Jan 22

Not much going on

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:32 EDT

S&P500 daily at 1:32 EDT

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.

Source: AAII.com

Source: AAII.com

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

Jan 21

Struggling with 1,850 again

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:14 EDT

S&P500 daily at 1:14 EDT

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.

TSLA daily at 1:14 EDT

TSLA daily at 1:14 EDT

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

Jan 17

Stalling shy of 1,850

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:12 EDT

S&P500 daily at 1:12 EDT

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.

Source: Yahoo Finance 1/17/2014

Source: Yahoo Finance 1/17/2014

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.

Source: Stocktwits 1/17/2014

Source: Stocktwits 1/17/2014

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.

TSLA daily at 1:12 EDT

TSLA daily at 1:12 EDT

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

Jan 16

Pausing near all time highs

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:15 EDT

S&P500 daily at 1:15 EDT

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

Jan 15

Bouncing back

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:16 EDT

S&P500 daily at 1:16 EDT

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.

Jan 09

Sideways is constructive

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks closed practically unchanged for the third consecutive day as buyers keep holding the market near all-time highs.  While we ended flat, there have been countless sharp intraday declines that always bounced back nearly as quickly as they came.  No matter how swift the dip, it never picked up momentum and the selling stalled.  Volume has been elevated the last three days, showing a good amount of churn.  Is this smart money getting out, or day traders chasing their tail as they overreact to every head fake the market throws at them?  We will know the answer soon enough.

MARKET SENTIMENT
Friday’s headline event is December’s employment report.  Many expect respectable gains around 200k as the recovery slowly picks up steam.  But to be honest, it’s been years since good or bad employment numbers triggered sustained moves.  Lately we’ve seen near-term volatility immediately after the release, but then the market quickly moves on to other ideas and concerns.  Of course looking back over the last year, no matter what headline or report came out, the market kept marching higher.

While this rally cannot continue forever, seeing the market bounce after every attempted selloff is supportive.  Fragile markets crack easily and this one is extremely resilient with all these bounces off 1,830.  People sell for many reasons, but they only buy for one, because they think prices will continue higher.  No matter how much selling bears and profit-takers throw at the market, buyers soaked up all that supply.  Markets typically roll over quickly and holding 1,830 for 6-days after repeated attempted selloffs is bullish.

TRADING OPPORTUNITIES
Expected Outcome:
While many expect decent employment numbers in the morning, it is only one piece traders are using to evaluate the market and economy.  A little above or below expectations will be a non-issue.  Since Taper is a done deal, the market no longer fears too good, so we don’t need to worry about that.  No matter what numbers we put up, it will remove one more risk factor and uncertainty.  As long as it isn’t horrible, expect the prior trend to continue.

Alternate Outcome:
Recent high-volume trade could be interpreted as distribution.  If smart money is getting out, we could see the market roll over fairly quickly once we run out of “next greater fools”.  Of course the best signal this is happening is declining prices.  As long as we remain near all-time highs, we have a sufficient supply of buyers willing to support the market.

Trading Plan:
Either we coast higher or collapse lower.  Holding 1,830 is supportive and expect new highs.  But if we violate support, especially the 50dma and 1,800, this will turn into the correction people have long been calling for.

Plan your trade; trade your plan

Jan 08

Cannot Fight the Market

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks keep bouncing off 1,825.  We tested this level five times since the start of the year and every time buyers prop it up.

MARKET SENTIMENT
Weak markets roll over quickly and this one had plenty of opportunities to breakdown, but the inability to do so is a gigantic signal to us.    Today’s trade had two sharp dips near 1,830, yet the selling never gained momentum and we bounced right back.  With every invitation to selloff, yet holding firm, shows this market is not ready to pullback no matter how bullish sentiment appears.  Holders continue holding and buyers keep buying.  While this market is getting overheated, there is no reason it cannot keep getting hotter, and that is exactly what keeps happening.  In spite of conventional wisdom, complacency is extremely bullish…….until it isn’t.  As long as owners continue holding the dips, supply remains tight and it only takes modest demand to push us to new highs.

