Category Archives for "Intraday Analysis"

Down, but holding support

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks gapped lower at the open on renewed emerging market concerns, but are off those early lows in midday trade.  This morning’s dip failed to undercut Monday’s lows and continues trading sideways above support.  If we hold this level for a few more days, we might be establishing a wider 1,770 to 1,850 trading range that could last the remainder of the quarter.  Several months of sideways trade would go a long way toward refreshing this aging bull.

MARKET SENTIMENT
The headline everyone is waiting on is the Fed policy statement due at 2pm EST.  I’m not sure what people expect since the Taper policy was explicitly telegraphed last month.  Plan on another $10B taper and holding ultra low-interest rates.  If that catches anyone by surprise, they are clearly not paying attention.  If some are hoping a 3% “crash” in equities or monetary crises in small countries on the other side of the globe will force the Fed to change their carefully laid out plans, they will be disappointed.

Of course fundamentals and sentiment are two very different things and we all know markets trade sentiment in the near-term.  While we will likely put this emerging market turmoil behind us in coming weeks, that doesn’t mean traders won’t react emotionally to the headlines in the present.  It comes down to how upset the market is when Taper marches ahead despite emerging market worries and disappointing December employment.  But often when the market responds emotionally to news, that creates profit opportunities for those willing to take the other side.

Last year we had a “half-full” market that looked at the positive in every data point or headline.  Could these emerging market woes be a sign the market is shifting to a “half-empty” outlook?  If we see a fundamental shift in the market’s outlook and disposition, that could signal a reversal in trend.  For the time being, four days of selling is anything but conclusive, it is simply something to keep an eye on.

TRADING OPPORTUNITIES
Expected Outcome: Cautiously bullish – buy weakness
Every selloff in history has been a buying opportunity, the only question is how long it takes to show a profit.  This time is no different.  Currently the market is finding support above 1,770 for the third day.  We didn’t get a V-bottom like we’ve seen following other dips recently, but halting the emotional selloff is constructive.  Buyers are demonstrating a willingness to support the market at these levels and we’ve run out of panicked sellers.  The market is likely establishing an extended sideways trading range in order to digest all of 2013’s gains.

Alternate Outcome:
If holding 1,770 is constructive, falling under it is destructive.  Failing to hold support will elevate anxiety all over again and reignite emotional selling.  Be prepared for another leg down if we cannot hold support.

Trading Plan:
Maintaining 1,770 through Thursday is encouraging and suggests we are putting these emerging market fears behind us.  Quarters typically have personalities and ending this selloff likely means this one is finding a bottom and setting up to trade sideways.  Fail to hold support and all bets are off.

INDIVIDUAL STOCKS
Buyers have not rushed in to save AAPL and the stock is down modestly following yesterday’s plunge.  Bulls argue that AAPL is a software company not a hardware company, but given the market’s reaction to yesterday’s earnings, Wall Street thinks AAPL is little more than a phone company.  The company exceeded expectations on almost every metric expect phone sales.  Everyone agrees AAPL built an impressive and profitable ecosystem, but at its core is the iPhone.  Take that away and everything else falls down.  Maybe the Street is on to something when it focuses almost exclusively on the iPhone sales.

Plan your trade; trade your plan

Relief Rally

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks took a break from three days of selling and are up modestly in midday trade.  Yesterday we bounced off 1,770 support that comes from October, November, and December trade.

MARKET SENTIMENT
The global rout eased as Asian and European markets finished their sessions flat or higher.  This took pressure off US markets and we are experiencing a modest relief rally.  While it is nice to end the emotional, sell first, ask questions later trade that occurred over the last few days, everyone is wondering if this is just a temporary reprieve before another leg down, or if this is the end of the Emerging Market tantrum.

The slide paused as all those who wanted to sell already sold.  Now bulls and bears are watching intently to see what comes next.  Most weak sellers were purged in the relentless, three-day implosion.  Far more bold traders took their place, buying the dip and through those actions demonstrate little fear of this weakness.  The remaining group of owners we have to worry about are those formerly confident holders who are now riddled with doubt and paralyzed with fear.  This morning’s bounce brings them some relief, but no doubt that anxiety will flare up if prices reverse lower.

The recent slide already undercut most stop-losses, so we don’t need to worry about big waves of automatic selling if the slide continues.  The biggest risk is a continuation of the pain trade where owners cannot bear the thought of losing any more money and manually pull the plug.  While this dip feels dramatic, we must realize anyone holding a widely diversified basket of stocks is most likely still sitting on profits from last year’s monster gains.  While theoretically money is a commodity, many traders have a higher risk tolerance for profits than principle.  That means most of the longer-term holders are still quite comfortable and the only ones experiencing an inordinate amount of pain are short-term traders and late buyers of last year’s rally.  Since both of these groups are relatively small compared to the broad market, their emotional selling can only take us so far.  To continue the selloff, we need to flush out longer-viewed traders sitting on nice gains.  That is harder to do and a large part of the reason the emotional selloff didn’t last more than three-days or push us down much more than 4% from the highs.

TRADING OPPORTUNITIES
Expected Outcome: Cautiously Bullish – buy weakness
Anytime emotional selling takes a break, it is a good thing.  This gives owners a chance to regroup and evaluate the big picture.  Buyers also often wait for the selling to stall before jumping in and this pause gives them the opportunity to buy at prices we haven’t seen since October.

We typically get a couple 5% pullbacks a year.  10% pullbacks are less common and  happen once a year or less.  20% pullbacks are rare and only happen every few years.  Straight probabilities suggest this weakness is more likely the 5% variety than a 10% or 20% correction.  When in doubt stick with the trend and the high probability trade.  If buying dips were easy, everyone would be rich.

Alternate Outcome:
Through most of 2013, we ricocheted off each dip’s low.  This rebound is taking its time.  Either this is not the actual bottom, or the market’s character is changing.  Both of these are concerns we need to pay attention to.  Markets rarely implode from the highs, instead they step lower.  So while the market might bounce here, we need to be wary of further weakness if the market is unable to make new highs.

Trading Plan:
We only make money by taking risk.  Buying dips when everyone is fearful of continued selling is never an easy trade, but more often than not it is the right trade.  But at the same time, there are no guarantees in the market and we always need a contingency plan.  If the selloff truly stalled and the market is ready to rebound, we should not retest Monday’s lows near 1,772.  Dipping under this level likely means another round of pain is coming.

INDIVIDUAL STOCKS
AAPL beat expectations on almost every metric but iPhone sales and the stock is getting crushed for it, down about 8%.  Tim Cook and bulls point to supply constraints and other issues that lead to slower sales, but Wall Street is not buying these excuses.  Most likely investors are frustrated by the lack of innovation.  The biggest risk is AAPL’s sentiment transition from great company with explosive growth to rock solid company with above average growth.  The nuance is minor, but to the market it is the difference between reclaiming $700 and trading sideways for a decade.  Many of the greatest companies in the world traded sideways following epic stock runs.  There is no reason to expect AAPL’s stock will be any different.  At this point we have dividends, buybacks, product refreshes, and China Mobile, but so far nothing is moving the needle.  Wall Street wants another new must have device and the stock will likely trade sideways until AAPL disrupts another product category.

