to regain their composure and it suggests fearful supply is drying up. If we hold current levels into next week, bulls will even start getting their confidence back.

It all comes down to Monday. A strong open is buyable with a stop near 3,310. If that strength fizzles and prices retreat, no big deal, we pull the plug and wait for the next bounce. But most likely, that strength will stick and even accelerate. Wait too long and there is a good chance you will miss the move.

The only thing to be wary of is a crash under 3,300. Few things shatter confidence like screens filled with red and if we crash under recent lows, all bets are off and the most aggressive can try shorting. But as long as we remain above 3,310, this is a buyable dip. Remember, start small, get in early, keep a nearby stop, and only add to what is working. If prices crash next week, no big deal, it just gives us more profit potential when the market finally bounces.

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Jun 19

Weekly analysis: Bad day, good week, and what it means

By Jani Ziedins | Weekly Analysis

Free Weekly Review and Lookahead: 

Friday’s price action was disappointing as a 40-point opening gain dissolved into a 20-point loss. But if you zoomed out to the weekly view, it was actually a good week and the market reclaimed 60-points that were lost the previous week.

Headlines continue obsessing over a “second wave” and Friday’s tumble was exacerbated Apple re-closing 11 of its stores in four states.

Hopes of a quick recovery could be thwarted by another government-imposed shutdown, but so far most states continue reopening despite the recent uptick in infections. At this point, there might not be the political will to force people to stay indoors indefinitely.

But even if the government doesn’t force us to stay indoors, people might be reluctant to resume their normal lives if every news broadcast starts with a body count. Fear-mongering and human nature are just as important to this recovery as government policy.

But when it comes to stock prices, investor sentiment is far more important than reality. As long as investors remain optimistic about the future and refuse to sell their favorite stocks at a discount, expect stock prices to remain stubbornly firm despite what the headlines keep shouting at us.

It has been a scary few months and stock owners who fear the Coronavirus and subsequent shutdowns have been given plenty of time to bail out. And not only that, these nervous sellers were replaced by confident dip-buyers who were buying despite the dire headlines. If these confident owners didn’t sell the “first wave”, what are the chances they will sell this “second wave”? When confident owners refuse to sell, headlines stop mattering.

As long as this market remains above 3k support, the larger Covid rebound remains alive and well. Even a dip and test of this level isn’t a reason to abandon ship. But if prices fall under this level and the selling accelerates, as nimble traders, it is our responsibility to get out and reassess. Until then, continue giving this rebound the benefit of doubt.

Next week is an important make-or-break week for the market. If the breakdown doesn’t happen next week, it isn’t going to happen. Keep your stops near 3k and let the market tell us what it wants to do next. Until the price action tells us otherwise, ignore all the cynicism and second-guessing.

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May 29

How much life is left in this rebound?

By Jani Ziedins | Weekly Analysis

Free End of Week Analysis and Lookahead:

The S&P 500 extended its weekly win streak to three out of the last four and finally reclaimed the 200dma for the first time since early March. As much as it feels like the wheels are coming off the global economy, the S&P 500 is completely oblivious and 10% shy of all-time highs. (The Nasdaq is only 4% away.)

As much fun as it was watching the market rally 40% in two months, we need to keep our expectations in check. There is no way we will do another 40%. Even collecting another 10% to get back to all-time highs will be challenging. While this feels like an invincible market, someone always gets left holding the bag. Now don’t get me wrong, I’m not a bear or anything close to that. But I have been doing this long enough to know that we need to be really careful when this feels too easy. By the time this resilience is obvious to everyone, it is getting really late in the game.

Without a doubt, momentum can keep carrying us a little higher, but this is definitely a better place to be locking-in swing-trading profits than chasing prices higher. If we are in this to make money, the only way to do that is by selling our favorite positions. Being proactive usually means selling too early, but if we assume it is impossible to consistently pick tops, that means we either sell too early or we sell too late. I like selling too early because that leaves me in the best position possible to take advantage of the next opportunity. When everyone else is debating whether they should bailout, I’m looking at a buyble the dip.

But that’s just me. You do what’s right for you. As nice as this ride has been, it is probably time to start planning our exit. Whether that means selling proactively on the way up or following the market with a trailing stop and getting out on the way down, it doesn’t matter as long as you pick something. And even better, do a little of both! Take some profits proactively and hold the rest with a trailing stop. But whatever you do, don’t be that guy left holding the bag.

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May 23

Should we be shorting this strength?

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis and Lookahead: 

This was a good week for the S&P 500 and it logged a 3.2% gain. That said, nearly all of those gains occurred Monday morning at the open when prices snapped back from the previous week’s dip. Following those early gains, the market spent most of the week drifting sideways. But given how dreadful the economic headlines are, sideways is an impressive achievement in of itself.

Two weeks ago the market pulled back as much as 6% in the biggest test of this rebound. But rather than crumble, prices bounced back to set even higher-highs. Instead of caving to the pressure, this resilient market keeps grinding higher.

There is an endless stream of cynics criticizing this market for refusing to go down. But rather than argue with this strength, wouldn’t it be smarter to profit from it? That’s one of the things I don’t understand about many traders. They frequently accuse the market of being “rigged”. Well, if you know the market is rigged, instead of complaining about it, why don’t you turn those insights into a few bucks? If we know this Covid market is “broken”, rather than argue with it, why not use this knowledge to make some money?

I’ll be the first to admit I’ve been suspicious of this rebound and have been wary of the “inevitable” pullback. But as long as this market keeps trading well and is grinding higher, I have no other choice but to respect that and give it the benefit of doubt. There is nothing wrong with shorting the cracks when they form, but we need to be quick to lock-in profits because it gets ugly real quick if we stubbornly hold a losing short too long.

But more than question this strength, when a market is trading this well, we follow those signals and keep jumping aboard the bounces. I have no idea how much longer this rebound can continue defying gravity, but as long as it keeps telling me it wants to go higher, I have no choice but to grab on and enjoy the ride.