TRADING OPPORTUNITIES
Expected Outcome:
Clearly I’ve been premature with my expectations of demand drying up, and in the market early is the same thing as wrong.  Strong bullish sentiment makes this market vulnerable to unexpected surprises, but expect clear sailing until then.

Alternate Outcome:
We can ride this wave higher, but the margin for error gets smaller with each uptick in sentiment.  Stay paranoid and be ready to bail at the first signs of trouble.

Trading Plan:
This market wants to go higher.  Reasons don’t matter, we just need to ride along.  We can own here with a stop under recent lows, near 1,823.  Expect market participants to keep finding reasons to buy and continue holding until something scares them out.  Just make sure we stay close to the exits.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS
AAPL hasn’t enjoyed the markets recent strength as it retests the 50dma following the widely expected China Mobile deal.  What many bulls predicted to be a huge upside catalyst was instead met with a yawn.  Everyone points to the great valuation, but when so many people are bullish on a stock, it is often better to take the other side of the trade.  Those who want AAPL already own it and there are few left to buy it now that all the widely predicted catalysts are behind us (buyback, dividend, product refreshes, and now China Mobile).

Tech hardware is a brutal business and few thrive for more than a single product cycle.  AAPL’s had the unusually good fortune to hit three consecutive home runs with the iPod, iPhone, and iPad, but its been nearly four years since AAPL disrupted the industry with radically innovative products.  While they continue printing money with their existing devices, it seems feels like they are being out-innovated by the competition.

Plan your trade; trade your plan

Jan 07

New Mood

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks showed healthy gains for the first time in 2014 and we finished up 0.6%.  We recovered the last two days of losses and are only a dozen points off the New Year’s Eve highs.  The market broke above recent resistance at 1,810 and is in the upper end of a trading channel that stretches back to the November 2012 lows.

MARKET SENTIMENT
2013 was a great year and many think we cannot produce a repeat performance in 2014.  A recent Yahoo Finance poll shows most people expect more modest gains this year.  As contrarians, if we discount what the crowd predicts, that leaves us with three other outcomes; up a lot, down a little, and down a lot.  While intuition tells us lightening doesn’t strike the same place twice, the market often strings together multiple years of eye-popping performances during powerful bull markets like the unstoppable 80’s and 90’s.  Modestly lower is always a possibility if the fragile recovery stalls for a few quarters.  Recent gains were predicated on the expected recovery and any hiccups in company earnings will pressure stocks.  Much lower requires dramatic new developments traders don’t see coming.  Since worries are few and far between, the market is vulnerable to a cascade of selling like we saw following the US debt downgrade in 2011.

If a person is bullish, then they can be really bullish.  If a person is bearish, they need to decide if that is modestly bearish because they think the market is a little ahead of itself, or if they are a lot bearish because they think the market is oblivious to major risk factors not currently priced in.

Today’s bounce following three days of modest selling shows owners are content owning and few are locking in recent profits.  While complacency is often seen as a bad word in markets, in reality it is often bullish because complacent owners hold through volatility and that keeps supply out of the market.  Only after we run out of buyers does complacency become a problem as traders continue holding while the market keeps sliding lower.

Source: Yahoo Finance 1/7/2014

Source: Yahoo Finance 1/7/2014

TRADING OPPORTUNITIES
Expected Outcome:
How do we tell the difference between bullish complacency and bearish complacency?  Easy, the market keeps going higher on bullish complacency and bearish complacency  forms a series of lower highs.  Since we are within 1% of all-time highs, it is premature to call this complacency bearish.  That doesn’t mean we cannot see normal gyrations as the market consolidates recent gains, but so far recent market trade points to bullish complacency.

