Category Archives for "Weekly Analysis"

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

Apr 14

WR: Big gains

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 a historic week as we smashed the all-time high set back in 2007 and kept on going.  This was also the largest weekly gain since the start of the year, moving up 2.6% on light volume.

MARKET SENTIMENT
Markets typically make big moves under two conditions.  The first is after a steep selloff where traders were impulsively selling stocks by the truckload.  This leads to a capitulation bottom and the market rebounds decisively from irrationally oversold levels.  The second condition is at the tail end of long move where the last holdouts forget their reservations and finally embrace the long-established rally.  These are the last traders left to buy a rally and markets roll over shortly after on a lack of demand.

This rally is almost five-months old and to see some of the largest weekly moves in such a mature market is enough to raise suspicions.  One strong week doesn’t mean the top is in and we often see multiple strong weeks leading into a top.  Every market is different, but they are all the same.  There are parts of this rally that are unique, but after it is all done, we will look back and say I should have seen this coming because it was exactly like……..

I hope this market tops soon because normal and periodic pullbacks keep a rally sustainable.  This is the one-step back after two steps-forward.  If we jump ahead three, four, and five-steps at a time, expect a two, three, and four-step pullback.  I don’t think the market is grossly over-bought at this point and a five or ten-percent pullback would be part of finishing the year higher.  But if we go another ten-percent higher without a pullback, we will likely have a 20% correction in our future.  In a bit of irony, bulls should be rooting for a pullback and bears a strong rally higher.

TRADING OPPORTUNITIES

Expected Outcome:
The trend is higher and no matter what our biases, we have to respect that.  The market is clearly above support and the breakout remains intact until we dip under 1570.  Longs should move a trailing stop up to this level because a dip under this level in the first half of the week spells trouble for the aging rally.  On the short side, an aggressive bear could short weakness with a stop above the recent high of 1597.

This market is bound to pullback at some point.  Maybe it is this week, maybe next week, or next month.  The question isn’t if, but when.  The key to making money is figuring out the timing.  Without crystal balls, we have to watch the market and respond to the signals it sends.  Right now those are moves above 1597 and through 1570.

Alternate Outcome:
This is the rally that just won’t quit.  These things go longer than anyone expects, but fail as soon as everyone expects them to keep going.  It is really hard to say where we are.  Last week’s strength was due to the resurgence of the too-far, too-fast crowd after pushing up to all-time highs.  With those in the rearview mirror, what comes next?  Have all the pessimists given up and we can finally correct?

The biggest challenge I have is determining what conditions would get me reengaged in this rally.  Obviously I’m looking for a shakeout to refresh the uptrend, but what if the chase is just getting started?  I don’t want to stubbornly miss 100-points of upside because the market doesn’t do what I think it should.  A weakening market cannot hide its cracks, so if we don’t see weakness develop over the next few days, the next move will be higher.  Then we resume our search for cracks and another move higher.  Repeat until the market stops going higher.

Plan your trade, trade your plan

Apr 07

LA: Are the good times ending?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

S&P500 weekly at end of week

Look Ahead
The first week of the second quarter gave us our first real taste of selling in 2013.  Is this a preview of things to come?

MARKET BEHAVIOR
Stocks stumbled into the biggest loss of the year.  For all practical purposes this was the only losing week since the two prior ‘down’ weeks ended essentially flat.

We follow weekly charts because they filter out the daily noise, allowing us to see what is really going on.  The first quarter  saw a relentless march higher with very little selling as pessimists were scrambling to catch up.  The first week of the second quarter is the only real selling since December.  One week doesn’t make a trend, but we need to watch for a shifting mood because market personalities often change from quarter to quarter.

MARKET SENTIMENT
Friday’s gap at the open was a wakeup call, but bulls were placated by the intraday rebound.  The smart move was sitting through every other dip this year and holders were sticking with what they know.  The problem is every dip bounces until it doesn’t.

