Category Archives for "Weekly Analysis"

WR: Brace for the plunge?

By Jani Ziedins | Weekly Analysis

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

LA: Buyers keep buying

By Jani Ziedins | Weekly Analysis

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

LA: Can bulls hold on?

By Jani Ziedins | Weekly Analysis

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

WR: Who is buying the dip?

By Jani Ziedins | Weekly Analysis

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

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

WR: Big gains

By Jani Ziedins | Weekly Analysis

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

LA: Are the good times ending?

By Jani Ziedins | Weekly Analysis

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

WR: Worst week of the year

By Jani Ziedins | Weekly Analysis

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

LA: Time to leave the party?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Look Ahead

We made all-time closing highs, but how much is left in this 4.5 month old bull?

MARKET BEHAVIOR

Stocks are trading at the highest levels in history.  As far as the market is concerned, the Great Recession is ancient history and it’s embracing the expected recovery.  Volume remains chronically low since we broke above 1550 three-weeks ago, showing a lack of engagement by both bulls and bears.  Thursday’s all-time closing high was a momentous achievement and  time will tell if this was the start of the end, or just another step in the steady march higher.

The next significant milestone is 1576, the all-time intraday high set in late 2007.  We are seven-points shy of this target and in easy striking distance if buyers support this breakout.  The other noteworthy event is the end of the first quarter.  Big money managers closed their books on Thursday and are starting fresh Monday.  Will they pursue the same strategy from Q1, or shift gears?

MARKET SENTIMENT

The rally that Ben built.  It seems everyone knows the Fed created this invincible market and “don’t fight the Fed” is the rallying cry of bulls.  But as readers of this blog know, only two things move markets, supply and demand.  Stock certificates are like baseball cards and primarily derive their value from what other people are willing to pay for them.   The only real tool the Fed has is indirectly influencing interest rates and they have been successful at driving them to historic lows.  Low interest rates make it less expensive for businesses and individuals to borrow money, but this also make it less attractive to invest in safe, fixed-income instruments.  The pathetic interest rate on Treasuries and savings accounts persuaded many to search for return in riskier assets, and to a large degree this worked as the stock market has been a large beneficiary.

Last year there was concern about diminishing returns and inflation from QE3 and QEfinity, but the market continued rallying and  inflation remains constrained.  Some will point to rising prices at the grocery story as proof of inflation, but to have real inflation we also need wage inflation, and given the employment situation, it seems unlikely we will experience runaway inflation any time soon.  While we might experience a decrease in standard of living as the dollar falls and we compete with an exploding global middle-class for resources and products, that is completely different from out of control inflation.

But back to the markets, easy money has propped up the stocks, but now everyone expects it to keep working, will it?  Going back to the supply and demand argument, where are the next buyers coming from?  Some point to an over-inflated bond market, but most bond holders are not in bonds for profit, but security.  After 2008 ROI has a new meaning, Return OF Investment.  Many investors saw their retirement plans shatter over a period of months and it will take many years to recover from that trauma.  The eventual move out of bonds into equities will happen at a glacial pace and while it will provide lift to the secular bull market, it is not enough to overcome intermediate market weakness.

The current rally is 4.5 months old, fueled by a nearly nonstop wave of buying since the November lows.  The question any bull needs to answer is who is the next buyer?  Everyone trusts Uncle Ben’s safety net and is buying with little regard to the risks, but if everyone is in, who is left to buy?  Its been a long time since the markets felt this safe, making it one of the most dangerous time in years.

TRADING OPPORTUNITIES

Expected Outcome:
The easy money has already been made.  Any profits going forward will be hard fought and involve some gut wrenching volatility.  Every rally leg eventually comes to an end and given the size of the September’s modest selloff and recent rebound, this rally has come a long way.  Given the recent strength, we should be looking for places to lock in profits not initiate or add to positions.

Momentum is clearly higher, and shorting the market here is picking a top, but there is a huge difference in risk/reward between locking in profits and going short.    The market could top on Monday, next week, or next month.  The truth is no one knows exactly when the market will top, but we can identify situations where it is more likely to top.  The key to success in the markets is not selling too soon and not holding too long.  Given we are 4.5 months into this, that doesn’t seem too soon, and holding for more gains is pushing our luck.  If we were to pick the sweet spot between too quick and too long, this seems to be it.