Until we get a string of dreadful closes or start a new pattern of lower-highs, we must continue giving this market the benefit of doubt. There will be inevitable down-days along the way, but as long as there is more up than down, this rebound is alive and well.

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May 09

How much risk are you holding?

By Jani Ziedins | Free CMU , Weekly Analysis

Free End of Week Analysis and Lookahead: 

The S&P 500 added 3.5% this week and produced its first weekly gain in three weeks. That said, the previous two weekly losses were fairly modest at -1.3% and -0.2%. This continues to be the most epic rebound of all rebounds and the index is towering 30% above March’s lows.

In previous posts I covered the reasons this market is ignoring the horrific economic carnage surrounding us. But for those that missed it, it mostly comes down to the market’s forward-looking nature pricing stocks for where we are headed, not where we are today. The stock market expects the economic situation to be much improved in six months and that is how it is valuing stocks today.

But now that stocks are significantly above the selloff’s bottom, is there still a reason to be buying stocks at these levels? As is usually the case, the answer is both Yes and No.

First, let’s start with the Yes. Momentum is definitely higher and this market is refusing all invitations to breakdown. We just completed the seventh week of this rebound and if it was unsustainable and vulnerable to a crash, it would have happened by now. Compare this to the typical market crashes that are breathtakingly quick and force traders to sell first and ask questions later. The market most definitely doesn’t give us the luxury of multiple months to thoughtfully consider the full situation and allow us to sell in a calm and orderly fashion before the crash.

But just because this market is trading well and will most likely continue trading well doesn’t mean it is a good buy. Successful trading has less to do with the outcome of any individual trade and is more about managing our risks. Let’s say chances are good we can make $20 over the next few weeks. That seems like a no brainer, right? Well, what if that opportunity to make $20 also came with the risk we could lose $80. Does it still seem like a good deal? Probably not.

This market is dramatically higher and most likely it will keep going higher. But just because it goes higher doesn’t mean we should be chasing it here. The big run from the March lows ate up a big portion of the upside and means there is less profit potential left for us to squeeze out of the market over the near-term. And more than just limited upside, if there are any bumps in the road, there is an awful lot of air underneath us right now.

Given how skewed against us the risk/reward currently is, this is definitely a better place to be locking-in profits than adding new money. Just because the market goes up next week and the week after doesn’t mean buying stocks at these prices was the smart trade.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

May 02

What to look for next week and how to trade it

By Jani Ziedins | Weekly Analysis

Free End of Week Analysis:

The S&P 500 finished in the red last week but the 0.2% loss hardly seems noteworthy. The optimist will say a six-point loss is laughable. The pessimist will say the lack of meaningful buying is the early signs demand is drying up. Which side is right? While I’d love to tell you, unfortunately, we will only know after it happens.

Momentum or gravity, which wins next week? While I cannot say what direction we go, we are definitely at a tipping point. If this market doesn’t break this week, it isn’t going to break anytime soon and we can quit worrying about it. But if it breaks, it is going to break in a big way. Either no move or a big move, now that’s something I can plan a trade around.

All we need to do is wait for the market to reveal its hand. If it stumbles, short the weakness with a nearby stop. If that initial wave of selling fizzles and bounces, cover and wait for the next opportunity. Just because the first trade doesn’t work doesn’t mean we give up and go home. Sometimes it is the second or third move that finally works. If we don’t stick around, then we let someone else collect profits that were supposed to come to us.

On the other side, if we get to the back half of the week and the selloff hasn’t started, give up because it ain’t going to happen. There is a fine line between patient and stubborn and we don’t want to step over it.

As usual, start early and start small. Regardless of the opening gap, short any early move that stumbles from the opening levels with a stop just above this level. Only add more money after the trade starts working. If we close near the lows, consider holding the position overnight. If the market rallies into the close, take what profits we have and try again tomorrow. If the first trade doesn’t work, get out and try again. And if the bounce is decisive, admit defeat and go long. There is no room for pride in the market, only making money and losing money.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Apr 24

What to expect from this market next week

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis and Lookahead

The S&P 500 lost 1.3% this week and slipped for only the second time in the last five weeks. As bad as the headlines have been, the stock market is holding up amazingly well as it continues ignoring all the critics calling for a pullback.

I will be the first to admit I was among those waiting for a pullback because that’s what markets typically do. Yet, this one is defying the odds. And even that is not that unusual. Markets tend to do the opposite of what the crowd expects. Not because it is spiteful, but because that’s the nature of supply and demand.

When people expect a particular outcome, they naturally trade in anticipation of it. That means all of the people who feared a near-term pullback already sold. Once these cynics abandon ship, there is no one left to sell and supply dries up. Holding true to its contrarian nature, when the crowd calls for a pullback, prices hold up instead.

While I was one of those that expected a pullback three weeks ago, I was also one of the first to change my mind when the market refused to do what it was supposed to do. There are few trading signals more reliable than looking at what a market isn’t doing. A market that refuses to go down is far stronger than most people give it credit for and it deserves our respect. While we don’t have to embrace this market, we definitely shouldn’t be fighting it.

What does next week hold? Most likely more of the same. The market is very comfortable at these levels and it will take something significant to change that. Right now we are in a very bad place but things are improving ever so slightly. Infection rates are starting to slow and some states are starting to relax their restrictions. If we get more of the same next week, expect stocks to continue trading well, which mostly means sideways to slightly higher.

To make a dramatic move higher or lower, we need a significant change in the headlines. Either a huge surge in infections and deaths. Or a cure. Outside of those extremes, expect more of the same, i.e. continuing to defy the cynics.

That said, as nimble individual investors, we shouldn’t be married to our outlook. If the environment changes, change with it. If stocks breakout or breakdown, disregard everything we believed previously and jump aboard the next move. When we disagree with the market, the market is always right.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Apr 17

Free Weekly Analysis and Lookahead

By Jani Ziedins | Weekly Analysis

Free End of Week Analysis and Lookahead

The S&P 500 finished the week 3% higher and was the third up-week out of the last four. Equally impressive is Friday closed at the highest levels in six weeks. And not to be overlooked, this week’s spread between the lows and highs was the smallest in two months. As dire as the economic headlines have been, the stock market definitely seems to be coming to terms with our new reality.