Plan your trade; trade your plan

More selling

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks sold off for a third straight day and are testing prior support near 1,770.

MARKET SENTIMENT
Emerging market fears continue embroiling stocks and buyers are unwilling to step in front of this selloff.  This price decline is shaking the resolve of previously confident owners and many are choosing to sell this weakness rather than endure the pain of seeing the market fall any further.

As rational traders, we need to decide if currency issues in Turkey and Argentina will materially affect the US economy and corporate earnings.  In years past we’ve seen our markets tumble over downgrades of US debt and the risks of financial contagion in the Eurozone. Those issues threatened our financial infrastructure and brought flashbacks of the 2008 meltdown.  Obviously we cleared those terrifying hurdles on our way to all time highs last year.  In the big picture current emerging market issues are far less threatening to our economy and will likely pass through the system even quicker.

This selloff is more about sentiment than fundamentals.  We should ignore these relatively minor headlines and instead focus on how other traders are responding to this weakness.  Most traders are not overly concerned about these fundamental issues on the other side of the globe, but there is just enough uncertainty to make them nervous.  Then when they see everyone else panic and run for the exits, it is hard to resist the urge to join the hysteria.  Everyone knows markets go up and down, but it is easy to forget that when we see prices tumble.

The last three days of weakness has flushed out a large chunk of the excess enthusiasm.  Dramatic moves lower chase off most of the holders who are inclined to sell.  Those owners still holding are far more confident in their analysis and not interested in selling no matter what near-term moves the market makes.  It is on the backs of these confident owners that the market will find a bottom and bounce higher.  This periodic purging of weak owners is how markets refresh themselves.  Recent sellers and shorts will eventually push the market higher when they buy back in over coming weeks.

TRADING OPPORTUNITIES
Expected Outcome: Cautiously bullish – buy weakness
Everyone wants prices to pullback so they can get in at lower levels, but every time the market gives us what we ask for, many are too nervous to take the gift.  Profit opportunities come from volatility and this weakness is exactly what we want to see.  Emotional owners are selling at discounts as compared to what they thought stocks were worth last week and that creates profit opportunities for those willing to take a risk.  We buy their fear and sell their greed.

Alternate Outcome:
Every 20% selloff starts with that first 4%.  While the market could bounce at any time, there nothing more effective at shattering confidence than a relentless selloff.  While these headlines seem unworthy of a large decline, the market rarely does what we expect it to do and if the crowd reaches full-blown hysteria, there is no telling what it could do.

Trading Plan:
Buy weakness and sell strength.  Define your risk and take what other traders are giving away.

INDIVIDUAL STOCKS
AAPL earnings are on tap after the close.  The stock is up quite a bit from last year’s lows and it will take impressive results to continue the recovery.  If the company blows away expectations, look for the strength to continue.  If bulls don’t get what they are hoping for, the stock will struggle as it runs out of catalysts to justify high growth expectations.  This earnings will like set the tone for the next three months of trade, so go with the momentum.

Plan your trade; trade your plan

Who’s the sucker

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks undercut prior support near 1,810 and slipped under the 50dma for the first time since October.  The market is testing the lower bound of the recent trading range after failing to break above it earlier in the week.

MARKET SENTIMENT
Markets are nervous following recent Asian and emerging market weakness and this anxiety is flaring up among short-term traders.  Stocktwits’ SPY sentiment survey has seen bullishness drop from 80% in December to 39% today.  Last week’s AAII sentiment survey showed bullishness dip under 40% for the first time since November.  What was record high levels of bullishness just a few weeks ago has cooled off dramatically and is a healthy sign.

When analyzing sentiment, it is helpful to segregate market participants by timeframe.  We have day-traders, swing-traders, position-traders, and buy-and-hold-forever.  Stocktwits is comprised primarily of active day and swing traders.  This group has clearly grown bearish recently, suggesting many liquidated longs and some have even gone short as sentiment on those boards plunged.  We can largely ignore the buy-and-hold-forever crowd since many of these 401k types don’t follow the market daily and a 3% dip over two days is unlikely to send them running for cover.  That leaves medium-term position traders.  How are these traders positioned and what are they think will go a long way to telling us what will happen next.

Many of position traders are fully invested following 2013’s monster run.  Last year they flinched anytime the market showed weakness, but every dip turned into a buying opportunity and anyone who sold kicked themselves for being so foolish and weak.  After getting burned a couple of times, these position traders learned to hold any and all weakness.  When confident/complacent owners hold the dips, they keep supply off the market, making it easier to bounce.  With fewer people hitting the sell button, markets don’t selloff as much, and as we’ve seen in recent months, volatility decreases.

The headline roiling global markets is Asian and emerging market weakness.  Most short-term traders have either been shaken out as the market dipped under their stop-losses, or they used the violation of support as a signal to go short.  No doubt a lot of the selling over the last couple days has come from this highly active group of traders.  The buy-and-hold-forever crowd isn’t selling, so we can ignore them.  The million dollar question is if weakness in emerging markets is enough to shake the confidence and resolve of position traders.  These guys held through Shutdown, Debt Ceiling, and Taper as we bounced off those lows.  If those significant headline issues that hit close to home didn’t make them flinch, why would a manufacturing index data point on the other side of the world all of a sudden turn them into scared sellers?  That’s a good question.

TRADING OPPORTUNITIES:
Expected Outcome: Bullish – at lower end of trading range
Stocks dipped under support and the 50dma in early trade, triggering many stop-losses in the area and tempting bears to short the weakness.  At this point either the selling accelerates as the weakness shatters the confidence and resolve of a wider pool of owners, or supply dries up as we run out of sellers and the market bounces like it has so many times before.

Who’s the sucker here, nervous sellers or excited dip buyers?  Asian markets have been selling off since December, so why it became big news yesterday is curious.  Most likely this was just an excuse for the nervous to sell and the cooling sentiment is a healthy part of moving forward.  Dips wouldn’t refresh the market if they didn’t convince everyone this time it is real.

Alternate Outcome:
Nothing shatters confidence like a screen filled with red.  It doesn’t matter why the crowd is selling, just seeing other people sell makes us nervous.  This dates back to our days in the wild.  When everyone else started running, those that waited around to see what all the fuss was about quickly became lion food.  It doesn’t matter if these headlines are legitimate or not, price is truth and emotional selling often leads to more emotional selling.