Alternate Outcome:
The market has experienced year-long rallies before, the most recent following 2009’s generational market bottom.  But we have to ask ourselves if the events leading up to March 2009 bottom are materially different from our most recent November 2012 lows?  Is there anything in common between the two?

Markets often act like springs, the harder we push one way, the bigger the reaction in the opposite direction will be.  We see major moves following crashes and euphoric bubbles, but current conditions don’t conform to these extreme scenarios, so more likely this rally will be of the vanilla verity.  6-months is not out of the question, meaning we could have another few weeks of upside left and that is what we have to watch for.  Continued support above 1560 next week shows the market can still find buyers and will likely continue higher.  The thing we need to be most careful of is weakness that doesn’t bounce back.  There are only so many time dip-buyers can prop up the market and we are testing that limit.

Stay safe

WR: We finally did it

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review

All-time highs, but what comes next?  AAPL finished weak and inability to find follow-on buyers after breaking above the 50dma is a concern.

MARKET BEHAVIOR

Stocks gained 0.8% in a week where we finally set the all-time closing high.  While volume was extremely light due to the holiday shortened week, it still fell 8% below average when prorated to account for the missing day.  The 10wma is closing the gap with our sideways market and is just 37-points behind.  The 40wma is also making gains, trailing by 125-points.

Market Cycle:
This rally is 19-weeks old and covered 16.8% since the November low.  This already exceeded the 15-week, 16.4%, June-September 2012 gains, but is short of the 25-week, 32.2%, rally between October 2011 – April 2012.

The most notable difference between these previous rallies was the prior decline.  The 2011 market corrected 20%, the 2012 Spring selloff was 11%, and the most recent pullback leading to our current rally leg was 9%.  The bigger the selloff, the larger the rebound.  The last decline was the smallest and likely means we are living on borrowed time.

If there are any Elliot Wave fans out there, we are in the 5-wave across three-different time-frames.   See the accompanying chart.  Combine this with the potential head-and-shoulder formation, technically this is a good time to tread lightly.

This late in the rally we would expect the rate of gains to slow.  The best profit opportunities follow the reversal and we are four-months removed from those easy buy-and-hold gains.  The later stages of a rally are typified by volatility and limited progress; exactly what we’ve seen over the last three-week, 15-points gain.  Technicals and history say this market is running on fumes and we closer to the end of this run.

MARKET SENTIMENT

All-time highs typically bring cynics out of the woodwork as they cry unsustainable and point to the secular-bear tripple-top.  While I count myself as a long-term bull, there are enough warning signs to make me cautious here.  It is not uncommon for rally legs to last longer than 4-months, but so far everything is lining up for a near-term top.  Indifference to negative news, lack of short-squeezes, and widespread enthusiasm show market sentiment has changed dramatically from the fear and pessimism that dominated December and January.

TRADING OPPORTUNITIES

Expected Outcome:
This is a place to take profits, not establish new positions.  We are in this to make money and can only do that by selling our winners.  I started growing more cautious three-weeks ago when we first broke 1560.  Anyone selling into that strength missed all the recent volatility and gave up less than 10-points of upside.  Without a doubt there is a break-even between profits and nerves.  In my book a fraction of a percent is not worth being jerked around.  Amateur traders hate selling early, but it is one of the easiest ways to keep our sanity and avoid making dumb mistakes.

Alternate Outcome:
Continued strength shows the market is not ready to breakdown.  Markets typically selloff shortly after making news highs.  If we don’t encounter weakness next week, we will likely see higher prices before topping.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL had a disappointing finish to the week after showing such promise closing above the 50dma for the first time since September.  The stock lost 4% for the week and gave back virtually all the previous week’s gains.  Bulls claim this is just a temporary setback on the way higher, but failing to find new buyers after such a significant technical breakthrough should give anyone pause.  The down-trend was not broken by recent strength and any buying here is catching a falling knife.  There is nothing wrong with playing a game of bottom picking, but make sure to use tight stops and appropriately sized positions.  Until the stock starts making higher-highs and higher lows, expect the trend of lower-highs and lower-lows to continue.  That means we likely have a date with $400 in the near future.  Reclaiming the 50dma this week is bullish and look for a retest of $485.