Alternate Outcome:
Quarters often exhibit different personalities as the herd changes trading strategies.  Sometimes they chase the market higher, other times they all sell together, and most often they cannot make up their mind and we get stuck inside a trading range.  Q4 of 2013 was a chasing quarter.  If the market changes its mood, that leaves us with either a sideways consolidation or a reversal of trend.  Time will tell, but price will give us tradable clues.

Trading Plan:
It always comes down to timeframe.  Longer-term holders can continue holding for the eventual economic recovery.  Shorter-term traders can look for a trading range to develop following the strong Q4 performance and swing trade the consolidation.  Value investors are finding it increasingly difficult to identify good buys.  Some are digging to the bottom of the barrel and betting on laggards catching up, but patient managers are waiting for the inevitable five or ten percent dip that happens every year.

Plan your trade; trade your plan

Jan 06

Welcome to 2014

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

Intraday Analysis

MARKET BEHAVIOR
Stocks slipped for a third consecutive day as they stumble into the new year.  Volume was slightly above average as traders return from Christmas vacation and get back to work.  The market cleared prior resistance near 1,810 and broke to new highs in the final weeks of 2013, but it would not be unusual for it to retrace those low-volume gains and test support at 1,810.  Holding support shows broad support for these new highs and builds a solid foundation for further gains in coming weeks.  Failing to hold the breakout shows big money doesn’t support the move orchestrated by a smaller pool of holiday traders.

MARKET SENTIMENT
Stocks ran up in light volume over the holidays, quarter end, and year-end, but investors have shown less enthusiasm in buying these new highs following a change in the calendar.  No doubt there was lots of portfolio shuffling into quarter and year-end for window dressing and tax reasons.  But now that we are in a new year and these strictly bureaucratic maneuverings are behind us, few are willing to continue bidding up stocks.

The only overhang coming into December was the inevitable Taper.  Some feared a selloff on the winding down of easy money, but in typical market fashion we saw the exact opposite as the market surged on the news.  With Taper anxiety and uncertainty behind us, there is nothing holding this market back.  While that sounds extremely bullish, we must remember that strong moves follow heavy weights being lifted from the market as reality turns out less bad than feared.  Without fear to fuel this rally, the only thing left is letting momentum carry us higher, and so far that’s been working.

The risk is when the market doesn’t have fear, there is plenty of room for it to become fearful.  While no one knows what the market’s next obsession will be, the market is a worrier by nature and we all know it is coming.  The last time the market was this complacent we fell nearly 20% on a US credit downgrade.  While it is always possible to skate obliviously on thin ice for hours without falling in, all it takes is one bad headline to ruin our day.

TRADING OPPORTUNITIES
Expected Outcome:
The market needs to consolidate the low-volume holiday gains and three days of selling is hardly alarm-worthy.  Failing to hold support at 1,810 and 1,800 is where things get interesting, but without any fear inducing catalyst, expect momentum to continue carrying us higher.

Alternate Outcome:
Rallies die only after most stop calling for a top.  While recent strength silenced most of the critics, has complacency finally sucked in the last of the buyers and set the stage for a reversal on lack of demand?  Price is truth and failing to hold support will be our best signal the supply of willing buyers is drying up.

Trading Plan:
Look for support near 1,810 to demonstrate support for recent gains.  Hold these levels into next week and expect new highs.  Fail to hold support and things get interesting.

Plan your trade; trade your plan

Dec 19

Pausing or stalling?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks dipped in early trade, but rallied back to breakeven by the close.  We stopped just shy of resistance at 1,810 as buyers were unwilling to chase the market higher for a second day.

MARKET SENTIMENT
Depending on your point of view, either the market took a break following yesterday’s impressive rally, or it stalled as demand dried up.

In this afternoon’s post, I discussed who is sitting out of this market and what it will take to get them back in.  Tonight, I will look at who is already in the market.

Momentum traders are on board this rally.  They learned months ago it is futile second guess this strength since they regretted every dip they sold because it quickly rebounded to new highs.  Last week they said markets will continue higher because of QE.  Now they say we don’t need QE to keep on going.  At this point they  just invent reasons to keep holding.