Trading Plan:
If the recent trading range holds and selling doesn’t accelerate, this is clearly a buying opportunity.  Continued carnage in the emerging markets is a real risk, but the best profit opportunities always feel risky.  The conservative trade is to wait another day or two for this trade to play out.  A trader with a higher risk tolerance can try picking a bottom if the selloff stalls this afternoon.

Plan your trade; trade your plan

Bouncing around the trading range

By Jani Ziedins | Intraday Analysis

Intraday Analysis

MARKET BEHAVIOR
Stocks gapped lower at the open and slipped to 1,825 by midday.  The market is still above recent support/prior resistance near 1,810 and well within the 1,810 to 1,850 trading range.  The 50dma continues marching higher and is catching up to 1,810 support.

MARKET SENTIMENT
Headlines claim this weakness is driven by disappointing earnings and manufacturing data out of China, but take those explanations with a grain of salt.  Journalists are paid to come up with a fundamental reason for every gyrations, whether real or imagined, but the truth is markets often move for no discernible fundamental reason.  Over the last few weeks traders have been reluctant to buy new highs and demand dries up each time we approach 1,850.  So far this dip doesn’t appear to be any more than a continuation of that aversion to buying 1,850.

For a material decline to take place, the market needs to become inundated with excess supply.  That means currently complacent owners hitting the sell button.  So far they have proven unwilling to sell and every move lower stalls when supply dries up.  For the last 12-months each dip has been a buying opportunity and owners quickly learned selling weakness is a poor trading decision.  Now they confidently hold any and all weakness, keeping supply tight and making it easy for the market to bounce on modest demand.  To see more meaningful and sustainable selling, we need to shatter the confidence of holders and send them rushing for the exits.  If the recent announcement of Taper didn’t concern owners, I doubt some footnote about manufacturing in China will all of a sudden trigger a wave of emotional selling.

TRADING OPPORTUNITIES
Expected Outcome: Modestly Bullish – Inside Trading Range
Without a fundamental reason for the market to collapse, today’s weakness is likely another buyable dip.  This sideways churn is refreshing the market and setting the stage for the next move higher.  Unsustainable markets rollover quickly and holding this levels for nearly a month suggest higher prices are in our future.  But the market could dip under recent support at 1,810 in coming days, flushing out the last of the weak hands before bouncing higher.

Alternate Outcome:
Sometimes markets rollover before the crowd understand why.  This happens when the market is most bullish and everyone already owns all the stock they can hold.  Without new buyers, prices fall under their own weight.  If we slip far enough, previously confident owners turn into nervous sellers.  Major market tops occur when the crowd is most bullish and is how this one will likely end too.  While it is hard to know when sentiment gets too extreme, price will always let us know with a pattern of lower highs and lower lows.  Since we are less than 2% from all time highs, calls of a market top are clearly premature.

Trading Plan:
As long as the market stays inside the trading range, continue buying weakness and selling strength.  A dip under 1,810 presents an interesting buying opportunity if the market finds support.

Plan your trade; trade your plan

Not much going on

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks are trading sideways in a tight range today as we continue consolidating recent gains.  The market remains inside the 1,810 to 1,850 trading range.

MARKET SENTIMENT
Many companies have already reported earnings, but few investors are changing their mind based on what they hear.  Prices only move when people alter their outlook and make adjustments to their portfolios.  So far few traders are buying or selling based on the results companies are posting.  Bulls are staying bullish, bears are staying bearish, and those out of the market remain reluctant to chase.  Even though we are still early in the earnings cycle, enough companies have reported reasonable results that is it unlikely the back half of earnings seasons will bring any macroeconomic surprises.  Obviously there will be big moves in individual companies, but for the most part the fragile recovery is no better or worse than people thought coming into this.

In this case no news is good news.  Stocks have a natural upward bias and without a reason to sell, most owners continue holding.  The resulting tight supply supports prices and makes it more likely the next move will be higher.  The sideways trade is wringing out some of the euphoric bullishness seen in December.  AAII’s sentiment survey shows the percent of Bulls dipped under 40% for the first time since November.  It is also worth nothing that the number of bears is also falling in recent weeks as the percent of Neutrals swelled to the largest level in months.

With the self-identified Bulls and Bears, it is obvious what their outlook is and how their portfolios are likely positioned.  I don’t like the term Neutral because a person can be an underweight Neutral or an overweight Neutral.  When looking for the next market move, it will likely be driven by these Neutrals since the are the most uncommitted and easiest to persuade.  Why it is important to know how they are positioned is because if they are fully invested, there is only one move they can make.  If they are out of the market, then for the average investor, there is only one move they can make.

By itself the Neutral reading doesn’t give us a lot of information directly.  But digging one level down, we see bullishness since Dec decreased 16% and bearishness only increased 3%.  That means most of the growth in Neutral outlook came from former Bulls.  Coming from a bullish bias, that makes me suspect our current crop of Neutrals is more overweight than underweight, especially since we have not seen a gut wrenching selloff trigger a large wave of emotional selling.  Most of these former bulls are less optimistic than they were a month ago, but their portfolios likely still reflect a bullish bias.

TRADING OPPORTUNITIES
Expected Outcome:
Cautiously Bullish – Inside Trading Range
Unsustainable markets rollover quickly and holding these levels for nearly a month suggests  a solid foundation under the market.

Alternate Outcome:
While the a move higher is more likely, with such a high level of comfort and complacency in the market, it is vulnerable to a wave of panic of hitting owners, triggering a mad dash for the exits.  So far owners have grown immune to modest selloffs, but be on the watch out for that one event that turns confident owners into nervous sellers.

Trading Plan:
Holding these levels suggests the next move is higher.  Long-term investors can continue holding.  Bears should avoid shorting.  Swing traders can sell strength and buy weakness until we breakout out of this trading range.

Plan your trade; trade your plan

Struggling with 1,850 again

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks stalled following an early assault on 1,850, finding themselves down 15-points from those initial highs.  This is the third time the market turned back from 1,850 in recent weeks and this level is quickly transitioning into meaningful resistance.  Support lies back at 1,810 and the market is holding within this range as it consolidates recent gains.

MARKET SENTIMENT
There is a lot of headline chatter about earnings, but so far traders are unmoved by what they see.  Owners keep holding and those out of the market remain reluctant to chase new highs.  The resulting standoff is building a sideways trading range between 1,810 and 1,850.

Bullish sentiment is cooling off as we consolidate recent gains.  Investors are ratcheting back their wildly bullish expectations as the choppy sideways trade gives them second thoughts.  Rallies refresh either by giving up some of the recent gains, or through time.  This market seems to be taking the latter approach.

TRADING OPPORTUNITIES
Expected Outcome:
Unsustainable markets typically rollover quickly, so holding near record highs for almost a month suggests we are building a foundation for further gains.

Alternate Outcome:
We are one bad headline away from everyone rushing for the exits.  By itself complacency is bullish since confident owners keep supply tight, the risk is if something happens that shatters this confidence.  We can continue holding stocks here, but stand near the exits and be one of the first to get out if fear starts taking hold.