Stay safe

WR: Stuck on 1550

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review

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

MARKET BEHAVIOR

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

MARKET SENTIMENT

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

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

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

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

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

TRADING OPPORTUNITIES

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

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

INDIVIDUAL STOCKS

AAPL weekly at end of week

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

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

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

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

Stay safe

LA: Time to cash in?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Look Ahead

MARKET BEHAVIOR

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

MARKET SENTIMENT

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

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

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

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

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

TRADING OPPORTUNITIES

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

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

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

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

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

Stay safe

WR: How safe is this market?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review

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

MARKET BEHAVIOR

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

MARKET SENTIMENT

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

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

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

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

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

TRADING OPPORTUNITIES

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

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

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

AAPL weekly at end of week

INDIVIDUAL STOCKS

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

Stay safe

LA: Getting close

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Look Ahead

MARKET SENTIMENT

It finally happened, the market had the biggest up-week since the start of the year.  Volume was off a tad, meaning the gains were due to lack of selling, not enthusiastic buying.  In fact, Friday’s lack of a short-squeeze on better than expected employment shows we are running low on buyers.  Markets move exclusively on supply and demand, and if demand is drying up, lack of supply is the only thing keeping this rally going.  Holders suffered regret every time they sold and were rewarded every time they sat through a dip.  This has been going on long enough that most owners are now content riding the market higher and ignore any intermediate volatility.  At this late stage in the rally, that is more indicative of greed and complacency than courage and conviction.

The other big catalyst is the end of the first quarter in a few weeks.  It is common for individual quarters to exhibit unique personalities because market participants tend to view the world through the same lens.  Last quarter markets were embroiled with fear over another four-years with a Democrat in the White House and the impending Fiscal Cliff.  Hindsight being 20/20, obviously that selling was overdone and the market rallied strongly as doom-and-gloom was grossly exaggerated.  This quarter has been nearly straight-up as the underinvested were forced to chase at ever-increasing valuations or risk being left behind.  Once the quarter ends, the slate is wiped clean and institutional investors have more freedom and flexibility to make their next move.  If they spent all Q1 chasing, the are likely already fully invested and without new buying, the market will fall under its own weight.

While nothing can tell us exactly when a market will top, these clues indicate we are getting close.  The S&P500 is a dozen points from an all-time closing high and couple-dozen from the intra-day high.  We are so close to these widely followed levels that we will likely be drawn to them.  What happens after that is the million dollar question.  Many contrarians and seasoned  traders will use the all-time high hype to unload stock on to the euphoric masses.  The climax of chasing and wave of profit-taking could be what finally does to this market what no bearish headline could.

TRADING OPPORTUNITIES

Expected Outcome:
Now is the time to be locking in profits, not initiating new positions.  It is likely the market will coast higher over the next couple weeks, but every day brings us closer to the pullback.  We could see the market continue higher early in the week and takeout those all-time highs.  Stretching a six-day winning streak to eight or nine is obviously a dangerous place to buy and any holders should consider selling into the strength.  A modest dip early in the week that finds support above 1530 means we are taking our time in reaching 1575, but those highs are still on the menu.  Failing support at 1530 shows we finally ran out of buyers and the uptrend is broken.  Depending on the circumstances, this violation could finally be the right time to short the market.

Alternate Outcome:
The market doesn’t need to top here and we could only be halfway through this rally.  The volatile pullback to the 50dma refreshed the market by shaking out many weak holders.  Volume has been restrained through the entire rally and doesn’t reek of unsustainable chasing.  Obviously the sign this market is not ready to selloff will be the lack of a selloff.  Trailing stops keeps a trader from selling too early and 1530 is a decent place leave a stop.

INDIVIDUAL STOCKS

AAPL weekly at end of week

In spite of how encouraging support at $420 on the daily chart feels, a look at a weekly chart shows no meaningful support yet.  There is a lot of confusing and misleading noise in daily charts and to really understand what a stock is doing, take a step back and look at the weekly.  The AAPL could be forming a double bottom between $432 and the recent low at $419, but bottoms typically happen on a material change in sentiment, something that still seems absent.  Markets often trade in such a way that hurts the largest number of traders.  It really seems further weakness would hurt a larger number of hopeful holders than a rally would hurt shorts.  At these valuations, more people are interested in buying than shorting and that has been the problem all along.  If everyone believes in the stock and already owns it, who is left to buy?  Look for institutional money managers to continue unwinding their overweight positions into quarter’s end.  Q2 could being new lift back into to the stock, but weakness in the broad market will be a serious hurdle to overcome.