Is a relatively modest 15% decline from all-time highs enough to account for the largest economic shock since the Great Depression? At this point, the stock market seems to think so. My Thursday post touched on some of the reasons the market finds itself at current levels, namely most investors believe the economy will bounce back relatively quickly. While this is part of the answer, there are also other supply and demand factors at play.

One of the bigger contributors to this limited selloff is the fact many investors have already lived through stock market crashes. Most of us were around to witness the 2008 Financial Crisis that cut stock prices in half. And the more recent example of 2018’s Christmas massacre that saw stocks tumble nearly 20% between Thanksgiving and Christmas.

What was the biggest takeaway from both of these crashes? Stocks bounce back even higher. Reactive sellers were left behind when the indexes pushed to new highs without them. Regret is a powerful motivator and these investors were not going to make the same mistake twice. Fool me once, shame you. Fool me twice, shame on me.

At least for the time being, many would-be sellers learned to hold through volatile episodes and not succumb to the panicked feeling in their gut. Rather than impulsively sell stocks again, these investors are still hanging on. And so far discipline has been rewarded with prices dramatically above the March lows.

No matter what we think should happen, when confident owners don’t sell, prices don’t fall.  While we could see prices slip over the next week or two in a normal and healthy exhale, as long as the selling remains restrained and orderly, any dip is a buying opportunity, not an excuse to abandon ship. Short-term traders can exploit this weakness, but long-term investors should stick to their buy-and-hold plan.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Apr 09

Free End of Week Analysis and Lookahead

By Jani Ziedins | Weekly Analysis

Free End of Week Analysis and Lookahead

The S&P 500 closed out another outstanding week, this time finishing 12% above last Friday’s close. As is usually the case, the best days (and weeks) occur in the middle of the worst times. As I often write, the market likes symmetry and it is no surprise this historic selloff contains an equally historic rebound.

As incredulous as people were two weeks ago when the index surged 20% and (technically) started the next bull market, thus far the new bull has been sticking. I’m most definitely not critical of the people who were skeptical of this sharp bounce because I was right there with them. Of course as is often the case in the market, the more people that think the same thing, the less likely it is to happen. There are a lot of structural and psychological reasons why this happens, but suffice to say, if an idea is too popular, the market is more likely to do the opposite of what most people expect. And that is exactly what we got this week.

Does this sharp bounce mean the selloff is over? No, of course not. Anyone who saw this morning’s weekly unemployment claims knows we are a long way from solving our economic problems. While social-distancing policies have done a lot to contain new infections, they are doing a number on our economy. So far the government has done a good job of reassuring markets by throwing truckloads of money at the problem, but it is safe to say any return to normalcy is still a long way in the future.

As is often the case, the market tends to overshoot during these crashes and the subsequent bounces. Last month’s crash went too far and it appears like this month’s rebound will end the same way. That said, it is easy to predict what the market will do next because it always does the same thing. The challenge isn’t predicting a near-term pullback, it is predicting when it will happen. And most important to us, getting the timing right is where all the money is made.

At the risk of sounding like a broken record, I’m still skeptical of this rebound and suspect the next pullback is just around the corner. That said, I’m prepared to be wrong again next week. What the market thinks is a lot more important than what I think. If it wants to keep going up, then there is only one way to trade it. That said, when the cracks start showing, be ready to get out of the way and even go short. If a person wants to know how I’m trading this, take a look at yesterday’s post.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Apr 03

What to expect next week

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis and Lookahead

It definitely felt like another rough week for the S&P 500 as the market retreated from last week’s rebound, especially Wednesday when the market shed 4.4% in a single session. That said, if you stand back and look at the weekly chart, it doesn’t seem so bad. For the week, we only gave back 2% of last week’s 10% rebound. I’d actually go so far as to call that resilience a win.

Stocks tumble from unsustainable levels quickly and the market had plenty of invitations to unleash bigger waves of defensive selling. Yet, most of the weak daily opens were met with buying, not follow-on selling. At least to this point, investors seem more interested in buying these discounts than selling them.

How much longer this can last is anyone’s guess, but the longer this goes, the more solid the ground is under our feet becomes. Calm and rational trade is almost always bullish and the longer we hold off another waterfall selloff, the better our prognosis becomes.

That said, the best case is falling into a trading range near the lows. Just because we don’t tumble doesn’t mean we are ready to race back to the highs. Expect prices to settle into a range between 2,300 and 2,600 for a while. As long as we remain inside that spread, everything is under control. Just make sure you remember this includes dipping back to 2,300. While everyone else is scared out of their minds, we will know better. (If the crowd didn’t think a dip was real, no one would sell and prices wouldn’t dip!) As long as we recognize what is going on, then we will be in a far better position to profit from it.

Chances are good the market tests 2,300 support next week and until further notice, we treat that as a dip-buying opportunity. That said, our greatest asset is our nimbleness. If prices tumble under the lows, we close our longs and go short. If prices bounce back, we close the short and go long. Moving proactively and keeping a nearby stop minimizes the cost of these whipsaws. More important is we ensure we are in the best possible position to profit from the next move no matter which direction it goes.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Mar 27

Free Weekly Analysis and Lookahead

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis and Lookahead

This was one of the most volatile weeks in S&P 500 history with the highs and lows spanning more than 20%. The moves were so dramatic in fact, the index actually started a new bull market after climbing 20% from Monday’s lows! (Also making this the shortest bear market in history.)

These are strange times. I was there for the dot-com bubble. 9/11. The housing crash and financial crisis. I even have memories of 1987’s Black Monday. But few things compare to the levels of uncertainty we are feeling today. 1987 blindsided market participants and few things are as shocking as watching 9/11 unfold in real-time. But neither of those events affected Mainstreet the way Coronavirus has completely and totally shut down the global economy. Everyone was numb after 9/11, but most people resumed their lives after a few days.