The thing about dips is the early ones bounce.  This is when everyone doubts the sustainability of the young rally and cynics are resisting the temptation to chase.  Ironically this pessimism is what fuels the rebound and continuation higher.  But the later we go in the rally, the more the sentiment changes.  Rather than calling for a pullback, everyone is rushing to buy the dip.  This is what happened on Friday.  The obvious rebound was obvious, and as any veteran traders knows, the obvious things rarely work.

TRADING OPPORTUNITIES

Expected Outcome:
Without a doubt we could continue higher here.  There are no absolutes in the market, only probabilities.  The longer this market lasts and the higher it goes, the safer it feels, but the riskier it becomes.  The best times to buy are after a big selloff and the worst time to hold is after a huge run.

To prove itself, the market needs to reclaim 1560 and hold it through Wednesday.  While the market might bounce early in the week from continued dip-buying, if this support dries up by mid-week, it shows bulls are running on empty and lower prices are likely.

Alternate Outcome:
If the market holds support and traders continue buying at these levels, look for a surge higher, finally taking out the all-time high at 1576.  This is a show-me story.  Don’t get sucked into buying the obvious dip until after it demonstrates real demand from buyers at these levels.  It is better to be a little late than a lot sorry.

Stay safe

Apr 06

WR: Worst week of the year

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

S&P500 weekly at end of week

Weekly Review
Is it too easy to buy this dip?

MARKET BEHAVIOR
Believe it or not, this week’s 1% loss is the biggest weekly drop since the start of the year.  That shows what a good first quarter we had and how easy it was to hold.  Daily charts are full of noise and head fakes, but it is much harder for the market to hide its tracks in weekly charts.  This is why they are such valuable tools for seeing what is really going on in the market.

MARKET SENTIMENT
Friday’s selloff bounced back and gave bulls something to calm their nerves.  Every dip this year rebounded to new highs and obviously this one will too……or will it?  It’s really easy to buy this dip and that’s what makes it feel so wrong.  We are over four-months into this rally and even the most casual observer expects the market to keep going.  And therein lies the problem.

To figure out where the market is going we need to understand what other traders are thinking and how they are positioned.  Everyone long forgot about the worries and fears of three-months ago.  It is amazing how calming and reassuring a strong market is.  Most naysayers have long given up and joined the rally bandwagon.  Even the worst employment report in nearly a year was glossed over after the market bounced off the lows.  What does it all mean?

The rally bred complacency as every holder was rewarded for sitting through prior weakness.  Anyone who sold a dip almost immediately regretted it and they won’t let the market fool them again.  The steady climb higher sucked in most of the skeptics as fear of a selloff was replaced by fear of being left behind.  At this point no one wants to sell because they are holding on for bigger profits.  This lack of supply is a big reason volume has been so light the last few weeks.

Most rallies end in a double top or a head-and-shoulders.  It is always easy to spot these months after the fact, but it is far more profitable to identify them in realtime.  The market formed a potential left-shoulder in February and is working on the head right now.  A dip back to, and bounce off of 1500 would form the right shoulder.  There are no guarantees this is what we are seeing, but there are enough signs to be extremely cautious.

TRADING OPPORTUNITIES
Expected Outcome:
It’s been a great run since the start of the year and easy money for anyone with the courage to ignore the headlines.  But that was then and this is now.  Markets are the safest when they feel the most dangerous and most dangerous when they feel the safest.  Every bounce brings us one step closer to the one that doesn’t bounce.  While Friday’s dip might result in another bounce, that doesn’t make it a good trade.  The risk/reward shifts dramatically the longer and higher this rally goes.  What was easy money two-months ago is playing with fire here.

Anyone still in this market that cannot bring themselves to sell proactively needs to set hard stop-loss limits.  We bounced off of 1538 on Friday and a second test of this level is unlikely to bounce again.

Alternate Outcome:
Friday’s selloff and March’s choppy trade cleared out many weak holders and could be setting the stage for a continuation.  We need to recover 1560 and hold this level through mid-week to prove buyers are still willing to support this market near all-time highs.

Stay safe

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