Stay safe

WR: Big weekly gain

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review

Strongest weekly gains in two-months as holders refuse to sell and keep supply scarce.

MARKET BEHAVIOR

Stocks had their best weekly gains since the start of the year, setting multiple-new highs along the way.  Weekly volume was unremarkable on this 2% up-week.  The market is 45-points above the 10wma and 124-points above the 40wma, both fairly reasonable levels for a bull market.

We are 14-points shy of the all-time closing high and 24-points from the intra-day high.  This rally set numerous records already, is all-time S&P500 highs next on the todo list?

MARKET SENTIMENT

Markets moved past recent volatility and rallied six-days in a row, gaining 50-points in just over a week.  This finally produced the large weekly gains we have looked for as a potential signal of impending exhaustion, although volume was modest and shows chasing has not hit a fever pitch yet.

We are within arm’s reach of all-time highs.  Can the market really come this far and not take them out?  Everyone is watching these levels and recent strength is emboldening holders.  They are less likely to sell when all they can think about is how smart they are and much money they are making.   Expect their confidence and greed to keep supply tight.

Losing shorts last week is a major development since they have been instrumental in powering the market higher with their short-covering.  The lack of pop on Friday shows their numbers are dwindling because the gap-up on strong employment was the perfect setup for another powerful short-squeeze.  The reason it didn’t happen is because bears are finally growing wary of shorting this market and were sitting this one out.

TRADING OPPORTUNITIES

Expected Outcome:
The market is drawn magnetically to record highs and no doubt all-time highs are on the todo list.  There are three-weeks left in this quarter and the market has a little more upside left in it.  Strength early in the week, pushing us to 1565 and beyond should be sold.  We’ve come a long way and the market needs to rest, even if it is just a few days.  If the market dips early in the week, finding support above 1530 signals a continuation and record highs before the end of the quarter.  Violating 1530 likely means we ran out of buyers and the pullback is happening.

There is no good reason to hang on much longer in this market.  We have 20-points of upside and 100-points of downside.  That doesn’t create a favorable risk/reward.  Once we are in cash, that frees us to look for the next trade.  Maybe that is shorting the correction, or maybe buying the continuation.  Either way the clear head from being in cash is what let us see the next profit opportunity.

Alternate Outcome:
Six-consecutive up-days isn’t even close to the record and we could string together another six.  But just because it is possible doesn’t mean it is likely.  We are here to make the high-probability trade and that often means getting out early.  Maybe we proactively sell into strength or alternately use a trailing-stop , but at some point we have to say good enough.  If this market has a lot more upside in it, it will slow down and rally at a sustainable pace, meaning it will be easy enough for us to recognize and correction our mistake of selling too soon.

Stay safe

LA: Look for new highs

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Look Ahead

The market clearly wants to go higher, but stay vigilant because the next dip is less likely to bounce.  Look for AAPL’s weakness to persist as money managers dump shares before the end of the quarter.

MARKET BEHAVIOR

The market finished within 1% of a 52-week high in spite of several down-days that tried to break the market.  Weekly volume was above average, not surprising given the volatility.

MARKET SENTIMENT

Last week’s violation of major support at 1500 gave the market every excuse to breakdown, but rather than trigger a larger wave of panic selling, the dip ran out of supply and prices snapped back.  This behavior is extremely insightful for understanding what the market is thinking.  Obviously we had an initial wave of sellers crowding the exits, but no one else followed their lead and soon after the selling stopped.  When the market finally bounced back, holders were rewarded for holding and sellers were humiliated for being impulsive.

This strength is emboldening bulls and humbling bears.  We can take two things from this.  First, holders are more confident and less willing to sell because in their mind every dip bounces.  This keeps supply tight, reduces volatility, and supports price increases.  Second, when the market does dip again, this will be the real thing.  If everyone is holding the dip, yet we are still going down, that means we ran out of buyers and the music has stopped.

TRADING OPPORTUNITIES

Expected Outcome:
Stay long and look for new highs.  The recent shakeout refreshed the market and 1550 is expected and all time highs at 1575 is within reach.  But be wary of any breakdowns because they will be less likely to bounce.  Falling under 1500 shows this market lacks follow-on buying and makes for a stop-loss of last resort.    If we keep making new highs, use a trailing stop to protect gains.  For example, if the market hits 1540, move the stop up to 1520.