Trading Plan:
Inside trading ranges we sell strength and buy weakness.  Longer viewed investors can continue holding this complacency as it keeps supply tight and props up prices.  Keep a close eye out for that inevitable headline that turns complacency into anxiety.

INDIVIDUAL STOCKS
TSLA is adding to its recent high volume bounce off the 50dma.  The stock recovered more than half of the recent pullback and is likely headed to new highs.  Things that seem too high often keep going higher.

AAPL keeps flirting with the 50dma and recovered this level on light volume today.  Unless volume picks up dramatically, this bounce is suspicious and not a valid buy point.  No doubt most traders are already looking forward to next week’s earnings and we will likely trade sideways until then.  It will be interesting to see how the refreshed iPad sales fare.  The biggest risk to sales is satisfied customers who see little reason to upgrade from a perfectly usable device.

Plan your trade; trade your plan

Stalling shy of 1,850

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks were down modestly for a second day following Wednesday’s record highs.  1,850 is acting like resistance as the market consolidates recent gains.  The 50dma continues its ascent higher and is over 1,800 for the first time.

MARKET SENTIMENT
Bullish sentiment is cooling off following Monday’s sharp selloff and a fear of heights is creeping in.  A recent Yahoo Finance poll shows 57% expect a major correction and Stocktwit’s SPY sentiment gauge is down 20 points since the December highs.

Even in the face of a shifting outlook, we continue holding near record levels.  Markets refresh one of two ways, through a pullback or alternately sideways churn.  So far sideways churn is doing a reasonable job taming the euphoria.  Nervous owners are selling a fair number of shares as almost every day this year has seen above average volume, but so far there have been plenty of new buyers willing to step in at these levels.  If the market continues higher, expect many of these recent sellers to chase the market and buy back in at higher levels.

The one big concern is the lack of concern.  By nature the market is a worrier and since we cleared the Debt Ceiling and Taper fears last fall, there hasn’t been anything to fret over.  Is this the calm before the storm?  With so few worries priced in, the market is vulnerable to a panicked rush for the exit if it gets caught off guard.  Both traders and investors should embrace the selling as an opportunity to buy discounted shares.  It is nice to see our accounts grow every day, but the big profit opportunities come from volatility.

TRADING OPPORTUNITIES
Expected Outcome:
While most people come to the market with predictions of moves higher or lower, we trade sideways far more often than anything else.  So far the market appears to be establishing a trading range between 1,810 and 1,850.  We will likely bounce around this range until traders get bored.  Only after they stop buying the breakout or selling the breakdown will we get the next move.

Alternate Outcome:
With the market so happy-go-lucky these days, it is hard to imagine a headline that will trigger a surge higher.  The downside is a far different story.  Complacent owners can turn into panicked sellers at the drop of the hat.  The last time we saw such bullish sentiment was back in 2011 prior to the US Debt downgrade plunge.  Without a doubt we are skating on thin ice and vulnerable to a selloff, but we need that catalyst to break the ice before we fall in.  Until then the party continues.

Trading Plan:
Near the upper end of the trading range, there is not a lot to do.  Those out of the market can wait for an upside breakout, swing traders can lock-in recent profits, and buy-and-hold types keep holding.  Without a doubt we will dip under 1,800 at some point this year, the only question is when and how high we go first.  It is easy to predict the market, but all the money is made in getting the timing right.

INDIVIDUAL STOCKS
The China Mobile deal hasn’t been the  catalyst many AAPL bulls expected.  So far it seems more of a buy the rumor, sell the news story.  While the stock is up huge over the $400 lows of last year, last year’s catalysts failed to reignite the growth story.  It is still a great company with a strong balance sheet, but companies like TSLA and GOOG are doing a better job of capturing the imagination of growth investors.

TSLA‘s huge bounce off the 50dma on Tuesday might have created an interesting entry point for the most aggressive momentum investor.  The huge volume suggests a lot of traders are onboard this rebound.  Expect volatility to persist, but if this bounce holds, we will likely break $200 in the not too distant future.

Plan your trade; trade your plan

Pausing near all time highs

By Jani Ziedins | Intraday Analysis

Intraday Analysis

MARKET BEHAVIOR
Stocks paused after setting new highs yesterday.  We are at the upper end of a two-week consolidation that started in the final week of 2013.  Weak markets roll over quickly, so holding these levels for two-weeks suggests the market is not on the verge of collapse.  That leaves us with the two remaining possibilities, breakout to new highs or continue consolidating.

MARKET SENTIMENT
Monday’s selloff flushed out many weak hands.  While not as effective as a bigger selloff, churn like this keeps the rally from overheating.  Breaking under prior support triggered a wave of stop-loss selling from recent buyers and aggressive shorting by bears.  Those sellers will provide fuel for the next leg higher when they buy back in at higher levels.

TRADING PLAN
Expected Outcome:
Holding current levels for a few weeks suggests this market is on solid footing.  Most likely this it will trade sideways for another week or two before continuing higher.  Of course sideways is not a synonym for easy.    Monday’s plunge was part of this sideways trade and consolidations only work if the dips convince many traders a collapse is imminent.

Alternate Outcome:
Without any fear priced into the market, we are vulnerable to an unexpected headline that catches the market off guard.  Markets have a tendency to overreact, so when this unexpected event surprises us, look for the market’s imagination to blow things out of proportion.

Trading Plan:
Bears need a spooky headline to shake the confidence of complacent owners.  Until then expect every bout of selling to stall quickly as confident owners continue holding, keeping a lid on supply.  For bulls, markets never go straight up, so take profits into strength and buy the dip.  Longer viewed owners can continue holding on for higher prices.

Plan your trade; trade your plan

Bouncing back

By Jani Ziedins | Intraday Analysis

Intraday Analysis

MARKET BEHAVIOR
Stocks broke 1,850 for the first time as the market fully recovered Monday’s selloff.

MARKET SENTIMENT
We are in the early days of earnings season and so far traders are happy with what they hear.  The market was spooked on Monday, but that selling appears impulsive since we rebounded so quickly.

As we’ve seen in recent months, complacent owners are not concerned by modest weakness.  Their confidence in the future keeps supply tight and prevents selloffs like we saw on Monday from gaining momentum.  Selling pressure stalls quickly when most owners are not interest in selling.

Contrary to popular opinion, complacency is often bullish.  Running out of new buyers is what we need to fear.  Weakness in the bond market over the last nine months is flushing money out of those securities and they are pumping those funds into equities.  As long as people keep throwing new money at the market, it will continue defying gravity.

TRADING OPPORTUNITIES
Expected Outcome:
Hard to fight what is working.  The market has been given multiple invitations to breakdown, but every time this weakness fails to trigger wider selling.  This rally is long in the tooth and it is realistic to expect the rate of gains to slow.  The most vocal in the marketplace are debating between big gains or a correction.  More likely the answer lies between these two extremes.