Paranoid traders who avoided this market because of Fiscal Cliff, Sequester, Obamacare, Contagion, Shut Down, Debt Ceiling, etc no longer have an excuse to not own this market.  Now Taper’s come and gone, there is nothing to fear except being left behind.

It is easy to forget about the buy and hold crowd since they never trade.  They don’t buy much and sell even less, making them mostly a ghost when trying to anticipate near-term market moves.

Most shorts bought with both hands yesterday as they were forced to cover on the strong rebound.  All that are left is the most stubborn shorts who are unlikely to buy back their shorts no matter how high this goes.

An entire herd of former bears are now enthusiastic bulls.  These traders blow with the wind and are the ones who helped us go from 20% bulls a few months ago to nearly 70% now.  As they changed their mind, their buying fueled this rally to all-time highs.  But the remaining 20% bears are a stubborn bunch and we have better shot at getting Bozo the Clown elected president than persuading any of these hardened bears to join the party.

TRADING OPPORTUNITIES
Expected Outcome:
While I respect yesterday’s extremely bullish reversal, I have a hard time getting excited about a market with so few buyers left to keep pushing this rock uphill.  Call me stubborn, early, wrong, or better yet all three, but I simply cannot embracing the market here.  I’ve been a raging bull since the bottom back in November 2012, but there just comes a point when expecting continued strength doesn’t make sense any more.

While the largely meaningless trade of the next couple weeks is unlikely to move the market far, things will get interesting in January, especially once some of the early adopters of this rally pass the 12-month mark and can start locking in long-term capital gains.

Alternate Outcome:
These things go longer and further than anyone expects.  That is clearly the case for this rally that most called a dead cat bounce back in January.  While the ranks of bears and cynics thins by the day, their capitulation buying is what keeps this rally alive.

Trading Plan:
We are coming into year-end and volume will drop dramatically next week.  Low volume allows smaller trades to have a larger impact on prices and we should expect increased volatility.  Maybe we run up, maybe we come down, or maybe we just chop around, but without the big players the market behaves far less predictably.  Buy and hold can sit through it, but the rest of us should consider taking some time off.

Plan your trade; trade your plan

Dec 19

Rest Day

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:43 EDT

S&P500 daily at 1:43 EDT

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.

TSLA daily at 1:40 EDT

TSLA daily at 1:40 EDT

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

Dec 18

Taper rally?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Huge intraday reversal following the Fed’s policy statement that formally launched Tapering, yet pledged to keep interest rates low for years to come.  The day’s range was well over 40-points on 30% above average volume.  Following the initial Taper surge, prices continued ramping into the close as bears were scrambling to buy back their shorts.

 

MARKET SENTIMENT
The market loves to surprise us.  Few expected a strong performance following a Taper  announcement.  In May we tanked in the year’s biggest sell off on a hint of Taper.  In September we surged when the Fed surprised us by not Tapering.  But today we ramped up even more on the announcement of Taper.  The two most likely explanations are the promise of low-interest rates for as far as the eye can see.  The other is removing uncertainty.  Now the market no longer needs to worry about Taper since we know exactly what the game plan is.

The interest rate justification is a bit fishy since the Fed has long promised to keep interest rates near zero.  The other thing is this move is through conventional means that mostly affect short-term interest rates.  Long-term interest rates will largely be set by the market once the Fed’s bond buying program winds down.  The one potential concern for the market is a material portion of this rally’s success stems from companies buying stock financed through ultra cheap bond issuances.  With increased interest rates on the long end of the curve, companies are less likely to continue buying their stock at the same rates.

Without a doubt actual volatility is ramping up as we keep whipping between 1,780 and 1,810 over the last several weeks, but implied volatility tanked today as demand for options plunged due to today’s strength and the elimination of uncertainty surrounding Taper.  A potential red flag is volatility typically increases at market tops due to the messy power transition between bulls and bears.