Alternate Outcome:
Last week’s price action was extremely bullish, but there are no guarantees and the market could turn lower at any moment.  Give the market some room to move around and digest recent gains, but if dip buyers fail to show up near 1500, they are not coming and we need to get out.  Markets can only bounce so many times before they run out of support and break lower.  The trend is higher and that is the high-probability trade, but always cover our backside.

INDIVIDUAL STOCKS

With just a few weeks left in the quarter, AAPL is running out of time to bounce and save overweight managers.  When portfolio managers become convinced AAPL will not bounce back by the end of the quarter, they will sell ahead of quarter-end so they don’t look foolish being overweight AAPL.  Expect this window-dressing to keep weighing on the stock in coming weeks. But what starts as window-dressing will likely devolve into wider selling as the market dips under stop-losses and flushes out holders who cannot handle any more pain.  This will likely push AAPL to $400 over the next couple weeks.

A steep selloff without a legitimate fundamental catalyst says the stock is finally reaching capitulation.  This will be the ‘V’ bottom that finally put a floor under the stock.  The lack of a fundamental driver means it is a sentiment based move and is finally showing a change in investor attitudes.  But if the stock continues grinding lower, that is more worrisome because grinding bottoms are longer and deeper.  The goal is extinguishing all hope and a slow grind lower means holders are still stubbornly holding on and refusing to let go.  This is like pulling a band-aid, quick is usually better than slow.

ET CETERA

I receive a lot of compliments for this blog and I want to thank everyone for their support and encouragement.  I created a new tab to showcase all the kind words people share and I want everyone to know how much I appreciate it.  Thank you.

Stay safe

LA: Buy the dip?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review and Look Ahead

Look for a quick bounce from last week’s dip as holders grow more comfortable holding.  This market will top, just not yet.  AAPL continues its 6-month trend of lower-highs and lower-lows.  Don’t bottom pick in this stock and wait for strength to come back before buying.

MARKET BEHAVIOR

Stocks recorded their first negative week of the year and shook out a pile of nervous holders in the process.  Weekly volume was light due to the holiday, but each day was near or above average, meaning it was not a quiet trading week.  The 10wma is catching the market and only 33-points behind.   The slower moving 40wma is still 100-points, but closing the gap.

While the market finished down just 4-points, the weekly range of 34-points was the widest we’ve seen in a while, setting a new high and temporarily dipping under support at 1500.  Obviously things didn’t workout as planned for anyone buying the breakout or shorting the breakdown and everyone will be watching anxiously for the market’s next move.

MARKET SENTIMENT

There are two kinds of pullbacks, those that go further than expected and those that bounce quicker than expected.  While there are no hard rules in the market, extended pullbacks are usually rooted in emotion.  Obama winning reelection and the Fiscal Cliff debate lead to a wave of emotional selling as traders left reason at the door and predicted an imminent collapse of the American way of life.  The subsequent rebound was equally impressive because the selling was unjustified.  Now compare this to the dips that were more structurally based and arose from buyers taking a break.  Selloffs caused by normal supply and demand imbalances are short-lived because the market is simply regaining its footing.

Many traders expect last week’s selling to continue, but it really doesn’t need to and in fact the high-probability trade is a quick bounce.  Of course quick is a relative term and can mean anything from 1 to 3 weeks, but the sheer number of people thinking this selling will continue leads me to believe it is likely done.  I could be wrong, but that’s what stop-losses are for.

TRADING OPPORTUNITIES

Expected Outcome:
The harder trade is buying the dip after only two-day, but the dramatic shift in sentiment and surge in the VIX suggests we already shook complacency from the market.  It is encouraging selling dried up on Thursday as holders kept holding after a dip under 1500.  And more than that, anyone who held the dip is feeling pretty smart and  even more committed to this rally.  That growing confidence among holders is why this market will not top on bad news.  No doubt the rally’s days are numbered, but the correction will happen from running out of buyers.  In the near-term continued strength will force bears to cover shorts and those trailing the market will keep chasing, meaning there is more buying left in this move.