Alternate Outcome:
With little fear left in the market, it is vulnerable to a large wave of selling if complacent owners are spooked by an unexpected bad headline.   While we can continue marching higher on the back of complacency, stay near the exits and get out quickly if it appears like a wave of fear and uncertainty is infecting the market.

Trading Plan:
If the market wants to consolidate recent gains, the best trade is buying weakness and selling strength.

Rest Day

By Jani Ziedins | Intraday Analysis

Intraday Analysis

MARKET BEHAVIOR
Stocks took a breather this morning following yesterday’s rebound to new highs.  Previous buying stalled at 1,810 and breaking through this barrier will show this rally is ready to continue.  Failing to add to recent gains likely means we will remain within the recent 1,780 to 1,810 trading range into year-end as neither bulls nor bears have the strength to move the market.

MARKET SENTIMENT
Yesterday was fueled in part by a large wave of short-covering as bears were forced to buy the unexpected bounce to new highs.  This strong move also won over many standing on the sidelines because they feared a Taper driven selloff.  With a budget deal in the works and Taper uncertainty behind us, there is no reason left to not own stocks and why the crowd feels so good right now.  But the more comfortable the crowd is, the more nervous we should be.

Quirks arising from supply and demand lead to “irrational” market behavior.  Yesterday saw a huge surge on Taper because no one wanted to sell and buyers were forced to pay a premium to coax owners to sell.  We can say this or that about a fundamental justifications for yesterday’s move, but the simple fact is owners didn’t want to sell and that scarcity drove prices higher.

The initial surge was fueled by short covering and late to the rally buyers, but to keep going the market needs new money to continue buying.  As long as we find a next greater fool willing to buy at even higher prices, all is well.  And that is the big debate.  When fears and uncertainties are few and far between, who does not already own stocks?

We have the chronic worrywarts hiding in bonds.  If they are still reluctant to trust stocks after the market ran up nearly 300% over the last four years, I seriously doubt a two-page policy statement from the Fed will cause them rush into the market with reckless abandon.

Swing traders buy weakness and sell strength.  They are more likely to sell yesterday’s bounce than buy at all time highs.

Value investors are notoriously thrifty and largely avoid buying near all time highs, preferring to wait for more attractive discounts.  These buyers have tons of money, but even more patience.  They are more likely to buy the dip than chase a breakout.

With so few buyers left willing to chase all-time highs, we need to be concerned about demand.  Confident owners and tight supply can mask demand problems for extended periods of time, but there comes a point when even tight supply cannot prop up the market.

TRADING OPPORTUNITIES
Expected Outcome:
The market bounced when it should have sold off.  That is always noteworthy.  But we also need to be cautious of recent volatility since that is a common component of topping patterns.  Obviously there are plenty of people who keep buying this market near all time highs, but with so few excuses to avoid stocks, we are getting close to the point of running out of new buyers.  While we are not there yet, we are getting closer to the dip that won’t bounce.  Until then keep holding, but stand close to the exit.

Alternate Outcome:
The last time the Fed really surprised us was September 18th when it didn’t taper.  The market surged 1.2% to all-time highs on the news, yet that marked the top as we slid into the Shutdown/Debt Ceiling lows.  While we don’t have a clearly identified hurdle in front of us, the market is vulnerable to any negative headline.  With the Taper officially started, bad news is bad again.

Trading Plan:
Barring an imminent collapse, the market will likely trade flat or modestly higher through the holidays and into the end of the year.  Traders can move to cash and take much deserved time off while others can continue hold through the holidays.  January is the next time the market will fall under the microscope.  Until then its flaws will remain hidden.

INDIVIDUAL STOCKS
While the market is acting strong, AAPL and TSLA are not having the same success.  TSLA is being rejected by the 50dma and AAPL is failing to hold $550.  Stocks go up and stocks go down.  While both of these stocks might be consolidating recent gains and setting the stage for a continuation higher, owners need to have a plan on when they will take profits.

Plan your trade; Trade your plan

To Taper or not to Taper

By Jani Ziedins | Intraday Analysis

Midday Analysis

MARKET BEHAVIOR
Stocks are modestly lower ahead of the widely anticipated Fed’s policy  statement.  The market is near the lower end of the 1,780 to 1,810 range, while the 50dma is rapidly catching up during this month-long consolidation.  Beyond the moving average, the next level of support is 1,750.

Currently the market is consolidating recent gains, but we need watch out for the next directional move, either a breakout or a breakdown.  Next week is Christmas and we have New Year’s the following week.  If the market holds current levels following the Fed , expect it to coast into year-end on the typical light holiday trade.

MARKET SENTIMENT
Buy the rumor, sell the news, or sell the rumor, buy the news?  Both sides are jockeying ahead of the Taper/no-Taper decision, but since the market is forward-looking, what the Fed does today is less important than what it signals it will do in the future.  At this point today’s Taper/no-Taper is a coin-flip, but most are confident the Fed will come out with more hawkish language that implies the Fed will start winding down monetary stimulus in the near future.  While bulls could get no-Taper today, if the Fed puts in firm language, the market might respond to those forward-looking statements and actually sell no-Taper.

Of course another view is much of this has been dissected to death over recent weeks and the market might coast through this policy statement because it is already priced in.  In that case not much will happen.

TRADING OPPORTUNITIES
Expected Outcome:
Taper is coming, if not today, soon.  While it won’t be a big deal for the economy, markets and reality rarely intersect.  This is a game of perception and the only thing that matters is what other people think.  If the start of taper fills them with fear and they sell stock at a steep discount, the market will crash.  Given the widespread bullishness reported by many sources, there are plenty of confident holders that can be convert into fearful sellers.

If the market falls on Taper, it is simply creating another dip buying opportunity.  The best profit opportunities arise when others are reluctant and fearful, not when the crowd expects good times as far as the eye can see.

Alternate Outcome:
Recent weakness tempted many bears to short this market.  A surge to new highs will be fueled by these shorts forced to buy back the market as it rolls over them.  Only price pays and it really doesn’t matter how sustainable a move higher is, only that is going up.

Trading Plan:
Expect near-term volatility as news-driven traders jump all over the Taper/no-Taper.  In the past the knee-jerk reaction was often a head fake and the market ultimately moved the other direction.  Don’t buy the pop and don’t short the dip.  Wait for market to calm down before trading the resulting move.

Plan your trade; trade your plan

Churn ahead of the Fed

By Jani Ziedins | Intraday Analysis

Midday Update

MARKET BEHAVIOR
Stocks gave up yesterday’s opening gap, briefly falling under 1,780 support.

MARKET SENTIMENT
Monday was the bounce bulls and dip-buyers were hoping for, but they were never able to build on early momentum.  Almost all of the buyable dips this year accelerated following the bounce.  This stalling likely indicates this is not the real buyable bottom.