Not today. Governors are instructing, if not downright ordering, citizens to stay in their homes for at least two weeks. And that is just the start. No one knows how much further this could go. Stocks rallied this week after Congress approved a $2 trillion dollar stimulus package and the Fed assured us they have “unlimited ammunition” to combat this economic slowdown. That was good enough to launch stock prices 20% above Monday’s lows. But can these things solve our problems? No…not even close.

This week’s rebound was more of a massive relief-rally and short-squeeze than a vote of confidence about our “new” outlook. While it was definitely nice to see the stock market string together a few positive days, our situation is not any better this Friday than it was last Friday. In fact, in many ways, they are worse now because this virus continues expanding at an exponential rate and this week’s shelter-in-place orders had a minimal impact on the growth curve.

As nice as it felt to see the market put together an impressive performance this week, we are far from out of the woods and should expect this historic volatility to stick around for a while. At the very least, expect prices to retest the lows over the next week or two. Maybe we find support at the prior lows. Maybe we don’t. Either way, hopefully, anyone who was savvy enough to buy this week’s rebound is also savvy enough to lock-in a big portion of those profits before they evaporate. Investors can buy these discounts for the long-haul, but traders need to be extremely nimble because today’s profits will turn into tomorrow’s losses if we allow ourselves to get greedy.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Mar 20

Free Weekly Analysis and Look Ahead

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis and Look Ahead

The S&P 500 just finished its worst week since the 2008 Financial Crisis. The Covid-19 epidemic continues to spread uncontained and governments are taking extreme measures to “flatten the curve”. It has yet to be seen if these strategies will work, but one thing is for sure, it’s wreaking havoc on the global economy. Schools are closed. Non-essential businesses are closed. Anyone who can work from home is working from home. Others are less fortunate and find themselves without a paycheck. All while hospitals are bracing for the worst.

As I wrote last week, this situation is without a modern precedent. No one knows how long this epidemic will last. We don’t have any idea what the economic damage will be. And most importantly for markets, don’t have a clue about how long it will take before the world returns to business as usual. Are we talking about weeks? Months? Even years? With so much uncertainty swirling around us, no wonder investors are on edge.

Stocks have fallen 30% from February’s all-time highs only a few weeks ago. That pullback priced in a tremendous amount of bad news. But has it been enough?

If there is one thing we know for certain about markets, it’s that they overreact. What is already too far often goes even further. Have we already passed too far? Can this go even further? No amount of technical or fundamental analysis can answer those questions. This is a crowd psychology problem and the only way to figure out what comes next is to follow the herd.

Luckily for nimble traders like us, these dramatic moves are big, fast, and easy to trade. We can profit handsomely even if we don’t know which direction the market is headed next. Buy the bounce. If that doesn’t work, short the breakdown. Start small. Keep a nearby stop. Take profits early and often. And get ready to go the other direction the next day. One day up, the next day down. Repeat over and over again until we have more profits than we know what to do with.

Will Monday bounce? Probably. Over the last ten trading sessions, we’ve alternated between gains and losses. Odds are good Friday’s tumble will be followed by Monday’s rebound. The best way to trade the bounce is to buy shortly after the open. Put stop under the morning’s lows. And hold on. If prices tumble under our stops, close and consider shorting the weakness. Again with a nearby stop. If the dip proves to be a false alarm and rebound, switch directions again.

While it is frustrating to get hit by the inevitable whipsawed, being nimble and fast means we get in and out quickly and any losses are small. More important is that once that next big directional move takes hold, we are in the market and ready to take it all the way. While bull and bears are busy arguing about whether the next move is higher or lower, I’m over here making money. I’m an opportunist and could care less who is right. All we need to do is wait for that next turning point, grab on, and enjoy the ride.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Mar 13

Was this the V-bottom?

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis and Look Ahead

This has been a week for the record books. The oldest bull market in U.S. history died Thursday following the S&P 500’s worst day in over 30 years. As bad as that sounds, this week would have been even worse if it weren’t for Friday’s spectacular 200-point rebound that erased a big chunk of the midweek losses. In the end, the index “only” took a 10% haircut this week and is now 20% under the all-time highs set just a few weeks ago.

“The bull market is dead, long live the bull market.”

The end of one thing becomes the birth of something else. While bears want us to believe this crash is only just getting started, history is not on their side. This Coronavirus selloff bottomed at 27% this week and only a handful of times over the last 150 years has the market fallen even further.

While prices could absolutely continue making new lows next week, we are definitely a lot closer to the end of this move than the start of it. And even more reassuring, markets love symmetry and dramatic crashes typically capitulate in a V-bottom. If things get even uglier next week, it won’t be long before the market ricochets off the oversold bottom and creates the sharp right-hand recovery side of the Vee. (There’s even a good chance Thursday/Friday was the crash and rebound of the Vee capitulation.)

While I cannot tell you when this will be over, the one thing we know for certain is next week will be extremely volatile. That means big moves in both directions. One day’s up will be followed by the next day’s down. No doubt a lot of traders will continue getting cutup by these whipsaws, nimble traders who move confidently and proactively will continue printing money.

The greatest strength we have as individual traders is our nimbleness. We can go from full long to full short in a few mouse clicks. Use this power responsibly and we don’t need to be victims of the market’s gyrations. The only thing we need to know is the market is going to make big moves. During periods like this, we’re not bulls or bears, we’re opportunists. It makes no difference which direction the market goes as long as it goes somewhere in a spectacular way. Simply jump aboard these moves early and keep a close stop. Buy the first signs of a bounce. If that fizzles and undercuts the lows, switch direction and go short. Then buy the next day’s rebound. Follow that by shorting the next day’s fizzle. When that bounces, jump back in on the long side. In markets that move this fast and hard, all we need to do is be there to catch the next big wave. Who cares which direction it goes. And most importantly, just when we’re feeling really good about our profits, lock them in. If we don’t, they will be gone in a few hours.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Feb 21

Weekly Review and Look Ahead: Should we be buying this dip or selling it?