Alternate Outcome:
Two-days of selling might not be enough and we could see another week or two of weakness before the market makes new highs again.  The deeper the selling, the more sustainable this rally becomes.  Shaking weak hands is what refreshes the market and clears the way for a move higher. If we resume the rally after just two-days of selling, the rally will be fragile and close to topping.  A deeper dip will let this market more thoroughly refresh, potentially extending into the 2nd quarter.

As for a trade, stay long the market as long as it holds above 1495 and look for a new high stretching past 1540 over the next few weeks.  A dip under 1495 means the market will test support at 1475.  No one knows for sure what the market will do next week and we will revise our outlook as the market gives us new information.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL fell 2% for the week and is resting at $450.  Upside resistance remains at $485 and the low of the move is $432.  Dropping under $432 will extend the pattern of lower-lows and a close above $485 gives the stock its first higher-high in 6-months.  It took rumors of an increased dividend to push the stock up to $485 two-weeks ago and it will most likely take another fundamental catalyst to get it back up there.  Without some great news, expect the stock to continue drifting lower.  The stock could rally on broad market strength, but use that as a selling opportunity and resist the temptation to buy strength until the stock regains $485.

Stay safe

LA: What to look for

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Look Ahead

How far can this streak of up weeks continue and where is the incremental AAPL buyer going to come from?

MARKET BEHAVIOR

Stocks were up for the seventh consecutive week.  Over the last few years this is as long as any streak lasted and we should expect a red-week simply based on historical precedent.  While I’m sure there are many times over the last 100-years where the market strung together a larger number of winning weeks, trading is a game of probabilities and we need to trade what is most likely, not what is possible.

MARKET SENTIMENT

The recent rally and absence of volatility is making the market feel safe, something we need to fear.  I’m not promoting a crash, simply a red-week or two to keep traders on their toes.  How people respond to the dip will tell us how far it will go.  If the prevailing attitude is complacency and buy-the-dip, look for a deeper pullback.  If everyone starts yelling fire and rushing for the exits, look for another quick rebound.

The rule of thumb is trade the opposite of what most expect.  The sharp pullbacks to 1,500 two-weeks ago got traders attention and excited bears.  This was finally the pullback everyone was waiting for, but the market rebounded and is now 20-points higher.  That episode ago humiliated bears and sellers who jumped on the pullback bandwagon only to watch the market pop higher.  Now this group of potential sellers is less likely to pile on board a similar dip in the future.

This matters because nervous sellers and shorts have a limited war-chest and run out of ammunition quickly if bigger money doesn’t join the selling.  That is exactly what happened two-weeks ago.  But what happens if the nervous sellers are already out of the market and bears are reluctant to re-short the market?  That means the next dip isn’t manufactured selling, but real selling.  This is the fundamental difference between a buying-the-dip opportunity and a real market reversal.  If you know who is selling, you have a better chance of accurately anticipating the move.

The above scenario describes the way these things normally play out.  I’m not exactly sure where we are in this process and that is why we need to keep looking for clues from the market’s behavior.  The trend remains higher, but we need to be increasingly cautious with each passing day.

TRADING OPPORTUNITIES

Expected Outcome:
Look for a small red week this week or next simply because history says this is about as far as these things normally go.  This could be a small pullback, or the start of something bigger.  We need to keep a close eye on how the market and sentiment responds to any weakness, looking for clues on where this market is headed.

Alternate Outcome:
While seven up-weeks is a lot, it is not impossible for us to string together several more.  The momentum is clearly higher and reluctant buyers are finally starting to wade in.  Their buying will keep propping up the market until they run out of money and that will be when the market finally noses over.  Running out of buyers, not complacency is what finally causes a market to top.

The outcome I am most hoping for is a strong push higher because that is unsustainable, will clearly signal an intermediate top, and be an attractive place to short the market.  This grinding higher stuff is far harder to predict and time.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL is struggling again and the last few weeks of buying sucked in many of the bottom-pickers.  The question any AAPL bull has to answer is who is the next buyer that will keep the rebound going?  Markets are driven by supply and demand, so where is this new demand going to come from if all the AAPL bulls already own the stock?

My opinion is there is still too much hope and optimism left in the stock to stage a quick recovery.  The most likely scenario is the most loved stock will need to become the most hated stock before selling and hope finally exhaust themselves and the stock can bottom.  The other red flag is any weakness felt by the broad market will be exacerbated in AAPL shares.