All eyes are on the two-day Fed meeting, but will the outcome change anyone’s mind?  Will it turn bears into bulls, or bulls into bears?  The only thing that moves prices is when market participants change their mind and alter their portfolio allocations.  That resulting buying and selling is what moves markets.  Will Taper turn bulls into bears?  Will no-Taper turn bears into bulls?

No doubt we will see near-term volatility as short-term traders try to game the headlines coming out of the FOMC meeting tomorrow, but after that passes, expect the market to return to its previous trajectory.  Since the Thanksgiving high, buying stalled as few are enthusiastically buying these new highs.  The last couple months has seen a dramatic shift from 20% bulls to 60% bulls.  Converting cynics into buyers fueled the 150-point surge off the October lows, but with so few cynics left to convert, we might be running into demand problems.

TRADING OPPORTUNITIES
Expected Outcome:
The challenge for bulls is yesterday’s pop pulled a portion of the no-Taper buying forward, meaning there will be fewer left to buy the news when it comes out Wednesday.  Today’s weakness shows many are not willing to follow the dip-buyer into this trade.  Maybe they don’t believe it, or maybe they are already in the trade and don’t have extra money to buy more.  The challenge is when so many people already believe in a move, there are few left to keep pushing prices higher.

Alternate Outcome:
The last few weeks of churn removed some of the market’s recent excess, setting the stage for a continuation.  Sentiment can remain at bullish extremes for extended periods of time and is a secondary indicator.  When in doubt stick with the trend and in spite of modest weakness, the market is still in an uptrend.

Trading Plan:
Now we simply wait and see what the Fed has to say and trade the resulting move.  Given the high level of bullishness already in the market, there is not a lot of explosive upside in the market.  On the other hand, we are vulnerable to a herd selloff if the crowd loses its nerve.  While the high probability trade might be higher, the bigger move potential is lower.  Trade those conditions according to your style, risk tolerance, and plan.

Plan your trade; trade your plan

Bulls attempt a rebound

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR
Stocks ran up on the heels of the European market’s strength.  We reclaimed prior support at 1,780 and traded as high as 1,790, but the market slipped midday as buying paused.

MARKET SENTIMENT
This was the bounce bulls were waiting for.  The Fed’s meeting starts tomorrow and some of this buying is in anticipation of the “No Taper” surge to new highs.  But if excited bulls are buying the rumor, how many will be left to buy the news?

While everyone is debating “to Taper or not to Taper”, we should really be asking if it matters.  Given the trillions of dollars in bonds the Fed already owns, will dialing it back by $10 billion really make much of a difference to either the Fed’s balance sheet or the broader economy?  Yet it is all anyone is talking about.  The bulk of the debate revolves around taper now or early next year.  Again, this is a relatively small numbers and it won’t make much difference either way, but markets trade emotion, not common sense.  While the economic nuances of Taper policy don’t matter that much, the crowd’s reaction is what we are trying to anticipate.

Whether they Taper this week or hold off a month or two, there is a lot of pressure on the Fed to dial back its monetary intervention, both externally and internally.  Even if the Fed delays Taper, expect the language to firm up as the Fed prepares the market for the inevitable withdrawal of QE.  Bulls might get the “No Taper” they are hoping for, but if the language is hawkish, that could temper enthusiasm.

TRADING OPPORTUNITIES
Expected Outcome:
Markets remain more bullish than they’ve been in years.  While this condition can persist for an extended period of time, it is riskier to own stocks here than at any other point in the last two years.  Since no one knows for sure what the future holds, the best we can do is play the odds and anyone buying this rally is late to the party.  The best buying opportunities arise when everyone is nervous and fearful.  That is clearly not the case here as the crowd widely expects the good times to continue.

While Taper/No-Taper is a coin-flip at this point, we need to evaluate the potential moves in either direction before deciding how to trade.  The market is only 1.5% off all-time highs and 7% above the 200dma.  Given the strong run and the already bullish sentiment, it is hard to imagine a huge upside surprise given how much optimism is already priced in.  On the other hand, markets go up and markets go down.  It’s a year since we last tested the 200dma and it wouldn’t take much of a headline to trip up the market given current expectations.

Alternate Outcome:
The sideways churn between 1,780 and 1,810 saw a lot of owners move to cash.  While not a dramatic move lower, holding these levels for a few weeks allows the market to cool off, making another leg higher more sustainable.

Trading Plan:
The market is in the middle of the recent trading range ahead of the Fed meeting and there is not a lot to do here other than wait for the market to show its hand.  Dipping under the 50dma in coming days is clearly bearish and launching through 1,800 is bullish.  Until then we are all spectators.  I have a bearish bias given the bullish shift in sentiment, but this could go either way.

PLan your trade; trade your plan

Three in a row

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
Stocks slipped for a second day, undercutting support at 1,780.  If today’s losses hold, that makes eight out of the last ten sessions ending the red, a dramatic reversal from all the buying we’ve seen in recent months.  The next material level of support is 1,760 and the 50dma.

MARKET SENTIMENT
While we’ve held near all-time highs in recent weeks, there was a clear undercurrent of distribution taking place under our noses.  Eight of the last ten and twelve out of the last eighteen sessions finished lower.  The losses have been so minor that bulls could easily ignore the distribution, but violating support this morning makes this phenomena harder to hide from.

Dip buyers remain MIA.  Wednesday they failed to defend 1,800 and today they allowed us to slip through 1,780.  The saving grace is today’s violation of 1,780 didn’t trigger a free fall selloff as many owners chose to wait for the “inevitable” bounce rather than sell a dip under some “arbitrary” technical level.  And this isn’t surprising.  Every other bout of weakness this year ended in a powerful rebound to new highs and regretful sellers learned to be more patient next time.  While this strategy worked every other time this year, we inevitably come to a dip that doesn’t bounce.  It is too early to say this is the end, but the lack of urgent selling likely means we haven’t hit bottom yet.

TRADING OPPORTUNITIES
Expected Outcome:
The crowd was wrong about “Sell in May” and they avoided September and October because that’s when markets crash.  But now they are waiting for the Santa Clause rally.  Will conventional wisdom end the year oh and three?  If the success in the market was as simple as following a few catchy phrases, preschoolers could beat the market.

Dip buyers need to come in and prop up the market, until then assume buyers are scarce and selling will continue.

Alternate Outcome:
The best time to buy is when everyone else is convinced we are headed lower.  Violating support this morning flushed out anyone with stop-losses.  Once that selling runs its course, supply will dry up and we will bounce yet again.

Trading Plan:
Stick with what is working.  The market is selling off without urgency and these things typically end on an emotional climax, something we have not reached yet.  Bullishness it near historic highs and we need a dramatic move to reset sentiment to more sustainable levels.  While we will eventually reach a buyable bottom, there is no reason to buy prematurely.  Wait for this move to run its course and buy the resulting strength.