Trading Opportunities
Expected Outcome:
While I still don’t trust this market, today’s strength in the face of what should have been a selloff shows this market is standing on firm footing.  Sentiment cannot remain at current levels indefinitely, but so far owners refuse to sell their stocks no matter what the headline.  This confidence keeps supply tight and supports prices.

Alternate Outcome:
While today was not the day the market resets sentiment to more sustainable levels, that day is coming and we need to tread lightly.  The safer the market feels, the more dangerous it is.

Trading Plan:
If the market adds to gains tomorrow, a trader can buy with a stop at 1,810 and cost into year-end.  Those that are already in the market need to grow increasingly cautious and protective of recent gains.  Move up your trailing stops up and remember, the more comfortable you are with your positions, the more nervous you should be.  It is tough to be short given this market’s resilience, but the most bold can short this strength if we fail to add to today’s gains on Thursday.  Use a stop above Wednesday’s highs.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS
AAPL didn’t participate in today’s rebound because China Mobile has not announced the iPhone yet.  Best guess is they are trying to extract better pricing from AAPL.  If China Mobile wins concessions from AAPL, that likely means other carriers will follow.   A couple of years ago AAPL was in the driver’s seat when it had the only smart phone people wanted.  But with Android clones dominating market, AAPL is in a weaker position and phone companies will likely pressure AAPL’s revenues, margins, and earnings.

Plan your trade; trade your plan

Dec 18

To Taper or not to Taper

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:36 EDT

S&P500 daily at 1:36 EDT

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.

Source: Yahoo Finance 12/18/2013

Source: Yahoo Finance 12/18/2013

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

Dec 17

Hope, Fear, and QE

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks gave up five-points Tuesday, failing to hold Monday’s rebound.  The market briefly slipped under 1,780, but recovered this support level by midday.  It is at the lower end of the recent 1,780 to 1,810 range.  Falling under this level will likely lead to further selling, a test of the 50dma, and prior support at 1,750.  If the market holds current levels through the end of this week, it will likely rally in the final weeks of the year.

MARKET SENTIMENT
Fear Taper, hope for no-Taper, or don’t care.  Those are the three attitudes the crowd can take toward the Fed’s policy statement.  The reason we want to gauge sentiment is it is often profitable to take the other side of the trade.  This isn’t because the crowd is “dumb money” but because the crowd’s opinion is already priced in and supply and demand dictates the market will do something else.

If the crowd fears Taper, it will come into the policy statement underweight so it won’t be hurt by the anticipated selloff.  That means most of the selling already happened, making it far easier for the market to rally on the news.

If it hopes for no-Taper, it is holding through recent weakness, expecting the Fed’s non-move will lead to yet another surge in prices.  But since most already own stocks coming into the event, there are few left to buy the news and that lack of demand makes it harder to support current levels.

And finally, if few change their mind based on the Fed statement, the crowd will maintain current positions and the lack of trade will keep up the status quo.

TRADING OPPORTUNITIES
Expected Outcome:
Since there is little fear in the market, it doesn’t seem like the market sold ahead of Wednesday’s policy statement  Without an ample supply of underweight traders to buy the news, it is unlikely we will get a no-Taper pop we’ve seen following past meetings.  And since so few people sold ahead of time, that leaves a large supply of optimistic owners that could easily become nervous sellers.

Alternate Outcome:
A month of sideways trade saw cautious owners lock in profits bears lay on short positions.  These traders are ready-made buyers if the Fed forces them to chase a surge higher.

Trading Plan:
Given bullish sentiment and proximity to all-time highs, the potential for an explosive move higher is limited.  On the other hand, given those same conditions, we are vulnerable to a material selloff if confident owners become fearful sellers.  Nothing shatters confidence like seeing everyone else rush for the exits.  While the high probability is sticking with the up-trend, the potential for a larger move is to the downside.  How a person trades this setup is up to their style, risk appetite, and trading plan.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS
AAPL bulls got an early Christmas present with the China Mobile announcement, but the stock is surprisingly down on the news.  It seems like everyone widely expected it and there was no one left to buy the news.  Now that all the positive catalysts of product refreshes, buybacks, dividend increases, and China Mobile are behind us, what is left to convince people to bid up the stock?  If the story returns to decreasing profits, margins, and market share, this might be a good time to lock in recent profits and wait to buy the stock back at lower levels.