Stay safe

WR: Amnesia

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review

MARKET BEHAVIOR

Stocks closed flat for the week, up less than 2-points.  The range was tight, 0.7%, with a low of 1514 and high of 1525; both of these levels representing near-term support and resistance.

Exchange volume was right around average, but since it was option expiration week, volume was actually a little light.  The slow trade allowed the 10-week moving average to catch up and it is now just 48-points under the market and the slower moving 50-week moving average is trailing by 110 points.

MARKET SENTIMENT

Holders have not been interested in selling this market.  We’ve seen multiple dips to support, but nothing achieves critical mass and inevitably rebounds quickly.  If there was one trade that worked well with the indexes the last couple months, it’s buying anything, dips or not.  A few weeks ago traders were afraid of this too-far, too-fast market, but now that every sale, stop-loss, and short has been a mistake, cynics are finally coming around.  But the thing to be careful of is this shift in sentiment is what causes an intermediate market top; after everyone buys, demand dries up, and stocks dip.

There were tons of reasons not to buy this market a few weeks ago, but a relentless series of new highs is giving traders amnesia.  Everyone isn’t sold on this market yet, but they are coming over in larger numbers with each passing day.  How much longer this can keep up is the big question.

I don’t expect the market to collapse because there are still too many cynics remaining, but there is no more effective persuader than seeing everyone else make money.  This means there are two ways we can move ahead.  One is directly and the other is after a nerve rattling dip.  Straight up will suck in the last of the fence-sitters and exhaust demand in one final push higher.  Typically this happens on the largest weekly gains we’ve seen since the early days of the rally.  This would be the quickest route to a material pullback.

The slower, but more sustainable trade would be dipping dramatically to flush out some of this new-found complacency.  To continue sustainably the market needs to shake out recent buyers and tempt aggressive bears to short the market.  Once this limited selling runs its course, look for the market to find support and resume its rally.  A mid-rally dip like this could last a couple of weeks before resuming higher, but expect it to feel like the real selloff because that sense of panic is what will refresh the rally.

TRADING OPPORTUNITIES

Expected Outcome:
Look for near-term weakness from a sustainable rally or a strong push higher out of a topping pattern.  We are half way through the first quarter, meaning there are at most six-weeks left in this move, and possibly less.  The conservative trade is taking profits and the aggressive trade is squeezing out a little more.  If you like sleeping at night sell some stocks, if you enjoy the thrill of the chase, tighten up your stops and get ready to hang on.

The advantage of selling into strength is you don’t have to guess if a dip is just a dip or the start of a real selloff.  Chances are weakness next week will be another buying opportunity, but there are no guarantees and the aggressive trader will have to decide wither or not to sell.

Alternate Outcome:
The market is not always predictable and a strong break higher could be a buying opportunity, but that is a low probability trade and one I’ll just have to sit out.  I don’t need to make all the money, just the easy stuff.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL finally had a down-week after two-weekly gains following the post-earnings plunge.  Was this two-week rebound the dead-cat bounce or is this week’s weakness just a dip on the way higher?  The stock ran into psychological resistance at $485 and is currently retesting support at $460.  A dip under $460 would trigger more stop-loss and short-selling, pushing the stock back down to recent lows of $430.  To resurrect this stock from the dead, it will need to regain and hold $500, but in the near-term the stock will make for a far better swing-trade than buy-and-hold investment.  Buy the dips and sell the rallies and the stock swings between extremes of hope and despair.

Stay safe

LA: Rally continues

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review and Look Ahead

Another modest weekly gain, but volatility picks up.  AAPL is rallying on rumors and hope, but will Tim Cook deliver?

MARKET BEHAVIOR

The market finished fractionally higher in a week that provided the largest volatility we’ve seen since the Fiscal Cliff pop.  These swings show there is still indecision in the markets, but for all the attempted selloffs, the market held firm at 1500 and finished at a new high.

The market is 56-points above the 10-week moving average and 112-points above the 40-week moving average.  The faster 10wma turned up and is keeping pace with the market, trailing the index by only 3.6%.

MARKET SENTIMENT

Bears continue trying to take down this “overbought” market, but are helpless to stop it.  We saw three legitimate attempts to break this rally, but each one failed because the wider group of holders was unwilling to join the selling.  From a supply and demand viewpoint, each selloff shook out weaker holders, meaning those left holding stocks are confident in their positions and their resolve is keeping supply tight.