By Jani Ziedins | Weekly Analysis

Free Weekly Analysis

The S&P 500 retreated from all-time highs set earlier this week as Coronavirus fears came rushing back. While nothing concrete popped up in the headlines, the creeping spread of this epidemic outside of Chinese borders is concerning investors. That said, prices only retreated 2% from the highs, hardly panic material.

Is the market about to fall off a cliff? Some people seem to think so and are abandoning ship before the big crash starts. But is that the way these things normally happen? A crisis happens. The market gives us a few weeks to think about it and lock-in our profits. And then it crashes??? I don’t know about you, but in my nearly three decades of trading experience, when things go bad, they go bad breathtakingly fast. Traders sell first and ask questions later. If you stop to think, you are left behind.

This Coronavirus thing first hit markets back in mid-January. Here we are more than a month later and the crowd is still talking about it. Should we be scared? To be honest, I don’t fear things the market’s been chewing on for this long. The owners who fear these things have been given plenty of time to bail out and they were replaced by confident dip buyers who didn’t mind jumping in front of these headlines. Out with the weak and in with the strong. That’s how news gets priced in. If these dip buyers didn’t care about these headlines when they bought two and three weeks ago, what are the chances they will change their minds now? Pretty small.

Typically, the reaction to a recycling of the same old headlines get smaller over time, not larger. We have the knee-jerk reaction where traders fear the worst. Next comes the “less-bad than feared” relief rally. Not long after we hear the first echo of the initial selloff. But like most echos, the intensity falls off with each reverberation. There is a good chance we are in the middle of the first echo.

Every once in a while, like 20 years once in a while, things actually turn out far worse than feared and prices continue to tumble. That’s what happened during the 2008 financial crisis. Investors thought things were as bad as they could possibly get, yet somehow they ended up getting even worse. That certainly could happen with the Coronavirus if it spreads to the point where hundreds of millions of people are infected. Of course, if that happens, we have bigger things to worry about than this latest swing-trade. We are not there yet and we most definitely shouldn’t trade as if that is where we are headed.

Successful traders focus on the high probability events and trade them when the risk/reward lines up in their favor. If we assume this modest pullback is nothing more than pausing after rallying 200 points to 3,400 resistance and that this Coronavirus echo will be smaller than the initial selloff, we could be very close to the bottom of this dip.

While no one knows what will happen next week, when the probabilities and the prices line up in our favor, we take a chance. A lot of times we get it right, sometimes we get it wrong. But as long as we are smart with our entries and stops, the cost of being wrong is low and if we buy right, the eventual rewards are quite nice.

Over the last few weeks, the way the market went into the weekend was the exact opposite of the way it came out. A “better safe than sorry” dip Friday afternoon was greeted with a relief pop Monday morning when things didn’t get worse. The “there is nothing to worry about” Friday afternoon rally was met with second-guessing Monday morning. Today the market stumbled into the close and if this pattern holds, this was actually a decent entry point because a lot of the selling already happened. If things don’t get much worse this weekend, expect prices to pop Monday.

The best way to buy this dip is to start with a small position and only add more money once the trade is working. Keep a stop under today’s lows. If we get squeezed out Monday, don’t worry about it, pull the plug and try again. Often these rebounds fail once or twice before the real one takes off. But if we are smart about our entires and stops, getting whipsawed a couple of times isn’t a big deal. Good Luck!

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Feb 14

Weekly Review and Look Ahead

By Jani Ziedins | Weekly Analysis

Free Weekly Review and Look Ahead:

It was a good week for the S&P 500 as it put Coronavirus fears out of its mind, gained 1.5%, closed at record highs. While this health epidemic is far from over, previous contagions didn’t have a lasting impact on stocks and traders are assuming the same will happen this time too.

The problem with this optimistic outlook is it already prices in a favorable outcome. With stocks selling at record highs, buyers are not being compensated for holding this risk. While the market will most likely be correct in this assumption, why would anyone want to own the risk if they are not getting paid for it in terms of buying stocks at a discount?

The market’s ambivalence skews the risk/reward against us. With stocks at record highs, the upside is already priced in there is a fair amount of air underneath us. This is skew is even more pronounced ahead of a three day weekend. If things go well over the next three days, that is what the market expects and stocks will rise a modest amount. If something goes wrong, there is a lot of room to fall.

Now don’t get me wrong, I’m not a bear in any shape or form. I actually like this market a lot. The problem is I don’t like paying full price for stocks. I prefer waiting for nervous sellers to give me free money.

The correct time to buy was two weeks ago when fear and uncertainty were peaking. Now that calm and complacency returned, this is the time to be taking profits. Rather than pay premium prices, we should be the ones selling them and that is exactly what I’m doing. This market likes to pause at the round 100-point levels and given the nearly 200-point rebound since the Coronavirus lows, 3,400 is a good place for the market to slow down and catch its breath.

I’m taking some profits off the table proactively and moving the trailing stops up on my remaining positions. We only make money when we sell our winners and for me, this is a good time. While I might be getting out a little early, if the market trades well next week, I can always buy back in.

Enjoy the long weekend.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM

Sep 10

The Big Move Came. What Happens Next?

By Jani Ziedins | Weekly Analysis

screen-shot-2016-09-10-at-2-35-40-pmMy August 30th free blog post was titled “The Next Big Move is Coming“. By almost all standards Friday’s 2.5% freefall qualifies as that move. We’ve been lulled into complacency by this summer’s tight, sideways trade, but we knew it couldn’t last forever.

Friday’s volume was the highest we’ve seen since the Brexit, but certainly not over heated considering the size of the accompanying price move. The selloff crashed through all kinds of technical levels and triggered most automatic stop-losses, but the relatively constrained volume suggests we didn’t set off a frenzy of reactive and emotional selling. That can be good or bad depending on how you look at it. It is nice to see most owners remain calm during a painfully ugly period. That bodes well for a rebound if these owners keep their composure next week since confident owners keep supply tight. But the opposite argument is Friday’s turnover didn’t look capitulatory. That could lead to further losses if emotions and fears flare up next week.