Plan your trade; trade your plan

Where are the dip buyers?

By Jani Ziedins | Intraday Analysis

Intraday Update

MARKET BEHAVIOR
This morning’s selloff wiped out all of last Friday’s employment bounce.  We slipped under support at 1,800 in early trade and its been all downhill since then.  The next meaningful support level is 1,780.  Failing to hold that likely means a trip back to 1,760 and the 50dma.

MARKET SENTIMENT
Dip-buyers are MIA.  Either they are sitting on their hands waiting for even better prices, or we ran out of them and this slide will continue until we reach levels far more thrifty value investors cannot resist.

The news is fairly benign and we don’t have a major headline event driving this selling.  We simply ran out of new buyers willing to chase stocks at all time highs.  This happens from time to time and why buying stocks when everyone is fearful is typically a better strategy than waiting until the coast is clear.  Regardless of how we feel, stocks have never been riskier as we marched to new all-time highs.  That is the great paradox of the market, the higher prices go, the safe we feel, the more risk we are exposed to.  There are plenty of great times to buy breakouts and hold stocks making new highs, but that is when we still have fear and cynicism to feed off of.  Since the budget deal in October, there has been little to worry about and most investors forgot their reluctance and finally embraced this market with open arms.  But as soon as everyone finishes packing their accounts full of stocks, we run out of new buyers to keep pushing prices higher.

While it is premature to call this a top, buying definitely stalled.  Between stronger than expected employment numbers last Friday and a new longer-term budget solutions in DC on the table, we should be higher, not lower.  Some will attribute this to renewed expectations of Taper, but never forget prices move on supply and demand, not fundamentals or technicals.  We simply ran out of new buyers willing to throw their money at the market and are selling off as a result.

The challenge for bulls is this third pullback under 1790 is making many current owners and prospective buyers nervous.  With so many bullish on stocks, that leaves us with a huge pool of potential sellers.  Few buyers and lots of potential sellers is rarely a good combination for stock prices.

TRADING OPPORTUNITIES
Expected Outcome:
Failing to capitalize on recent good news shows buying is stalling and we need to tread lightly.  The key levels to watch are 1,800 and 1,780.  Bouncing and retaking 1,800 shows demand is alive and well.  Slip under 1,780 and it will trigger a wave of stop-loss selling, pushing us down to 1,760 and the 50dma.  From there it will be a matter of seeing if that is low enough to trigger a counterbalancing surge of value oriented dip-buying.

Alternate Outcome:
Over the last 12-months owners have been conditioned to hold through any and all weakness because it always ends in a bounce.  This makes it far more difficult for weakness to shake supply free.  That lack of selling makes it easier for modest dip-buying to prop up the market and has been the foundations this 25% year was built on.  Markets go down when supply swamps demand and as long as owners keep their cool, supply will remain constrained.

Trading Plan:
Shorts can take a shot at this weakness with a stop above 1,800.  Buyers are best served waiting until the market regains 1,800 because it is better to be a little late than a lot early.  Owners need to decide how much pain they can tolerate.  Shorter duration traders should have already locked in gains.  Long-term traders should ignoring these fluctuations and use any weakness as a buying opportunity.

Plan your trade; trade your plan

Employment saves the day

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR
Stocks recovered two-thirds of recent losses on Friday following a stronger than expected employment report.  We gapped higher at the open and held these gains through the close.  Reclaiming prior support at 1,800 is a big win for the rally and the market is establishing a trading range between 1,780 and 1,810.

MARKET SENTIMENT
Bulls are breathing a sigh of relief as this employment report snaps a five-day losing streak.  While the modest selloff made holders uneasy, it wasn’t deep enough to convince a large number of them to dump their shares.  Much of the recent selling was likely bears shorting the weakness and Friday’s strength forced many of them to buy back those shorts for a loss.  Short-squeezes are strong, yet temporary and the bigger question following Friday’s rebound is if this strength will attract a sustainable wave of new buyers to the market.

With bullish sentiment at levels we haven’t seen in years, it is hard to get excited about owning this market.  The challenge of trading sentiment is it is just as hard to pick a top in sentiment as it is to pick a top in the market.  While sentiment doesn’t give us a timing signal, it does provide insight into how large resulting moves might be.

Stocks only move when people change their minds.  This is when they adjust their portfolio to reflect their new outlook and the resulting buying and selling moves prices.  The problem with widespread bullish sentiment is there are fewer people remaining to convert to buyers and that limits the potential upside.  On the other hand, a huge crowd of bulls creates an ample supply of prospective sellers.  While we can continue higher as we attract the last of the holdouts, there is far more risk of a large downside move simply because of how crowded the bull side has become in recent weeks.

TRADING OPPORTUNITIES
Expected Outcome:
Trends are more likely to continue than reverse, but the larger potential move is to the downside.  How each person trades this is up to them.  Someone swinging for the fences will short the market since that is where the biggest pile of money is.  Someone happy with small gains will continue squeezing nickels and dimes out of the rally.

Alternate Outcome:
Treasuries keep falling in price, chasing many out of that market and they need to find a place to park their money.  Given what a great year it’s been for equities, many will be tempted to chase this strength.  Their buying can continue pushing us longer and higher than anyone imagines.

Trading Plan:
The market is consolidating in the 1780 to 1810 range.  We can buy the weakness and sell the strength until the next directional trade breaks out or breaks down.

Plan your trade; trade your plan

Nickels and Dimes

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR
The slow grind lower continues for a fifth day as the market gave up an almost trivial three-points in early trade.

MARKET SENTIMENT
Five days of selling that only manages a 1.5% decline from all-time highs is hardly worth paying attention to, but maybe that is the plan.  The market might try to lull us to sleep before it robs us blind.

There are two kinds of market declines, the spectacular crashes that take everyone’s breath away, leaving us paralyzed with fear and indecision.  The other is a painfully boring slide that chips away nickels and dimes under our nose.  We all know the market is imploding when we wake up one morning and a huge chunk of our portfolio is missing, but when we slip a few points here and there, no one seems pay too much attention.  These are the losses we can easily rationalize away because no one is afraid of 0.1% and 0.2% declines.

But the thing is the slow-moving selloff tend to last longer and do more damage than their faster moving cousins.  Everyone remembers the Financial Meltdown that crippled global markets in the Fall of 2008, but many forget the market had already been selling off for a full year prior to the crash.  Drop five percent in a day and it is headline news.  Drop five percent over two months and no one notices.