The new highs are also intensifying the pressure on money managers underweight this market.  “Smart money” had a horrible 2012 and 2013 is starting with a case of deja vu.  It is hard to predict how long these guys can sit out, but it looks really bad when dumb index funds are outperforming smart money by multiple percentage points.

TRADING OPPORTUNITIES

Expected Outcome:
While we saw some of the widest swings in over a month, the weekly gain was modest.  Often directional rallies top on one of the largest weekly gains of the move, and by that measure this rally still has room to go.  The high probability trade remains to the upside.

Alternate Outcome:
Every rally ends and this one will be no different, but the challenge is figuring out when.  Money is made knowing the difference between what is real and what is just noise.  Keep a close eye on 1505.  If we cannot escape 1500, that will indicate this market is running out of new buyers and we should prepare for an imminent pullback.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL climbed into the post-earnings gap on rumors and hope.  Tim Cook is speaking this week and traders are looking for hints at a more generous plan to return money to shareholders.  If Cook doesn’t say what investors want to hear, look for AAPL to selloff sharply.  And even if they get what they want, look for significant resistance at $500 as many regretful owners try to get out at break-even.

Stay safe

WR: Don’t doubt this bull just yet

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review

Markets set another weekly closing high and are maintaining a moderate and sustainable pace of gains in spite of all the calls of overbought.   AAPL bulls are a stubborn bunch and the rebound will take even longer than I originally suspected.

MARKET BEHAVIOR

Stocks closed at a new weekly high and are up five-weeks in a row.  The winning streak’s duration and rate of gains is reasonable when compared to other rallies in recent history.  While it feels like a lot, it is not unusual to see markets string together consecutive up-weeks.  This also illustrates the advantage of looking at weekly charts because it eliminates most of the daily noise and more accurately reflects what the market is actually doing, in this case rallying smartly.

MARKET SENTIMENT

This market is attracting a chorus of enthusiastic and vocal bulls, but a fair number of cynics remain, saying these new highs cannot last.  These cynics are right, but anyone who says the market will pullback is right simply because the market always pulls back.  But as traders, undefined predictions are meaningless because successful trading has little to do with direction everything to do with timing.  You can get the overall direction wrong, but if you have impeccable timing, you can still make lots and lots of money, and no doubt most of us have been frustrated by making the exact right call, but lost money because we screwed up the timing.  Never forget, predictions are meaningless when it doesn’t include timing.

If we focus on the immediate market, the trend is clearly higher and we are not extended yet, so stick with the trend.  Looking back at the last couple years on a weekly chart we can see most intermediate highs occurred when an extended run had a larger up-week than at any point in the rally with the exception of the rally’s first week.  The last surge higher is when bears throw in the towel and sideline watchers can no longer resist the temptation to buy.  This crates one last surge higher and is typically larger than any previous weekly gain.  This large price gain on high volume is the classic capitulation reversal.  Our recent weekly chart does not show signs of this behavior, so the high-probability trade remains to the upside.

TRADING OPPORTUNITIES

Expected Outcome:
Stick with the trend and don’t try to pick a top because this rally has legs.  We will eventually see the surge higher and that will be the sign to short this market.  I have no idea if that surge will be this week or next month, all we can do is watch the market for clues and trade what the market gives us.  Boring trade is sustainable, big gains here are not.

Alternate Outcome:
While markets often surge into turning points, it is not written in stone and we could see the market run out of buyers at any time, especially if the market is caught off guard by an unexpected headline.  But as we saw with last week’s GDP report, this market is not all that vulnerable to negative headlines.  Recent support is at 1500 and breaking this level will force us to reevaluate the bullish thesis.

Investorplace.com poll

INDIVIDUAL STOCKS

No matter how low AAPL goes, people still talk about what a great stock it is.  I heard a professional money manager say when AAPL broke his $470 stop-loss, not only did he keep holding, he added to his position at $450.  What is the point in having a stop-loss if you don’t use it?

I found this poll online that shows a lot of people think AAPL is still a Buy or Hold after falling over 35%.  There is far too much love for this stock for it to bottom and it could take a year or longer to demoralize all these hopeful owners.  Two-weeks ago I was an AAPL bull, but I quickly changed my mind when my initial thesis was proven invalid.  It is normal, even expected to be wrong in the markets, but it is fatal to stay wrong.

Stay safe