A major theme in my August 30th blog post was the risks associated with holding a sideways market. Every day we own stocks we expose ourselves to the unknown. When we buy right, the market moves in our direction and we get paid for holding that risk. But in a sideways market, we don’t get compensated for holding risk. All risk and no reward is a lousy trade. Long-term investors can sit through these flat stretches and subsequent gyrations, but shorter viewed traders should avoid owning flat markets. Quoting William O’Neil, “all stocks are bad unless they are going up”. While it is helpful to critique the past, what everyone really wants to know is what comes next.

The widely circulated explanation for Friday’s selloff was disappointment over no additional stimulus from Europe and the prospects of a near-term rate-hike by the U.S. Fed. Allegedly this “news” turned traders into sellers on Friday. The question for us is if this was a one-day tantrum, or the start of something far more significant.

The key is figuring out the real reason people were selling on Friday. Anyone who honored their stop-loss levels was flushed out automatically as the market smashed through every technical level established over the last few months. While this technically driven selling added fuel to the fire, there are not many technical levels left to violate. That means most of the autopilot selling is behind us, allowing us to focus on the trading decisions made by humans.

Humans sell for rational reasons and they sell for emotional reasons. Let us start by examining the rational hypothesis. The Fed is going to raise interest rates at some point in the near future, the only real debate is if that 0.25% hike comes in a few days, or a few months. You have to be living under a rock if you don’t know it is coming because the media has been obsessing over it for years. We survived the first rate-hike last December and even traded higher following it. Were traders really selling on Friday because they are afraid of a 0.25% rate hike? Let me ask you, are you afraid of a 0.25% rate hike? Or is something else driving people to sell?

I believe very few stock owners are personally afraid of this rate-hike. This is old news and 0.25% isn’t that meaningful. Certainly not enough to derail our improving economy. And if someone really is terrified of rate hikes, they would have cashed-in months, if not years ago when we first started debating this. People who are afraid of rate-hikes don’t own stocks in this environment plain and simple. If they don’t own stocks, they are not selling stocks. (most investors don’t short stocks)

If traders are not selling because of the rate hike, why are they selling? It comes down to Game Theory. People are not selling because they are afraid of a rate-hike personally, they are selling because they think other people are afraid of a rate-hike. The financial press has conditioned us to believe stocks are going up because of easy money and prices will fall once the spigot is turned off. Say something enough times and people believe it.

We make money in the stock market, not by predicting the future, but predicting what other traders will do. Even though we might not fear something personally, if we think the crowd will get spooked by a headline, we will sell ahead of the anticipated decline. That is what really happened Friday. Traders are not selling the economic damage of a rate-hike (real), they are selling ahead of what they think will cause a selloff (imagined).

What does it mean if most traders are only selling because they think other people will sell? It means there is no meat to this selloff. If no one is changing their personal outlook about the economy, then they will continue to have the same appetite for stocks. While they might cash in some chips ahead of the widely expected “rate-hike crash”, they will jump back in once the waves settle down.

Value investors are not afraid of a trivial bump in interest rates and will start buying the dip once prices get so attractive they cannot resist. This pullback also gives underweight money managers the opportunity to salvage their year by buying stocks at prices they wish they had bought earlier in the year. When there is no real fear in the market, traders jump back in quickly and is why this rate-hike weakness will be short-lived. No doubt emotion and fear could flare up Monday as traders sell “before things get worse”, there is very little substance behind this move and we should be looking to buy it, not sell it. There is no reason to rush in and catch a falling knife, but once prices stabilize, don’t dally and miss these bargains because they won’t last long.

Are you personally afraid of interest rate hikes? Or are you going to take advantage of these discounts? Let me know in the comments below.

Jani

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Jun 02

WR: Brace for the plunge?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

S&P500 weekly at end of week

Weekly Review and Look Ahead

MARKET BEHAVIOR
Stocks closed lower for the second week in a row, but still finished May with impressive monthly gains.  Weekly trade was off due to the holiday shortened week and is not directly comparable.  Of note is the first back-to-back weekly decline since November’s lows 300-points ago.

MARKET SENTIMENT
No one disputes the rate of gains since the April lows is unsustainable, the argument centers on if we consolidate or rollover.

Markets decline one of two ways: they plunge when everyone is caught off guard by unexpected news and under appreciated risks, or grinding lower when everyone is fat, dumb, and happy; the proverbial boiling an oblivious lobster one degree at a time.  Our job is deciding which, if any, these scenarios apply.

Lets test the first one, plunge on unexpected news and under appreciated risks.  Recent examples are the 2008 Financial Crisis and the first bout of Euro Contagion fears three-years ago.  The market is blindsided and collapses as the new risk factors are priced in.  Over the last two-weeks did we uncover something new and unexpected?  Are there risks the market under appreciated?

Following financial press headlines covering this two-week selloff, it appears the headline worry is QE ending a couple of quarters early.  First, the Fed has given zero indication this will happen, and second, everyone already knows QE is going to end.  Where is the new risk factor worthy of a steep selloff?  We don’t have one and is why the market didn’t fall into a 5-day, 10% slide following the Fed minutes two-weeks ago.  Panicked selling is unbridled and impulsive; if it hasn’t happened yet, it is unlikely to start without a new catalyst

The second option is grinding lower.  These are the tops at the conclusion of long bull moves where we finally run out of buyers.  These typically end on good news, not bad, as demand exhausts itself in one last push higher.  AAPL’s 40% haircut following the strong iPhone5 launch is a perfect recent example of this.  The market top in 2007 is another.  In situations like this everyone is excited about the future and buying every dip, worries are few and far between.  Those calling for a big decline are labeled extremists.

Currently it seems everyone is bracing for the inevitable pullback/selloff/meltdown.  The market is on edge following recent selling, not complacent.  Even bulls are unsure and lightening up their exposure on the fear the market might be topping.

Now we ask, do we have new and unexpected news followed by a sharp correction?  No.  How about a complacent market topping on good news?  Some will debate me on this, but the fact that there are so many people promoting the bear case makes this also a no.  What does it mean when neither of these topping scenarios apply?  The bull is resting, not dying.