Plan your trade; trade your plan

Dec 17

Churn ahead of the Fed

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:19 EDT

S&P500 daily at 2:19 EDT

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

Dec 16

Market bounce

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks reclaimed 1,780 in early trade and held this level through the close.  Volume was higher than Friday, but still below average.  The market is inside of the 1,780 to 1,810 trading range still holding above the 50dma.

MARKET SENTIMENT
The talking heads are going round and round over whether the Fed will announce a reduction in QE on Wednesday.  Some say yes, most say no, but the consensus is the Fed will come out with strong language preparing the market for a slow withdrawal of fiscal stimulus in coming months.

Today’s rebound started strong, but failed to add to early gains and settled 5-point off the early highs.  Many traders are simply waiting for the Fed’s policy statement before adjusting their positions.  No doubt if there is a post-Fed pop, today’s strength brought some of that buying forward and makes an explosive move higher less likely.

TRADING OPPORTUNITIES
Expected Outcome:
The market remains in no man’s land, stuck between,780 to 1,810.  At this point it is a coin-flip if we get Taper.  The consensus seems to expect no Taper, so it is likely priced in.  We could get a short-lived bounce as news driven traders chase the move, but expect the market to quickly return the previous state.  Over the last couple weeks, the market has a couple lower-lows and lower-highs following the Thanksgiving all-time high.  Since then traders have been reluctant to buy near the highs and the market drifted lower on light demand.  (heavy selling is accompanied by above average volume)  Unless the market is shocked by good news out of the Fed, expect the light-volume drift lower to continue after the Fed induced volatility passes.

Alternate Outcome:
The market made it most of the way to the 50dma and often we don’t need more than that before refreshing the rally.  Without a scary headline, holders don’t have a reason to sell and are happy to own stock at these levels.  As long as they refuse to sell into weakness, supply will remain tight and it will be easy for the market to bounce on modest demand.

Trading Plan:
So close to the Fed statement, it is a bit late to put on a trade.  It is a binary trade and little more than a coin-flip, so the conservative approach is to trade the resulting move.  The most likely outcome seems to be an initial pop as the Fed kicks the can down the road, followed by weakness as most already expected this move and bought in anticipation.  Failing to hold 1,780 is sortable and surging above 1,800 is buyable.

Plan your trade; trade your plan

Dec 16

Bulls attempt a rebound

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:37 EDT

S&P500 daily at 2:37 EDT

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

Dec 12

Still no dip buying

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks slipped for a third straight day, undercutting recent support at 1,780.  The next technical level is 1,760 and the 50dma.

MARKET SENTIMENT
Volume was surprisingly light for a second day as a wave of fear and panic selling failed to hit the market.  While this orderly selling can be bullish because it shows most holders are confident and unwilling to sell modest weakness, it also means there is a huge amount of potential selling still hanging over the market if fear and panic take hold.  Since trading volume is near average, it shows sellers are not showing up in droves and this weakness is primarily caused by a lack of demand as dip buyers remain MIA.  Is this because they are waiting for more attractive prices, or more worrisome, we are running out of new buyers willing to prop up the market near all-time highs.

TRADING OPPORTUNITIES
Expected Outcome:
At this point the near-term trend is down since we were unable to hold support at 1,800 Wednesday and 1,780 Thursday.  Low-volume selling indicates we are nowhere near capitulation and there is plenty of downside potential if the herd gets spooked and rushes for the exits. The next level to watch is 1,760 and the 50dma.  Where we go from there largely depends on how emotional traders become.  If they remain calm and collected, expect more selling.  This market is stalling on over bullishness and we need to reset sentiment before the rally can resume.