TRADING OPPORTUNITIES
Expected Outcome:
The 1.5% dip from all-time highs doesn’t seem to be enough to attract a new wave of dip-buyers and we continue languishing under 1,800.  Sometimes holding near new highs supports recent price gains, other times it signals dwindling demand.  Most stock owners have been conditioned to continue holding weakness because every time they sold, they came to regret that decision as the market quickly rebounded to new highs.  That attitude is keeping supply tight and supporting prices as owners refuse to sell the weakness.  But we also need to worry about the other half of the equation, demand.  With as optimistic as the market’s become in recent weeks, many of the people who wanted to buy this market already have. Without a supply of fearful holdouts to convert into buyers, it is less clear who will fund the next leg higher.

Alternate Outcome:
Markets consolidate gains one of two ways, the first is pulling back, the second is trading sideways for extended periods.  While it seems likely this market will reconnect with the 50dma in coming weeks, it could do that by simply staying at these levels and letting the moving average catch up to it.

Trading Plan:
There is a little something for everyone.  A bear can short the market with a stop above 1800.  A bull can continue holding with a stop under  1,780.  For the person out of the market looking to get in, wait until we reclaim 1,800 before buying.  It is better to be a little late than a lot early given all the clear air under the market.

Plan your trade; trade your plan

A wild ride to nowhere

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR
A wild ride to nowhere.  Gap 10-points lower at the open, surge 15-points an hour later, collapse 20-points a few hours after that, only to reclaim another 15 just before the close.  If anyone is keeping track that, there was more than 60-points of up and down through the day, easily the wildest ride in quite some time.  But for all that amazing volatility, we finished down a trivial 2-points!

MARKET SENTIMENT
There was a little something for everyone in today’s trade.  For bears, tops are often volatile as the battle between bulls and bears heats up.  This is because previously dominant bulls start losing their grip on power and bears are finally able to put up a competitive fight.  Today’s back and forth certainly qualifies as a competitive fight.  For bulls, everything was clearly going the bears way when we slipped under 1,780, yet they couldn’t hold that ground as a wave of dip-buying bowled them over.

Markets often break down faster than they climb.  There are plenty of human and crowd psychology reasons for that, but what is important is bears had a golden opportunity to break this market wide open, but they just couldn’t get it done.  That clearly shows buyers are not rolling over here and they still have sufficient strength to defend these levels, at least for the time being.

While today’s rebound is impressive, it is hard to be bullish when everyone else is.  Investor Intelligence bullish readings are near 5-year highs (57.1%) and bearish levels are setting new 5-year lows (14.3%).  While these readings don’t give us definitive trading signals, they indicate an imbalance that will invariably swing back the other way at some point.  Maybe it won’t be tomorrow, next week, or next month, but it is coming and that makes it hard to get comfortable with these levels.

TRADING OPPORTUNITIES
Expected Outcome:
Markets decline for one of two reasons.  The more obvious is unexpected bad news causes investors to lower their expectations of the future and thus the price they are willing to pay for stocks.  The second is running out of new buyers because the crowd is extremely bullish and everyone who believes in the rally already owns all the stock they can hold.  While the first case leads to a terrifying and breathtaking plunge, the second scenario sneaks up on us as we slip lower without raising alarms.  Since current worries are few and far between, we can discount the imminent plunge and instead need to be watchful of the benign grind lower.  While it is clearly premature to be talking about a correction 1% from all-time highs, with so many bulls already in the market, it is hard to figure out who the next greater fool is.

Alternate Outcome:
When in doubt, stick with the trend.  So far we have seen little concrete data or technical behavior to suggest this market is running out of gas.  Even if we pullback for a few days, all that does is shake free weak owners who will soon be forced to chase this market as it continues higher without them.  Reclaiming 1,800 and setting new highs above 1,813 will go a long way to showing this rally still has legs.

Trading Plan:
The market is at a critical juncture.  Either we bounce or we don’t.  It is hard to be more clear than that.  Failing to reclaim 1,800 shows buyers are becoming scarce and a test of the 50dma is likely.  On the other side, another humiliating defeat of bears at 1,780 likely means we have new highs in the near future.  Trade each of these scenarios according to your outlook, but keep stops close incase the market doesn’t respond as expected.

INDIVIDUAL STOCKS
The WSJ is reporting AAPL finally landed China Mobile, something AAPL bulls have been eagerly waiting for.  Now that it is finally here, we get to see how much of this news is actually priced in the stock.  While we will no doubt see a strong reaction to the news, the more meaningful trade will occur after the initial excitement settles down.  Will the stock keep adding to those early gains, or is this a buy the rumor, sell the news event?  If we see a nice pop, it would be hard not to take profits off the table given how far the stock’s come in recent months.  This is not unexpected news, so it is unlikely it will cause a lot of investors to change their mind about the stock.  Those that were bullish before this news will remain bullish, and most bears are bears for reasons unrelated to China Mobile and equally unlikely to change their outlook.

Plan your trade; trade your plan

Volatility increases

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR
A wild ride this morning as we gapped lower, surged higher, and then plunged under the early lows by midafternoon.

MARKET SENTIMENT
Volatility is often a sign of shifting trend as many stubbornly continue trading what has been working, but their declining numbers mean they don’t hold the same sway over the market.  For the last 12-months every dip has been buyable.  While most resisted buying the dips in the first half of the year because they expected a pullback, now everyone is buying the dips because that has become the most obvious trade.  But what happens when everyone starts buying the dips?  After a while the crowd ends up fully invested and there is no one left to buy.

The last few months has seen a dramatic shift in sentiment as we went from countless headlines of doom and gloom to a complete lack of fear.  Markets move when people change their mind and as people warmed up to the market, their buying pushed us to all-time highs.  Now that we are at a point where everyone feels pretty good, there are fewer bears left to convert to bulls.  That means price gains will slow down.  Even more worrisome is this new, large pool of bulls is ripe to change their minds their selling will push us lower.

While sentiment is not an exact science, it gives us insight into probabilities for a move.  While we can easily continue making new highs, the large shift in sentiment makes us vulnerable to a pullback.  While we cannot use this as a timing signal, it gives us an idea of the actual risk/reward of owning the market.

TRADING OPPORTUNITIES
Expected Outcome:
Fear and uncertainty is only just starting to creep back into the market.  By nature the market is a fearful creature and the last six weeks has been unnatural.  Nothing brings fear back into the market like sliding stock prices.  It really doesn’t matter what reason people attach to it, they are simply trying to rationalize what is nothing more than the laws of supply and demand taking over.  While it seems likely we are destined test the 50dma in coming weeks, it won’t be a smooth ride and expect the choppy volatility to continue.

Alternate Outcome:
Every dip is buyable until it isn’t.  We are only 1.5% from all time highs and it is certainly premature to be calling a top.  Every dip purges excess from the markets and this choppiness might be all we need to refresh the market and set the stage for the next leg higher.  If the market recovers recent losses, that shows dip-buyers are alive and well.

Trading Plan:
Given the large shift in sentiment recently, it is hard to justify the risk/reward of buying such a minor dip.  Let this move play out and we will likely get the opportunity to buy at even more attractive levels in coming weeks.

Plan your trade; trade your plan