TRADING OPPORTUNITIES
Expected Outcome:
When everyone calls for a continuation or a breakdown, maybe answer is we trade sideways and consolidate recent gains.  We came a long way since the April lows and further upside at this pace is unlikely.  On the other side, everyone is waiting for the obvious selloff, so that won’t happen either.  All the nervous sold the recent weakness and we are running out of new sellers to keep the declines going.  That means we likely fall into a trading range for the next couple months.  Buy the dips and sell the rallies.

Alternate Outcome:
The market can fall apart at a moment’s notice and selling often triggers more selling.  I don’t expect a major correction here, but I’ve been wrong before and without a doubt I’ll be wrong again.  We use stop-losses to get us out of a bad trade and when the market doesn’t act as expected we must reevaluate our original thesis.  This market will violate material support if it fails to hold 1600, until then this is a normal pullback following a strong run.

Trading Plan:
The assumption is dips are buyable until they aren’t.  While new strength is buyable, but don’t get greedy and take profits as we approach recent highs since it is likely we are moving into a range bound market.  The risks for a market meltdown are always with us and use stop losses to control our risk.  If the market bounces on Monday, Friday’s low of 1630 is a decent stop for a dip-buyer.

Plan your trade; trade your plan

Apr 28

LA: Buyers keep buying

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

S&P500 weekly at end of week

Look Ahead

MARKET BEHAVIOR
Elevated volatility continued for the third week as the market rose 1.75% and extended the bounce off the 10wma.  We remain inside the recent trading range between 1540 and 1597, but are above previous resistance at 1570.

MARKET SENTIMENT
Increased volatility is often seen in market tops as the debate between bulls and bears intensifies.  This week’s rebound was the third largest weekly gain since the start of the year, but for all the criticism thrown at this market, we are still within 1% of the highs.  Believe in this rally or not, we live and die by price and right now prices are near all-time highs.  This rally is fueled by an abundant supply cynicism and is why we continue heading higher.

Markets go down because people stop buying and start selling.  No matter how far this rally came, holders keep holding and buyers keep buying.  Until this changes, expect the rally to keep going.  Every dip is a buying opportunity because large institutions use the weakness to build their positions.  It is anyone’s guess how long this can continue, but we need to stick with that is working until it stops.

TRADING OPPORTUNITIES
Expected Outcome:

We remain inside the trading range between 1540 and 1597.  Recent volatility could signal the last gasps of the rally before we roll over, or the volatility is flushing out weak hands and clearing the way for another leg higher.  Elevated volatility accompanies market tops and we have that in spades, but market tops are due to a lack of buying.  So far we have an endless supply of buyers willing to rush in and buy every dip.  As long as we keep making higher highs, the stick with the market.

The best thing about being small and nimble is we can respond to the market’s moves and don’t need to anticipate them.  If we don’t know comes next, we simply wait for the market to tell us.

Trading Plan:
Until we have evidence to the contrary, assume the rally is alive and well.  The market is stuck in a range between 1540 and 1595.  Setting new highs shows there are ample buyers willing to chase.  If we stall and break through support at 1570, look for continued selling to the lower end of the trading range.  As long as we stay above 1540, the rally is still intact and the dip is buyable.  But there are only so many times we can test a level before failing, so be extremely cautious and use tight stops under this level.

Plan your trade; trade your plan

Apr 21

LA: Can bulls hold on?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

S&P500 weekly at end of week

Look Ahead

MARKET BEHAVIOR
The market remains range bound even though we widened the window in recent weeks.  March traded primarily between 1540 and 1560.  A couple breakouts and breakdowns later, that range stretched from 1536 to 1597.  Twenty-points of volatility exploded to sixty since the start of the second quarter.  Increased volatility on the heels of a steady six-month rally hints at a shift in market personality and often signals the trend is on the verge of changing.

MARKET SENTIMENT
This rally was supposed to pullback January 3rd after the massive and “unsustainable” Fiscal Cliff pop.  Yet here we are nearly four-months later and a hundred points higher.  Like a broken clock, the naysayers will eventually be proven right if we wait long enough, are we finally getting close to that point?

Our job is not to know what the market will do next, but what it is more likely to do.  This is a very subtle, but important distinction.  No one knows what will happen tomorrow, but we can combine herd psychology with an understanding of what other traders think and how they are positioned.  There is no way to know what the news will be, but with some insight we can make an educated guess about how the market will respond.   Remember, while the news is random, the crowd’s reaction to it is not.

This market largely ignored any and all negative headlines on our climb to all-time highs.  Should we expect that to change anytime soon?  Some expected US markets to breakdown on China data two-weeks after it ignored the most sluggish employment report in nearly a year.  Really?  This market went from fearing every headlines six-months ago to completely ignoring them.  I don’t know what tomorrow’s headlines will be, but I do know this market doesn’t care about them.

This cannot go on forever and at some point the market will pullback; it always has and it always will.  If it won’t implode on a negative headline, what’s left?  Too optimistic.  Once all the chasers are in, no one is left to buy and the market will fall from a lack of demand.  This is the topping scenario we are watching for.  Unfortunately identifying the number of chasers left is far more ambiguous than trading some concrete and timely economic data point.

Previous market tops since the 2009 lows were abrupt, headline driven selloffs.  The selling was aggressive, but short.  Within a week or two we found a bottom and resumed the up-trend after a brief basing period.  If this market tops differently, will the resulting selloff be different too?  Something to keep in the back of our mind as we watch this market’s next move unfold.

TRADING OPPORTUNITIES
Expected Outcome:
There are plenty of reasons for the rally to continue here, namely the number of people still expecting a pullback.  But I just don’t feel comfortable owning it here.  In a rally of this age, the market no longer gets the benefit of doubt and it needs to prove itself, until then I will remain cautious.

Market selloffs take occur quickly and holding 1550 through Wednesday shows bulls still have the upper hand.  From there expect the next move to be higher.  But if the market runs into resistance at 1570 and rolls over, another test of 1540 is unlikely to hold.  Like a cat, a rally only has so many lives and we’ve used several of them in recent rebounds.  We are getting closer to the dip that doesn’t bounce with every passing day.