Alternate Outcome:
This dip will bounce at some point because they always do, the only debate is how low we go first.  We’ve seen a lot of distribution over the last three weeks with 12 of the last 18 days finishing in the red.  Anyone selling at the top has plenty of cash to buy the dip when it reaches an attractive level.  Recently we have been bouncing sooner and sooner and could very well could be on the verge of yet another rebound to new highs.  The key is reclaiming support at 1,780 and 1,800.  With the market so perfectly setup to selloff, if bears cannot get the job done, they show they are powerless to hold this rally back.

Trading Plan:
The new lines in the sand are 1,780 above and 1,760 below.  Reclaiming 1,780 shows buyers are finally stepping up to defend this rally.  Falling under 1,760 could finally trigger that high-volume wave of capitulation selling as confident owners turn into fearful sellers.  So far nothing indicates this move is more than a routine pullback to support, but given how much potential selling is still out there, things could get ugly in a hurry if fear takes over.

Plan your trade; trade your plan

Dec 12

Three in a row

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:15 EDT

S&P500 daily at 1:15 EDT

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

Dec 11

Time to get out?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
It was a bloody day in the markets as we gave back all of Friday’s employment pop.  The market is a couple of points above support at 1,780 and a dip under this level will trigger a second wave of stop-loss selling.  The market remains comfortably above the 50dma, but we will likely test this level if we cannot hold 1,780.

MARKET SENTIMENT
The question on everyone’s’ mind this afternoon was “buy the dip or sell before it is too late?”  This selloff roiled the calm ride we’ve had to this point.  This is far from a crash but it did serve as a wake up call for many traders.

Volume was only 7% above average, showing an orderly selloff without much panic.  This tells us the decline was more a function of buyers not showing up than a mass rush for the exits.  Like everything in the markets, there are two ways to read this.  The bullish view is confident owners don’t sell weakness and the market will quickly bounce on the lack of shares available for sale.  The bear’s counter argument is we haven’t seen the real wave of emotional selling hit the market yet.

For the first eleven months of the year I believed in the bulls argument that confident owners keep supply tight and prop up prices.  But given the dramatic shift in sentiment and churn in ownership from value oriented dip buyers to momentum chasers, I no longer have confidence in the resolve of owners to keep holding in the face of weakness.  These are buyers who rushed to the market once the coast was free of doom and gloom headlines.  These new, fair-weather owners are likely to be scared by their own shadow their selling will pressure markets.

TRADING OPPORTUNITIES
Expected Outcome:
It doesn’t feel like the dip is done.  The low volume selling shows we haven’t hit the emotional capitulation that often signals a bottom.  We will likely break support at 1,780 on Thursday and that stop-loss selling will trigger another leg lower.  The next stop from there will be the 50dma.  After that it largely depends on traders emotions.  Will confident owners keep holding and end the selloff?  Or will headlines screaming Taper cause many to throw out all their carefully laid plans and allow the herd selling destroys their resolve?

Alternate Outcome:
Every other dip this year felt like the real thing, why is this one any different?  We dip a couple percent, everyone gets all worked up, selling exhausts itself, and we make new highs a week later.  While this pattern cannot continue forever, its been the best trade of the year.

Trading Plan:
While we might see a modest bounce in the morning as dip-buyers try to defend 1,780, expect a fresh wave of selling to hit the market if this support level doesn’t hold.  How each trader responds to this move largely depends on their timeframe.  Nimble swing traders can short this violation of support with a stop above 1,780.  Intermediate-term traders looking to buy the dip should wait for lower prices.  Longer-viewed traders need to get ready to buy their favorite stocks when emotional owners are selling them at steep discounts.

While I expect further selling, the one thing that will turn me into a buyer is if we slip under 1,780 but bounce back decisively.  Failing to trigger another leg lower after breaking support shows the selling exhausted itself and this is yet another dip buying opportunity.

Plan your trade; trade your plan