Alternate Outcome:
Rallies often go longer and higher than anyone expects.  That is clearly the case here and it could continue proving the cynics wrong.  Many traders locked in profits over the last six-weeks of nearly flat trade and these are the next buyers ready to chase the next leg higher.  The most obvious sign the rally still has legs is seeing it head higher.  Regaining and holding 1570 is impressive and breaking above 1600 will put all this head-and-shoulders nonsense behind us.  But no matter what the market does, there is no reason to own what we don’t understand and trust.  Most traders know how to find good trade, but they end up giving back all those profits by forcing an ill-conceived trade when they get a little too cocky.

INDIVIDUAL STOCKS
AAPL’s make or break moment is just around the corner.  Even if the company modestly beats expectations or announces a dividend increase, the resulting strength is a selling opportunity, not a buying one.  This stock was built on 30%+ growth and unless it puts up those kind of numbers, it won’t regain its former glory.  The stock is now a dividend/value investment and one last selloff will chase off the leftover growth holdouts.  Without a doubt AAPL has a future and is a money printing machine, but the same can be said of MSFT, INTC, and CSCO.  How many growth investors are still hanging out in these 1990 growth stocks?  The same maturation is happening to AAPL.

It wouldn’t surprise me if GLD saw more selling this week.  We’ve seen the dead-cat bounce as anxious dip-buyers snapped up discounted shares.  The unfortunate thing for them is what is cheap, usually gets cheaper.  It is far easier to buy the overdone selloff than throw on a short, meaning this is the wrong place to buy.  Buying when there is blood in the street is a good way to get killed.  The key to successful dip-buying is having the patience to wait until the blood is dry.

Plan your trade; trade your plan

Apr 20

WR: Who is buying the dip?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

S&P500 weekly at end of week

Weekly Review

MARKET BEHAVIOR
This was the largest weekly loss since the election, even beating out the final week of 2012 when Fiscal Cliff fears climaxed.  Volume was also the highest of the year as holders wavered in their resolve and were selling by the truckload.  The market finished just above the widely followed 50dma/10wma.  The largest weekly gain immediately followed by the biggest selloff shows the market’s personality is chaining from the steady and predictable first quarter rally.

MARKET SENTIMENT
Was this week’s high-volume selloff the capitulation point before resuming the up-trend?  Without a doubt that is one of the possible outcomes.  Losing 60-points over a handful of days is more than enough to flush out weak hands.  Buyers replacing the sellers are clearly not afraid of this market and proved willing to step in front of a freight train.  Finding support at 1540 on Friday provided vindication for the buy-the-dip crowd, but is this real support or just a pause on the way lower?

True capitulation happens when emotional and irrational selling gets so carried away value investors can no longer resist and jump in, scooping up shares with both arms.  Is that what happened here?  Did we plunge far beyond sane levels and value investors were unable to hold back any longer?  That is a hard case to make when we only broke through to these levels in March.  Not a lot has changed in the ensuing weeks to make this 1540 level irresistible to value investors when they were uninterested in it six-weeks ago.   Heck, things are actually a tad worse with dramatically slowing employment and the precedent set by the Cyprus bailout.  There is no way value-buyers propped up the market on Friday when we are only 2.5% off of all-time highs and in the face of deteriorating economics.

If it wasn’t value investors, who was buying on Friday?  Speculative dip-buyers.  Every other dip this year was buyable and when people see something happen often enough, they start expecting it.  The unfortunate thing for bulls is dip-buyers lack the conviction, confidence, and deep pockets of value investors.  These late chasers opinions change with the wind and they will sell in droves as soon as the market moves against them.  Only after the selling accelerates and prices drop precipitously will reliable value investors finally step in and prop up the market.

TRADING OPPORTUNITIES
Expected Outcome:
Even if the this market is built on a house of straw, we could continue higher for a few more days.  Friday’s bounce will likely suck in another wave of dip-buyers, but look for the rebound to stumble when the limited supply of new buyers dries up.  Retesting 1540 shows buyers are running out of strength and can no longer support further upside.  A break of this key level will quickly send the market to 1500.  From there it is just a hop, skip, and jump to 1450.

Alternate Outcome:
As we discussed in Friday’s PM post, bearishness is picking up, offsetting the widespread optimism seen a couple of weeks ago when we set record highs.  Many of these pessimists are already out of the market and the aggressive went short, relieving potential selling pressure and making a move higher more likely.  Churn in sideways trade is what makes flat bases work as the paranoid sell to the confident.  Flat bases take longer to develop because they grind down optimists instead of frighten them with a sharp and decisive plunge.

If we hold 1550 through next week, bulls are stronger than most give them credit for and look for new highs.  Selloffs develop quickly and the longer we stay at these levels the more likely a continuation is.

GLD weekly at end of week

GLD weekly at end of week

INDIVIDUAL STOCKS
AAPL finally broke recent lows at $419 and plunged 9% on a fresh wave of selling.  The sliver lining is this dropped first quarter’s expectations below the already low levels and reduces pressure on next week’s earnings.  Failing to find a bottom is finally extinguishing hope and causing many AAPL evangelists to give up.  Only after the most loved stock becomes the most hated does it stand a chance at bouncing.  A disappointing earnings next week will trigger one last selloff and AAPL will finally be buyable.  An earnings beat only prolongs the agony as the resulting bounce inevitably sells off.  This move has nothing to do with fundamentals and the selloff won’t end until all the hopeful are finally driven off.  Anything that delays this cleansing process puts off finding the bottom.

GLD found temporary support at $130 and finished at the highs of the weekly range, albeit down 6% for the week.  Volume was the highest we’ve seen since the market top in 2011.  Optimists will call this a capitulation bottom, and they might be right, but if a dip is too easy to buy, it is rarely the bottom.  Anyone in GLD should use this strength to sell and wait to buy back in at lower prices.

Plant your trade; trade your plan